When an employment relationship in China comes to an end, one of the most common questions is: How much severance pay is the employee entitled to receive?
Under Chinese employment law, what is commonly referred to as “severance pay” is generally known as statutory economic compensation (经济补偿金). Its calculation is mainly governed by the PRC Labor Contract Law and the Implementing Regulations of the PRC Labor Contract Law.
In practice, severance is often described by the formulas “N,” “N+1,” and “2N.” However, these formulas apply in different circumstances and should not be confused with one another.
1. The Basic Formula: N
Article 47 of the PRC Labor Contract Law provides that economic compensation is generally calculated according to the employee’s length of service with the employer:
Severance Pay = N × Monthly Salary
Here, N represents the employee’s compensable years of service with the employer.
The length of service is calculated as follows:
For each full year of employment: 1 month’s salary;
For a period of 6 months or more but less than 1 year: counted as 1 full year;
For a period of less than 6 months: 0.5 month’s salary.
For example, if an employee has worked for a company for 5 years and 8 months, the compensable service period will generally be treated as 6 years, meaning the employee may be entitled to 6 months of salary as economic compensation, provided that the termination falls within a situation in which statutory compensation is required.
2. What Does “Monthly Salary” Mean?
For statutory severance purposes, the “monthly salary” generally means the employee’s average monthly remuneration during the 12 months immediately preceding the termination or expiry of the employment contract.
Importantly, the calculation is based on the employee’s salary payable before deductions, rather than merely the net amount actually received after individual income tax and social insurance deductions.
Under the Implementing Regulations, the calculation may include monetary remuneration such as:
Basic salary;
Piece-rate or time-based wages;
Bonuses;
Allowances; and
Subsidies.
If the employee has worked for the employer for less than 12 months, the average is calculated based on the employee’s actual period of employment.
If the employee’s average monthly salary is lower than the applicable local minimum wage, the local minimum wage should generally be used as the calculation basis.
Example
An employee has worked for a company for 4 years and 3 months and earned an average monthly salary of RMB 20,000 during the 12 months before termination.
The service period is calculated as 4.5 months of compensation.
Therefore:
RMB 20,000 × 4.5 = RMB 90,000
The statutory economic compensation would generally be RMB 90,000.
3. Is There Always a 12-Year Cap?
No.
This is a common misunderstanding.
Under Article 47 of the Labor Contract Law, the 12-year cap applies specifically to high-income employees whose average monthly salary exceeds three times the previous year’s local average monthly wage for employees in the relevant municipality or city.
For such employees:
The monthly salary used for severance calculation is capped at three times the applicable local average monthly wage; and
The compensable service period is capped at 12 years.
Therefore, the maximum statutory economic compensation under this particular rule is generally:
3 × Local Average Monthly Wage × 12
For employees whose monthly salary does not exceed the three-times threshold, there is no general 12-year cap under Article 47 merely because they have worked for the employer for more than 12 years.
Special transitional rules may also apply where employment began before the Labor Contract Law came into force on 1 January 2008, so long-service cases should be reviewed separately.
4. When Is “N” Payable?
Economic compensation is not payable whenever an employment relationship ends. The legal reason for termination matters.
Article 46 of the Labor Contract Law identifies a number of circumstances in which an employer must pay economic compensation. Common examples include:
The employer proposes termination and the parties mutually agree to terminate the employment contract;
The employer terminates the employee under Article 40 for certain non-fault reasons;
The employer carries out an economic redundancy under Article 41;
A fixed-term employment contract expires and the employer decides not to renew it, subject to statutory exceptions;
The employer becomes bankrupt, is dissolved, or otherwise ceases operations in circumstances specified by law; or
The employee terminates the contract under Article 38 because of certain serious breaches by the employer, such as failure to pay remuneration in full and on time or failure to provide legally required working conditions.
For example, where a fixed-term contract expires, compensation will generally be payable unless the employer offered to renew the contract on the same or better terms and the employee nevertheless refused the renewal.
5. What Does “N+1” Mean?
“N+1” is widely used in Chinese employment practice, but it does not mean that every employer-initiated termination automatically entitles the employee to one extra month of salary.
