The basic formula (“N”)
Severance equals one month’s wages for each full year of service. Service of six months or more but less than a year counts as a full year; less than six months counts as half a month.
“Monthly wage” means the employee’s average monthly wage over the 12 months before termination, including bonuses and allowances.
The cap for high earners
If the employee’s monthly wage is more than three times the local average monthly wage, it’s capped at three times that average, and the number of years counted is capped at 12.
When severance is due
- Mutual termination initiated by the employer
- Termination for incapacity, incompetence or major change of circumstances
- Redundancies
- Expiry of a fixed-term contract that the employer doesn’t renew on the same or better terms
- Resignation because the employer breached the law, for example by not paying social insurance
“N+1” and double compensation
- N+1: where the employer dismisses on certain grounds without 30 days’ notice, it pays an extra month in lieu.
- 2N: unlawful termination usually costs twice the statutory severance.
Example
An employee in Shanghai with 4 years and 8 months of service earning RMB 20,000 a month (below the cap) would receive 5 × 20,000 = RMB 100,000.
Before ending any employment, speak to our employment lawyers. Most expensive disputes start with a rushed termination.