This article was first published on China Business Law Journal , authorised reprint.
Inevitably, companies have to deal with employee dismissal. Labour laws and judicial practices on employee dismissal vary significantly between countries. Chinese companies with multi-regional operations overseas must understand and comply with the local laws and practices of their investment destinations. This article outlines and compares the legal and practical requirements for employee dismissal in China, Germany, Singapore and the US to draw reference for companies expanding abroad.
China
In China, companies are allowed to unilaterally dismiss employees only on statutory grounds specified by the Labour Contract Law. These grounds include severe disciplinary violations, gross negligence and incompetence by the employee, as well as substantial changes in objective circumstances that render the employment contract unperformable.
Companies must also follow the dismissal procedures stipulated by law, otherwise a dismissal may be recognised as unlawful. For instance, prior to dismissing an employee because of a departmental merger, business outsourcing or other major change, a company must first attempt to negotiate contract amendments (typically involving job reassignment) with the employee. Only when the negotiation fails can unilateral dismissal apply.
Except when dismissing an employee for misconduct, employers are generally required by law to pay a severance compensation. The statutory standard of severance pay is one month’s salary for each year of the employee’s service with the company.
Germany
Employment contract termination primarily falls into one of two categories – termination by notice and immediate termination. In practice, termination by notice is the most common type. The notice period is stipulated by law and varies from two weeks to seven months, depending on duration of employment. Employers must produce an original written termination letter, rather than an electronic file. Immediate termination is only allowed in extremely severe cases – such as an employee’s gross negligence or criminal acts against their employer – that make it impossible for the employment to survive a notice period.
In Germany, employees working at a company with more than 10 employees for six consecutive months are entitled to basic dismissal protection, under which their employer must have “social justification” to terminate employment contracts with notice. Dismissals are considered justified for only three reasons:
①
An employee’s misconduct, which severely disrupts company discipline or significantly breaches the employment contract, such as refusing to work, feigning illness and violating company policies. In such cases, the employer is required to give the employee a chance to rectify their behaviour through prior warnings;
②
The employee’s personal circumstances, referring to the employee no longer possessing the necessary competence or qualifications to fulfil the contractual obligations, such as lacking a work permit or suffering from a medical condition; and
③
The employer’s operational reasons, referring to the employer’s business difficulties and failure to provide alternative positions for the employee.
German law does not mandate severance pay as a prerequisite for terminating employment contracts. However, employers tend to pay when an employment contract stipulates severance pay on termination, or when the employer and the Works Council agree on a social plan for collective redundancies. Additionally, in cases of termination due to urgent operational requirements, employers opt to provide severance pay when issuing written termination notices, to avoid potential lawsuits from dismissed employees.
Singapore
Similarly to Germany, the termination of employment contracts in Singapore is categorised into termination by notice and immediate termination.
Termination by notice. Where termination notice is set out in an employment contract, either party terminating the contract must observe the notice period. The duration of the notice period is agreed by both parties in the employment contract. In the absence of a specified duration, a minimum notice period is prescribed by law. Again similarly to Germany, the required notice period increases with an employee’s length of service. Despite the requirement on notice period, an employer and their employee may terminate a contract immediately by paying the employee’s wages for the notice period.
Immediate termination. Where either party breaches an employment contract, or in case of misconduct by an employee, the contract may be terminated immediately. If due to a breach of contract, the breaching party must pay wages in lieu of notice. Scenarios of breach of contract include an employer’s failure to pay wages within seven days of the due date, or an employee’s absenteeism for two consecutive days. The employer may also opt for unilateral immediate termination if an employee is found to have engaged in misconduct, such as theft and dishonesty.
Other than the payment in lieu of notice, severance pay is not prescribed in law in Singapore and is primarily subject to the terms agreed on by both parties in the contract.
The US
Most states of the US adopt the doctrine of at-will employment, which allows employees to quit at any time with or without reason, and equally allows employers to discharge employees at any time with or without reason. At-will employment provides US employers with significant flexibility in dismissals, yet there are also exceptions. For instance, in California, at-will dismissal may be deemed illegal in the following two situations:
①
Where it is specified in either an individual employment contract or a collective employment contract signed by the labour union on behalf of the employee that the termination of a contract should be based on specific grounds; or
②
Where the design and implementation of an employer’s labour management policies disproves the nature and characteristics of a flexible relationship, altering and undermining the doctrine of at-will employment.
Additionally, at-will employment is constrained by anti-discrimination and anti-retaliation laws. The doctrine of at-will employment does not exempt employers from the risk of unlawful dismissals, as discharged employees may still sue employers on grounds of discrimination or retaliation-based dismissals.
In the US, most dismissals do not require prior notice or severance pay. For instance, in California again, the state’s law does not mandate severance payments upon termination, unless otherwise specified by company policy or contract. Employers typically offer the severance pay in the case of negotiated termination, contingent on the employee waiving all claims against the employer.
Given the legislative and practical differences across the countries, Chinese companies operating abroad must observe local regulations when establishing employment contracts, formulating policies and discharging employees. This is crucial to mitigate the risk of unlawful dismissals.
