China severance is not a universal payment for every employment exit. The legal route determines whether statutory economic compensation is due. Employer-proposed mutual termination, specified employee exits for employer breach, many no-fault terminations, qualifying layoffs, and several expiry or closure events generally trigger compensation. A proven Article 39 dismissal or an ordinary voluntary resignation generally does not.
Where compensation is due, the starting formula is commonly described as N: one month of the employee’s qualifying average wage for each service year, with statutory rounding. Notice pay, often called the “plus one,” is separate and applies only to specified routes. Compensation for unlawful termination, commonly called 2N, is a remedy, not ordinary severance. Wage base, caps, service continuity, tax and settlement drafting must be checked separately.
Direct answer
First identify why and how the employment ends. Then calculate the statutory economic-compensation unit, test any wage and service-year caps, and add other independent amounts. Do not begin with an assumed multiplier and work backward to a termination theory.
Use a payment schedule separating economic compensation, notice pay, unlawful-termination compensation, final wages, bonus or commission, unused leave, expenses, social-insurance adjustments, post-employment restriction payments and negotiated consideration.
When economic compensation is generally due
Labor Contract Law Article 46 lists the principal triggers. They include qualifying employee termination because of employer breach; employer-proposed mutual termination; employer termination under Article 40; economic layoffs under Article 41; and specified expiry, bankruptcy, dissolution or closure events. Fixed-term expiry has exceptions, including where the employer maintains or improves the offered conditions and the employee refuses renewal.
The payment follows the legal event, not the heading on a document. A “voluntary separation” drafted after the employer has already dismissed the employee may not change the underlying route. Conversely, a genuinely voluntary employee resignation ordinarily does not create statutory economic compensation unless another legal trigger applies.
When ordinary statutory severance may not be due
A lawful Article 39 summary dismissal generally does not require economic compensation. An employee’s ordinary voluntary resignation and some employee-proposed mutual exits may also fall outside Article 46. The employer must still pay final wages and other accrued entitlements.
Do not treat “no severance” as proof that an exit is lawful. If the Article 39 ground or procedure fails, reinstatement or unlawful-termination compensation may follow. The termination guide and specialist pages should be used to test the route before the payroll calculation is finalized.
The N formula
Article 47 generally awards one month of wage for each full year of service. A period of six months or more but less than one year is counted as one year; a period below six months is paid at half a month. This service unit is commonly called N.
Record 3270 remains the calculation-method sibling and should contain worked examples. This guide owns entitlement and payment classification. Complex histories involving transfers, related entities, prior settlements, labor dispatch or business acquisitions require a continuity analysis before service years are fixed.
Average monthly wage
The statutory monthly wage generally uses the employee’s average wage during the 12 months before termination or expiry. The Implementing Regulations state that payable wages include time or piece wages and monetary income such as bonuses, allowances and subsidies. Where service is shorter than 12 months, use the actual working months. Where the result is below the local minimum wage, the local minimum applies.
Build the calculation from payroll records rather than basic salary alone. Classify irregular bonus, commission, equity, reimbursement and non-cash benefits under current national and local rules. Do not count the termination payment itself in the pre-exit average.
High-earner cap
Where the employee’s monthly wage exceeds three times the prior-year average monthly wage for employees in the relevant locality, Article 47 generally caps the monthly calculation base at that three-times figure and caps the compensable service period at 12 years.
The applicable local statistic and geographic rule must be verified for the payment date. Do not copy a figure from another city or an outdated internet table. Record the issuing authority, publication and effective period in the calculation file.
N plus one
The “plus one” is not an automatic enhancement to every severance payment. Under Article 40, an employer can generally provide 30 days’ prior written notice or pay one additional month of wage in lieu. That notice payment is separate from Article 47 economic compensation.
Distinguish the wage rule for notice pay from the Article 47 average-wage calculation and confirm local application. A month in lieu does not repair an unsupported termination ground, missing consultation or protected-employee restriction.