The “+1” generally refers to payment in lieu of 30 days’ advance notice under Article 40 of the Labor Contract Law.
Article 40 allows an employer, under certain specified circumstances, to terminate an employee either by:
Giving the employee 30 days’ prior written notice; or
Paying the employee one additional month’s salary instead of giving the 30-day notice.
The relevant circumstances include, among others:
The employee is unable to perform the original job or another arranged job after the statutory medical treatment period;
The employee is incompetent and remains incompetent after training or reassignment; or
A material change in the objective circumstances makes continued performance of the employment contract impossible and the parties cannot agree on an amendment.
In such situations, the employer must normally also pay statutory economic compensation, or “N.”
If the employer chooses immediate termination and pays one month in lieu of notice, the result is commonly described as:
N + 1
However, the “+1” is legally distinct from “N.” Under Article 20 of the Implementing Regulations, the additional one-month payment is calculated according to the employee’s salary for the preceding month, whereas the “N” portion is generally based on the employee’s average monthly salary over the previous 12 months.
Therefore, “N+1” should not be treated as a universal severance formula.
6. What Does “2N” Mean?
“2N” usually refers to statutory damages for unlawful termination rather than ordinary economic compensation.
Article 87 of the Labor Contract Law provides that where an employer unlawfully terminates or ends an employment contract, the employer may be required to pay damages at twice the statutory economic compensation standard under Article 47.
The calculation is therefore commonly expressed as:
Damages for Unlawful Termination = 2 × N
For example, if the normal statutory economic compensation would have been RMB 100,000, the damages for unlawful termination may amount to:
RMB 100,000 × 2 = RMB 200,000
The Implementing Regulations further provide that once the employer has paid statutory damages for unlawful termination under Article 87, it does not separately pay the ordinary economic compensation again.
Whether a termination is legally valid depends not only on whether the employer has a substantive reason for termination, but also on whether the required statutory procedures and evidentiary requirements have been satisfied.
7. When May No Severance Be Payable?
There are also circumstances in which an employee may leave the company without receiving statutory economic compensation.
Common examples include:
The employee voluntarily resigns for personal reasons;
The employee is lawfully dismissed for serious misconduct under Article 39 of the Labor Contract Law;
A fixed-term contract expires, the employer offers renewal on the same or better conditions, and the employee refuses the offer; or
Other circumstances where Chinese law does not impose an obligation on the employer to pay economic compensation.
For this reason, the question is not simply “Who terminated the employment?” The exact legal basis for the termination must be identified.
8. A Quick Comparison: N, N+1 and 2N
|
Formula |
General Meaning |
Typical Situation |
|---|---|---|
|
N |
Statutory economic compensation |
Lawful termination or expiry where compensation is required |
|
N+1 |
Economic compensation plus one month in lieu of notice |
Certain Article 40 non-fault terminations without 30 days’ prior written notice |
|
2N |
Damages for unlawful termination |
Employer unlawfully terminates or ends the employment relationship |
These expressions are useful shorthand, but the actual amount depends on the statutory basis for termination, the employee’s length of service, remuneration history, local wage statistics and, in some cases, the date on which employment commenced.
Conclusion
The basic rule for severance pay in China may appear straightforward:
Years of Service × Average Monthly Salary
In practice, however, the calculation can become significantly more complicated, particularly where the employee has a high salary, began employment before 2008, receives substantial bonuses or allowances, is dismissed without notice, or disputes whether the termination was lawful.
Employers should therefore determine the legal basis for termination before calculating severance. Employees should likewise avoid assuming that every termination results in “N+1” or that every disputed dismissal automatically results in “2N.”
For cross-border employers, foreign-invested enterprises and expatriate employees in China, reviewing the employment contract, termination notice, payroll records and applicable local rules is often necessary before the final severance liability can be determined.
This article is intended for general informational purposes only and does not constitute legal advice. Specific employment disputes should be assessed in light of the facts of the case and the applicable local regulations and judicial practice.
For more information, please contact David Gao, an international lawyer based in Beijing China
Email: gaohexin@jingsh.com
Tel: 86 13611158067
