Terminating employees in China through negotiations

A US company recently approached us on an employment matter. Their Shanghai subsidiary terminated several employees due to the elimination of their positions, but after paying them severance these employees still filed claims in labor arbitration claiming economic compensation (which is two times severance) for unlawful termination, and in one case reinstatement.

Chinese labor laws are relatively strict when it comes to unilateral termination by the employer. This is only permitted for one of several grounds listed in the law. Some of these legal grounds allow immediate termination without compensation –mainly material breach of the employer's rules, and serious dereliction of duties or graft for personal gain (causing substantial losses to the employer).