In China, an employer may not terminate a fixed-term or open-ended employment contract at will. If a company terminates an employment contract before its expiry without a statutory basis, or without following the mandatory procedures required by the Labor Contract Law of the People’s Republic of China, the termination may be classified as an unlawful termination. In such circumstances, the employee may be entitled to statutory remedies, including reinstatement or monetary compensation.
This article explains the basic rules for calculating compensation for unlawful termination, the meaning of “N”, the salary base used for calculation, statutory caps for high earners, and practical steps that employees should take when facing dismissal.

1. Legal Basis: When Termination Becomes Unlawful

Under China Labor Contract Law, an employer must rely on a statutory ground when unilaterally terminating a labor contract. Common lawful grounds may include serious employee misconduct, employee incapacity or incompetence after statutory procedures, material changes in objective circumstances, or statutory economic layoff procedures. If the employer cannot prove a lawful ground, or fails to comply with required procedures, the termination may be deemed unlawful.
Article 87 of China Labor Contract Law provides that where an employer revokes or terminates a labor contract in violation of the law, it shall pay compensation to the employee at twice the rate of the economic compensation specified in Article 47. This is commonly referred to in practice as the “2N” rule.

2. The Core Principle: The “2N” Rule

For unlawful termination, the usual monetary compensation is calculated as follows:
Compensation = 2 × N × Average Monthly Salary
In this formula, “N” represents the employee’s years of service with the employer. Article 47 provides the basic method for calculating economic compensation: one month’s salary for each full year of service.
· For each full year of service, N = 1.
· For service of six months or more but less than one year, the period is counted as one full year, so N = 1.
· For service of less than six months, N = 0.5.
Example:
If an employee has worked for 3 years and 2 months, the service period is calculated as 3.5 years. If the termination is unlawful, compensation would generally equal 2 × 3.5 months of salary, namely 7 months of the employee’s average monthly salary.

3. What Counts as “Average Monthly Salary”?

The salary base is not limited to the employee’s basic monthly wage. For purposes of statutory economic compensation, the “monthly salary” generally refers to the employee’s average monthly salary during the 12 months immediately preceding the termination or ending of the labor contract.
Depending on the employee’s actual remuneration structure and local practice, the average monthly salary may include the following items:
· base salary;
· regular allowances, such as housing, meal, transport or communication allowances;
· bonuses and commissions;
· overtime pay;
· other wage-related income that should legally be included in the salary calculation.
Employees should therefore keep complete records of salary payments, payslips, bank statements, bonus notices, commission records and any documents showing the full remuneration package.

4. Statutory Caps for High Earners

Chinese law imposes a statutory ceiling for employees whose monthly salary is higher than three times the local average monthly wage for employees in the relevant city or region, as published by the local government.
Where the employee’s monthly salary exceeds this three-times threshold:
· the salary base used for statutory economic compensation is capped at three times the local average monthly wage; and
· the number of years used for calculating economic compensation is generally capped at 12 years.
Because Article 87 calculates unlawful-termination compensation by reference to the economic compensation standard under Article 47, the same cap is generally relevant when calculating the “2N” compensation for high earners. In practice, however, local arbitration committees and courts may differ in their detailed approach, especially in cases involving long service periods, pre-2008 service, senior employees or complex compensation structures. Specific local advice should be obtained before filing or settling a claim.

5. Unlawful Termination vs. Lawful No-Fault Termination

It is important to distinguish unlawful termination from lawful no-fault termination. The financial consequences are different.

Termination Type	Typical Legal Basis	Typical Scenario	Common Payment
Unlawful termination	Violation of the Labor Contract Law	The employer lacks a statutory ground or fails to follow mandatory procedures	2N compensation
Lawful no-fault termination with 30 days’ prior written notice	Article 40 of the Labor Contract Law	For example: medical incapacity, incompetence after training or position adjustment, or major change in objective circumstances	N economic compensation
Lawful no-fault termination without 30 days’ prior written notice	Article 40 of the Labor Contract Law	The employer pays one additional month’s salary in lieu of notice	N + 1
Mutual termination by agreement	Article 36 and Article 46, where applicable	The parties sign a negotiated termination agreement	Negotiated amount, often not lower than statutory N if initiated by employer
Employee voluntary resignation	Employee-initiated resignation	The employee resigns voluntarily and no statutory employer fault is established	Usually no N or 2N compensation

 

6. Practical Recommendations for Employees

6.1 Do Not Sign a “Voluntary Resignation” Letter Under Pressure

If the employer asks the employee to sign a resignation letter, voluntary separation form, or settlement agreement, the employee should carefully review the document before signing. A document stating that the employee resigns voluntarily may seriously weaken or even eliminate a claim for unlawful-termination compensation. If the employee does not agree to resign, the employee should avoid signing documents that misrepresent the true reason for departure.

6.2 Request a Written Termination Notice

Employees should request a written termination notice stating the employer’s reason for termination, the effective date, and the legal basis relied upon. A clear written notice helps determine whether the termination has a statutory ground and whether the employer complied with the required procedure.

6.3 Preserve Evidence

Employees should preserve evidence as early as possible. Relevant evidence may include:
· the signed labor contract and any renewal agreements;
· employee handbook, company policies and disciplinary rules;
· payslips, bank salary records, tax records and social insurance contribution records;
· performance review records, warning letters and internal investigation materials;
· emails, WeChat messages, meeting notices and HR communications about dismissal;
· the termination notice, resignation documents or settlement agreement, if any.

6.4 Consider Labor Arbitration

In China, most employment disputes must first go through labor arbitration before they can proceed to court. If the employer refuses to pay the statutory amount or if the employee disputes the legality of the termination, the employee may file a claim with the competent Labor Dispute Arbitration Committee. The employee should pay attention to the applicable limitation period and local filing requirements.

7. Practical Recommendations for Employers

Employers should not treat the “2N” amount merely as a commercial cost of dismissal. To reduce labor dispute risk, an employer should:
· confirm whether a statutory ground for termination exists before issuing any notice;
· review whether the company rules relied upon were lawfully adopted, communicated and consistently enforced;
· collect and preserve evidence supporting the termination ground;
· follow consultation, notice, trade union and other procedural requirements where applicable;
· calculate salary base and years of service carefully;
· use clear and accurate termination documents;
· consider a negotiated termination agreement where the legal basis for unilateral termination is uncertain.

Disclaimer

This article is for general information and educational purposes only. It does not constitute legal advice and should not be relied upon as a substitute for advice on a specific case. Labor law practice in China may vary depending on the city, the employee’s contract, salary structure, years of service, company policies, evidence, and the approach of the local labor arbitration committee or court. For specific disputes, parties should consult a qualified local legal professional or the competent labor authority.

For more information, please contact David Gao, an international lawyer based in Beijing, China
Email: gaohexin@jingsh.com;  
Tel: 86 13611158067