2N and reinstatement
Where an employer unlawfully terminates or ends a labor contract, Article 87 provides compensation at twice the Article 47 economic-compensation standard. This 2N amount is a statutory remedy rather than ordinary severance. Under Article 48, continued performance may instead be required if the employee requests it and performance can continue.
The 2025 SPC Labor Dispute Interpretation II addresses pay for the period between an unlawful decision and reinstatement, as well as allocation where both sides contributed to the loss. Do not assume that paying 2N in advance gives an employer a lawful buyout right.
Fixed-term expiry and non-renewal
Expiry does not always mean zero compensation. Article 46 generally requires economic compensation on expiry of a fixed-term labor contract, except where the employer offers renewal on the same or better conditions and the employee refuses. Protected status can extend the contract beyond its stated end date.
Keep the renewal offer, conditions, delivery and employee response. A vague oral discussion is poor evidence of equivalent or improved terms.
Employer breach and employee termination
An employee who terminates under qualifying Article 38 grounds can be entitled to economic compensation. The 2025 SPC interpretation confirms that an agreement to waive social-insurance contributions is invalid and addresses compensation where the employer failed to contribute and the employee terminates on that basis.
Investigate the asserted breach rather than classifying every employee departure as resignation. Wage, safety, rules and social-insurance records can determine the payment outcome.
Settlements and releases
A separation agreement should show statutory amounts and additional negotiated consideration. State the gross or net treatment, withholding method, payment date, account, late-payment consequence and treatment of contingent bonus, equity or commission. Use a controlling Chinese version where appropriate and give the employee a meaningful opportunity to review.
Current judicial rules generally support genuine agreements on termination procedures and payments where they do not violate mandatory law and are not affected by fraud, coercion or comparable defects. Overbroad waivers and unexplained below-floor payments remain risky.
Tax treatment
Tax treatment is distinct from employment-law entitlement. Under the current individual-income-tax transition policy, qualifying one-time compensation for termination is exempt up to three times the prior-year local average annual wage; an excess is calculated separately under the comprehensive-income rate table rather than simply added to annual comprehensive income.
Confirm the current policy, local average and payment characterization when payroll is processed. Do not promise that all severance is tax free, and do not split or relabel compensation without a lawful basis.
Other final payments
Final settlement can include wages through the last day, unused annual-leave pay, earned incentive compensation, expenses and contractual benefits. The national annual-leave measures require prorating unused statutory leave in the termination year and specify a payment method, subject to employee-request and local-rule details.
Post-employment non-compete compensation is not severance. It arises from a separate enforceable restriction and should be scheduled and administered independently.
Calculation file
Maintain:
- the exit document and statutory route;
- service-start date and continuity evidence;
- 12 months of itemized payroll;
- the current local minimum and average-wage publications;
- the N rounding and cap worksheet;
- any notice-pay calculation;
- leave, bonus, commission and expense schedules;
- tax source and withholding worksheet; and
- payment, receipt and separation-document evidence.
Common mistakes
- Paying N for every exit without checking Article 46.
- Calling notice pay “severance” and applying it universally.
- Using basic salary instead of the qualifying wage base.
- Applying the high-earner cap to everyone.
- Using the wrong city or year for the cap.
- Ignoring continuity across an employer-arranged transfer.
- Treating 2N as an optional employer buyout.
- Omitting leave, bonus or other accrued items from the exit ledger.
- Promising that the whole payment is tax exempt.
Sources
- Labor Contract Law of the People’s Republic of China, especially Articles 38, 46–48 and 87.
- Implementing Regulations of the Labor Contract Law, especially Article 27.
- SPC Interpretation II on Labor Disputes, effective 1 September 2025.
- Individual Income Tax Transition Policy, Ministry of Finance and State Taxation Administration.
- Measures for Paid Annual Leave for Enterprise Employees, especially Articles 10–12.
- Current local wage statistics and employment-adjudication rules for the employing location.
General legal information only; not legal or tax advice for a particular exit, payment or dispute.
