Hiring Employees in China: Contracts, Probation, Social Insurance, and Termination Rules

TL;DR — the essentials

China is an at-will-hostile jurisdiction: an employment contract must be written within one month of starting work or double wages are owed, and termination without cause is generally not available — separation requires a statutory ground.

Probation is capped by contract length (1 month for 1–3 year contracts, 6 months maximum) and can only be set once per employee; salary during probation must be at least 80% of the contract wage.

Social insurance plus housing fund add roughly 30–40% employer cost on top of gross salary — non-payment is the most common liability found in due diligence, with back-payment, late fees, and equal-payment claims.

Termination for cause (serious rule violation, fraud) needs documented evidence and a rules handbook acknowledged by the employee; termination without cause requires 30 days' notice (or pay in lieu) plus severance of one month's wage per year of service.

Mass layoffs (20+ employees or 10% of workforce), even structured redundancies ( economising measure, reorganisation), require prior notification to the trade union/employees and labour authorities.

The architecture: contract types and fixed rules

Chinese employment law is statutory and employee-protective; the contract operates inside mandatory floors, not above them. Employment comes in two contract shapes:

Fixed-term (固定期限) — the default. Note the conversion trap: after two consecutive fixed-term contracts, the employee can demand an open-term (permanent) contract.
Open-term (无固定期限) — no end date; termination grounds are the same, but there is no natural expiry.

A third — project-based contracts ending with task completion — exists but is rare in foreign-invested companies.

Double-wage trap: written contract within one month of start, or double wages from month 2 to month 12, and deemed open-term after a year. Probation must be inside the contract, defined once, with caps: 1 month for contracts of 1–3 years, 6 months for 3+ years or open-term, and probation salary at least 80% of the contracted wage.

⚖ Legal source

Labour Contract Law of the PRC (2008, amended 2012), Arts. 10, 82 — written-contract requirement and double wages; Arts. 19–20 — probation caps and minimum probation wage; Art. 14 — open-term contract after two consecutive fixed terms; Arts. 26–28 — validity of contract terms; Arts. 36–41 — termination grounds: mutual agreement (36), unilateral for cause (39), no-fault with notice and severance (40), structural redundancy with notification (41); Arts. 46–47 — severance: one month's wage per year of service; Arts. 4, 38–39 — democratic procedure for work rules and employee's immediate termination rights; Labour Law and Social Insurance Law — social insurance enrolment as a mandatory, non-waivable obligation.

Both employer and employee must contribute monthly to five insurance funds (pension, medical, unemployment, work-related injury, maternity — the last two merged in many cities), plus housing fund (住房公积金) in most cities. Rates and bases are city-set, with a floor and ceiling around the local average wage:

Item	Typical employer share	Notes
Pension	16%	To 275% of local average wage base cap
Medical	~9–10%	City-set
Unemployment	~0.5%	Small
Work injury	0.2–1.9%	Industry-rated
Maternity	Merged into medical in most cities	—
Housing fund	5–12%	City-set; some cities allow lower for first years

Non-negotiables: enrolment is mandatory from month one, contributions are calculated on actual wages (not the floor, despite common practice), and the obligation cannot be waived by agreement — an employee’s signed “I waive social insurance” letter is void, and the employee can still quit with compensation and claim back-contributions. This is the single most common employment liability in M&A due diligence.

For foreign employees: generally enrolled the same as locals, subject to totalisation agreements (Germany, Japan, Korea, etc.) that can exempt some home-country obligations.

Termination: the short list of legal doors

Every separation must fit a statutory route:

Route	Preconditions	Cost
Mutual agreement (Art. 36)	Signed settlement agreement	Negotiated, often N+1 or more
For cause (Art. 39)	Serious misconduct/violation of published rules, fraud, criminal liability	No severance — but evidence + procedure must be airtight
No-fault (Art. 40)	① Incompetence after training/adjustment; ② major objective change; each needs 30 days’ notice or pay in lieu	N severance + notice
Redundancy (Art. 41)	20+ employees or 10%+ of workforce cut, statutory business reasons, prior notification to union/employees and labour authority, priority rehiring rules	N severance
Contract expiry	Employer refuses renewal or offers worse terms	N severance

(“N” = one month’s average wage per completed year of service; six months to one year counts as one year; below six months pays half a month.)

Two systemic notes: pregnancy, medical treatment period, and work-injury leave create termination protection — Art. 40/41 routes are closed during these periods (Art. 42). And unlawful termination costs double severance (2N) or reinstatement at the employee’s election — with arbitration typically taking 6–12 months.

What actually gets employers in trouble

The handbook that wasn’t — dismissals for “serious violation of rules” fail because the rules were never democratically adopted or never signed for. Fix before the first hire, not before the first firing.
Social insurance at the floor — common, audit-visible, and clawback-prone: back contributions with late fees, plus employee claims.
Performance management without paper — the Art. 40(1) incompetence route needs documented standards, two documented review rounds, and training or adjustment evidence; “everyone knew he wasn’t performing” is not evidence.
Off-payroll and dispatch misuse — labour dispatch (劳务派遣) is capped at 10% of headcount and only for temporary/auxiliary/substitute roles; misclassification converts agents into co-employers.
Overtime and leave — standard hours are 8/day, 40/week with overtime caps (36 hours/month); unpaid overtime claims accumulate with a long look-back period.

The employment playbook is front-loaded: a proper contract, a properly adopted handbook, correct social insurance from month one, and documented performance reviews turn the most litigious area of Chinese law into a manageable one. Fixing these after a dispute starts costs multiples.

Frequently asked questions

Can I fire an employee without cause if I pay severance?

No — this is the biggest misconception about Chinese employment law. Unlike the US 'at-will' model, paying money does not create a termination ground. Valid no-fault routes are statutory: incompetence after training or position adjustment (two documented rounds), major change of objective circumstances making the contract untenable, or statutory redundancy procedures. Each route has preconditions: documented performance standards, training or adjustment evidence, and union/employee consultation. A negotiated mutual termination agreement (协商一致解除) with agreed compensation is usually the fastest, cleanest exit — and in practice often costs less than litigating a risky unilateral termination.

What happens if I don't sign a written contract?

After one month of employment without a written contract, the employee can claim double wages for every month worked without one — capped at 11 months — and after a year, the law deems an open-term contract to exist. This rule bites hardest on startups and new entities that 'haven't got around to' contracts; the liability is mechanical and has no defence of good faith. Sign before day 31, and keep signed originals.

How does the employee handbook become binding?

Only through adoption with democratic procedure and acknowledgement: rules on discipline, performance standards, and misconduct must be adopted after consultation with the employees' congress or all staff, and the employee must sign an acknowledgement of receipt. A dismissal based on a rule the employee never saw — or a rule adopted without the process — loses at arbitration, however obvious the misconduct. Serious misconduct dismissals (严重违反规章制度) fail in practice for evidence or procedure, not because the conduct was tolerable.