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How China severance pay generally works
N+1 is not automatic. The “+1” is commonly discussed as one month of payment in lieu of notice for certain no-fault termination grounds when the employer does not give 30 days’ written notice.
2N is a common shorthand for damages that may be discussed when a termination is found unlawful. Whether it applies depends on the legal ground, procedure, evidence and the dispute resolution outcome.
When does severance apply?
Under Article 46 of the Labor Contract Law, an employer is generally required to pay economic compensation (severance) in the following situations:
- Negotiated termination initiated by the employer: Both parties agree to end the contract, provided the employer proposed it.
- Constructive termination by the employee: The employee terminates because the employer failed to pay wages in full or on time, failed to pay social insurance, or violated laws and regulations that harm employee rights (Article 38).
- No-fault termination: The employee is unable to perform the original work after medical treatment, is unfit for the job even after training or reassignment, or the objective circumstances have materially changed making the contract impossible to perform (Article 40).
- Economic layoff: Mass redundancy due to bankruptcy reorganization, serious operational difficulties, or restructuring (Article 41).
- Expired fixed-term contract not renewed: The employer declines to renew or offers worse terms, causing the employee not to renew.
- Employer ceases to exist: Bankruptcy, revocation of business license, compulsory closure, or early dissolution.
How are years of service calculated?
Service years determine the number of monthly salary payments:
- Each full year of service = 1 month of salary.
- 6 months to under 12 months = 1 month (rounds up).
- Under 6 months = half a month.
- If an employee is transferred to a new employer not by personal choice, the service years with the previous employer count toward the new employer’s service period.
What counts as “monthly salary”?
Monthly salary means the average total compensation over the 12 months before termination or contract expiry. This generally includes:
- Base salary (hourly or piece-rate)
- Bonuses, allowances, and subsidies
- Overtime pay (varies by locality)
- Pretax amounts (before personal income tax and the employee’s social insurance deductions are withheld)
If the employee worked fewer than 12 months, the average is based on the actual months worked. If the 12-month average is below the local minimum wage, the minimum wage applies.
The high-salary cap
If the employee’s monthly salary exceeds 3 times the local prior-year average monthly wage (published annually by each city), two caps apply:
- The salary base is capped at 3× the local average monthly wage.
- The service years are capped at 12 years.
Example: if the local prior-year average monthly wage is ¥10,000 and the employee earns ¥40,000/month with 15 years of service, the severance is calculated as ¥30,000 × 12 = ¥360,000, not ¥40,000 × 15.
Payment in lieu of notice (the “+1” in N+1)
The additional “+1” month (代通知金) only applies to the three Article 40 no-fault termination scenarios, and only when the employer does not provide 30 days’ written notice:
- Employee cannot perform original work after medical treatment for illness or non-work injury, and cannot perform reassigned work.
- Employee is unfit for the job and remains unfit after training or position adjustment.
- Material change in objective circumstances makes the contract impossible to perform and no agreement on amendment is reached.
The payment-in-lieu amount is typically the employee’s salary for the previous month.
Unlawful termination damages (2N)
If the employer terminates the contract in violation of the Labor Contract Law, it must pay damages equal to twice the economic compensation (2N). Common unlawful scenarios include:
- Termination during protected periods (medical treatment, pregnancy, maternity leave, nursing leave, work-injury suspension).
- Termination without valid legal grounds or supporting evidence.
- Termination without following required procedures.
- Termination in retaliation for the employee exercising legal rights.
Note: once damages (2N) are awarded, economic compensation (N) is not paid separately. The damages calculation counts from the first day of employment.
Tax treatment of severance
Per Caishui [2018] No. 164, a lump-sum compensation received on termination of employment (including severance, living allowance, and other subsidies) is exempt from individual income tax up to 3 times the local prior-year average annual wage. The portion exceeding 3 times is taxed separately under the comprehensive income tax brackets, without being combined with other annual income.
Dispute resolution and time limits
If a dispute arises over severance, the employee may pursue the following channels in order:
- Negotiation: Discuss directly with the employer.
- Mediation: Seek mediation from the enterprise labor dispute committee, a grassroots mediation organization, or a township/street labor dispute mediation body.
- Arbitration: File with the labor dispute arbitration commission at the place of contract performance or employer location. The limitation period is 1 year from the date the employee knew or should have known their rights were infringed.
- Litigation: If dissatisfied with the arbitration award, file a lawsuit within 15 days of receiving the award.
Common misconceptions
Not necessarily. If the employer has committed Article 38 violations (unpaid wages, unpaid social insurance, etc.), an employee who resigns for those reasons may still claim severance.
The “+1” payment in lieu of notice only applies to Article 40 no-fault terminations. Negotiated separation, non-renewal, and economic layoff typically result in N only.
The salary base is the 12-month average of total compensation, including bonuses, allowances, and subsidies — not just the base salary line item.
Economic compensation (N) and damages (2N) are mutually exclusive. Lawful termination gives N; unlawful termination gives 2N. You cannot receive both.