Termination Payment

Termination payments are composed of:

  • Any breach of notice as established in the contractual agreement by either side (employee or employer). The party would pay the other in lieu of short notice period.

  • The compensation of accrued annual leave balance. Employers must pay out the leave balance.

Termination payments:

  • Are taxed along with the last month's salary of the employee. Not all companies have contractual agreements for the notice period.

  • Use one of two methods to determine the salary for the purpose of calculation:

    • A fixed monthly salary as decided or negotiated by the employer with employee.

    • The previous month's actual salary paid by the employer.

Leave Compensation for Annual Leave Balance

When an employee is terminated, if an outstanding statutory annual leave is accrued to his account, the company compensates the statutory annual leave. This amount is taxable along with normal earnings.

The amount paid in lieu of the balance statutory annual leave is calculated in the following way:

Statutory Annual Leave Payment = Daily Rate x Outstanding Statutory Annual Leaves x 300%

The calculation of daily rate is based on the type of the employee.

If the employee is a daily-rate employee, the same rate is used. If the employee works on a monthly rate, the daily rate is calculated as:

Daily rate = Average monthly salary of past 12 months ÷ Average working days in a month

The average working days in a month is regulated by the Ministry of Labor and Social Security (MOLSS) of China.

Pay In Lieu of Short Notice Period

If a breach of notice period occurs as detailed in the contractual agreement by either side, the party breaching the contract must pay the other in lieu of the short notice period. This amount is taxable along with normal earnings. Calculation of the notice period is:

Payment for Short Notice = Daily Rate × Days short of notice period

The Daily rate is calculated as:

Daily-Rate = Monthly Salary ÷ Average working days in a month

Payment in lieu of notice by the employer is a pretax earning for the employee. Payment in lieu of notice by the employee is a pretax deduction for the employee. As such, it would need to be taxed with the last month's salary.