Dismissing Underperforming Employees in Compliance with Chinese Labor Law

China's new Labor Contract Law (LCL), which became effective on Jan. 1, 2008, emphasizes employee rights, but employers in China are not without recourse when it comes to underperforming employees. Nonetheless, employers should make efforts to remedy underperformance before taking more drastic measures. In China's fast developing labor market, employees are increasingly aware of their rights. (Please also refer to our earlier advisories: The LCL and its impact on business and the LCL Implementing Regulations.)

According to Article 40, Section 2 of the LCL, an employer may terminate an underperforming employee's labor contract by giving him/her 30 days' advance written notice (or pay one month's salary in lieu of the notice) if, after training or reassignment, the employee still fails to perform his/her duties. Before terminating an underperforming employee, the employer must:

• Collect evidence of the employee's failure to perform his/her duties
  
  
• Provide training to or reassign the employee
  
  
• Prove the employee's failure to perform their duties after training or reassignment

Evidence of failure to perform job duties

In order to prove an employee's failure to perform his/her duties, ideally an employer should set forth such duties or job description in writing. This documentation could be accomplished as follows:

• In the employee's labor contract, specifying the employee's position duties or detailed job description
  
  
• In the company handbook, laying out various position duties and/or evaluation systems and policies
  
  
• In any supplemental accord with the employee, stipulating his/her duties

A Supreme People's Court interpretation established that the burden of proof rests with the employer. Without setting forth relevant duties, it would be difficult to prove an employee's underperformance.

Training or transfer

Once an employee is proven to have failed to perform their job duties, the employer needs to provide the employee a second chance though training or reassignment.

Training – Normally, an employee will continue to work in the same position after training. Therefore, training should be related to the employee's current position and be aimed at improving his/her skills and job performance. Training should be recorded by the employer and acknowledged by the employee.

Job Transfer – The LCL does not explicate requirements for reassigning an employee. When reassigning an underperforming employee, an employer should carefully consider the employee's capacity to perform his/her new duties. In other words, an employer should reassign employees based on their demonstrated ability.

An employer is usually prohibited from changing an employee's position and/or reducing an employee's salary at its own discretion without obtaining the employee's consent. Whether an employer can reduce an employee's salary after reassignment without the employee's consent is debatable. An employer should at least set forth such policy in employment contracts or in the company's employee handbook in advance.

If, after training or reassignment, an employee still fails to perform his/her duties, the burden of proof remains with the employer to show, ideally in writing, such replicate failure before terminating the employment contract.

Severance payment

According to Article 46 of the LCL, an employer is still responsible for severance payment in case of termination due to an employee's underperformance after training or reassignment.

When calculating severance payment, two service periods must be considered: (i) length of service before the effective date of the LCL (applying the old rules), and (ii) length of service after the effective date (applying the LCL).

If an employee joins before, and is terminated after, the effective date of the LCL, his/her length of service spans both of these periods. In other words, their severance payment will consist of severance before the effective date (calculated under the old rules) and severance after the effective date (calculated under the LCL).

If an employee joins after the effective date, his/her length of service falls within the above-mentioned second period and their severance is calculated under the LCL. If an employee is terminated before the effective date, his/her entire length of service falls within the above-mentioned first period, so only the old rules apply to their severance.

Conclusion

An underperforming employee can hamper a business. Numerous such employees could be fatal for smaller operations. China has specific rules that govern any massive layoff, applicable with dismissal of 20 employees or 10 percent of an entity's workforce. (Please refer to our recent advisory on massive layoff rules in China.) Given the requirements of training/reassignment and proof of failure to perform, terminating an underperforming employee can take time. Therefore, initial screening of prospective employees is the best defense against underperformance.