Separation from Senior Managers in China: Care, Control and Compliance required

Briefing

Pursuant to the Chinese Company Law, the term “senior managers” refers to the (general) manager, deputy (general) manager, financial controller of a Chinese company, board secretary of a listed Chinese company, and other personnel stipulated in the articles of association of a Chinese company. Broadly speaking, “senior managers” in practice also include those who actually perform senior management functions in a Chinese enterprise, such as the heads of HR, production, R&D, marketing, purchasing, etc.

However, under Chinese law, company’s senior managers are both managers and employees. That means, they not only have their authorities and duties under the Company Law and a company’s articles of association, but also enjoy the full-scale labor law protections.

With regard to separation from a company's senior manager, the Company Law stipulates that the company’s board of directors has the right to dismiss the senior manager without cause. In contrast, the Labor Contract Law stipulates that an employer may only unilaterally terminate the employment relationship with its employee for at least one duly evidenced statutory cause, in writing and after notifying the labor union of the termination reason beforehand. Otherwise it constitutes an illegal termination and the employer is required to pay double the statutory severance as compensation or even to restore the employment relationship. In other words, in the course of separation from senior managers in China by a unilateral dismissal, as employer a company bears the burden of proof for the cause, the process (including the potential legal proceedings) is costly and time-consuming, and the consequences of any mistake are often significant.

Therefore, “Care, Control and Compliance” are required to manage the challenge of separating from a senior manager. A detailed action plan shall be prepared and all homework shall be done before starting any separation talk with the senior manager concerned or taking any termination action. If possible and if it is not a case of the principle, a mutual termination should be preferred over a unilateral dismissal. Compared to a potentially contentious unilateral dismissal, an amicable mutual termination can settle all employee claims at once, keep the case confidential, avoid the costly and lengthy legal proceedings, as well as maintain the company’s reputation and even a good relationship with the departing senior manager (remember the Chinese saying: “More friends, more roads; more enemies, more walls.”).

For reference, we below summarize some common steps for separation from senior managers in China based on our experience in practice:

1 a.

Collection and review of all relevant data and documents (e.g. the manager’s CV, documents collected during the recruitment, onboarding information form, labor contract, employee handbook, information about seniority, remuneration, leave, etc.)
Conducting the necessary investigations and interviews to clarify the facts in connection with the planned separation and to collect evidence (e.g. the manager's statement during the recruitment and the investigation, performance and behavior, any secondary activities, activities on the company’s IT infrastructure, activities on social media, as well as information provided by whistle blowers and registered with official registries, etc.). The evidence collected can be used both as leverage for the separation negotiation and as causes of a unilateral dismissal. If necessary, the manager can be put on paid leave (“garden leave”) during the investigation and also for avoiding statutory wage for accrued but unused leave days upon termination (200% normal average daily wage per day).
Figuring out whether there are other separation options than a unilateral dismissal, e.g. mutual termination, termination upon expiration of the fixed term, by reaching the retirement age, termination due to lack of work permit in the case of a foreign national manager, etc.

1 b.

At the same time, identifying the successor of the manager concerned. Without a successor, the incumbent general manager cannot be deregistered with the company registry. In case of dispute, without a successor, the manager’s claim for reinstatement of his/her employment would likely be supported by the labor arbitral tribunal and the court.

1 c.

Not least, securing company items (including chops, licenses, cards, documents and items for online banking as well as company vehicles and company IT devices, etc.) to ensure the company’s normal operation

2.

Preparation for the separation negotiation:

Building the negotiation team in both the Headquarters and on-site in China;
Drafting the relevant documents such as board resolutions, mutual termination agreement, the (unilateral) termination notice, garden leave notice, termination certificate, handover list;
Calculating and determining the amount of any payable bonus, severance, wage for accrued but unused leave, non-compete compensation (if the non-compete covenant not to be terminated as well);
Determining the negotiation objectives, strategy and tactics.

3.

Separation negotiation, conclusion of the mutual termination agreement; or
Handing over the notice of garden leave; or
Notifying the trade union and handing over the notice of termination

4.

Handover of work and return of company items by the departing manager

5.

Amending registration with the competent company registry based on the change of the relevant manager (if necessary)

6.

Payment of severance pay and issuance of termination certificate to the outgoing manager

7.

Within 15 days after the termination:

Transfer of personnel files to the new employer or the competent employment agency;
Deregistration of employment relationships with the competent labor, social security and housing funds authorities;
For a foreign national employee to notify in writing the competent foreign expert authority and public security authority about the termination.