Answer: According to the Employment Contract law, economic compensation is applicable for employers to pay the employee in the following circumstances: employees are forced to resign, employment contracts expire and dissolute, employer terminates employment on the grounds of health incompetence, ability incompetence, or major changes in objective situation, or economic redundancy.
The basic calculation rules of economic compensation is as follow: if an employee has worked continuously for several number of years for their employer, the employer shall pay the same number of months of wages as the economic compensation to the employee; and the monthly wages for the economic compensation shall be the employee’s average wages from the 12 months immediately before the termination.
We use a case to illustrate how economic compensation is calculated. Mr. Zhang has worked for his employer for nine years and two months before his termination due to ability incompetence, and his average wages from the 12 months before the termination is RMB 9,000. Then the economic compensation he should receive for his termination is RMB 85,500 (9.5 months * 9,000 RMB/month). According to Article 40 of the Employment Contract Law, the employer shall notify Mr. Zhang of the termination 30 days (one month) in advance and pay the economic compensation at the time of the termination. The employer may pay RMB 9,000, one month of wages, as payment in lieu for the one-months notice, plus the aforementioned economic compensation. This is called N + 1 compensation in China.
Calculation of economic compensation is not necessarily always straightforward as Mr. Zhang’s case. There are some specific issues in accurate determination of the number of months and the monthly wage base, such as how to handle decimal months instead of a integer number of months, or whether the monthly wage base includes the year-end bonus, or the monthly wage base which exceeds three times local employees’ average wages of previous year shall be subject to a cap, and so on. Please refer to What are the considerations for calculating economic compensation and punitive damages?
This article is a part of our new book“Employment Law in China: A Practical Guide. A book about “What should I do” with case laws.”Stay tuned, and the book will soon be published as an electronic books!
Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
Email: wangdong@royalaw.com