Post Termination Asset Inspection and Tooling Clearance Verification Procedures
Verification of foreign-owned tooling clearance requires hard-stamped Chinese bailment marks, notarized site audits, and structured financial set-offs.
Statutory Severance Audit
Meaning
The systematic evaluation of financial and legal obligations owed to terminated employees represents an essential compliance procedure in Chinese labor relations. This process is governed by the Labor Contract Law of the People’s Republic of China, which is administered by the Ministry of Human Resources and Social Security and local labor bureaus. Under these statutory frameworks, the statutory severance audit is designed to verify the correct calculation of severance payments, social insurance contributions and housing fund arrears before an employment relationship is formally dissolved.
The boundary of this audit is limited to employees covered by the Labor Contract Law, excluding independent contractors or service providers. By conducting this audit, the employing enterprise ensures compliance with labor laws, minimizes the risk of labor disputes and prepares for potential labor arbitration proceedings.
Severance Calculation
The audit process begins with a detailed review of each employee’s employment contract, work history and payroll records to calculate the average monthly wage. This average wage is used as the basis for calculating the severance payment, which is set by law at one month’s salary for each year of service. The STA Announcement 2019 No 35 and local labor regulations define the maximum salary cap and the maximum number of years that must be used in this calculation.
The statutory severance audit must verify that these caps have been applied correctly to avoid overpayment or underpayment. In practice, local tax bureaus and labor courts inspect these calculations to ensure that they comply with the statutory formulas. If an error is found, the company can be ordered to pay double the statutory amount as compensation.
Social Contribution
Human resource auditors must also verify that the employer has made all required contributions to the employee’s social insurance and housing fund accounts. These contributions include pension, medical insurance, unemployment insurance, work injury insurance and maternity benefits. The audit of these accounts is critical because unpaid contributions must be settled before the labor bureau will process the termination.
When a factory in China undergoes a major restructuring or closure, the local government closely monitors the settlement of social contributions to prevent social unrest. The manufacturer must provide proof of payment for all outstanding social security dues to obtain a clearance certificate from the labor bureau. This clearance is required to proceed with the formal deregistration of the company.
Audit Report
The final output of the audit is a detailed report that outlines the total financial liability of the employer and the specific payments due to each employee. This report is signed off by the company’s legal and human resources managers to confirm its accuracy and compliance with labor laws. In the event of a dispute, this audit report serves as the primary piece of evidence in labor arbitration or court proceedings.
It is also used by the company’s financial department to allocate the necessary funds for the severance payments and social security settlements. By maintaining a structured and transparent audit process, the enterprise can manage its labor risks effectively and ensure a smooth transition during organizational restructuring or down-sizing projects.