[Q&A] Formalising a Mutual Labour Contract Termination
2025. 10. 17
Question: A company has mutually agreed with an employee on an open-ended labour contract to terminate the contract. Out of consideration for facilitating the employee's receipt of unemployment benefits, it plans to state "termination of contract (interruption of employment not due to the employee's intention)" as the reason for termination in the "Termination Agreement". Does the wording of this clause pose any risks to the company?
Answer: It does pose risks to the company. It is advisable to avoid using phrases such as "interruption of employment not due to the employee's intention" or "due to the abolition of the position by Employer" as reasons for termination, to prevent the employee from subsequently claiming in a dispute that the company abolished the position but did not offer redeployment. According to Article 36 of the "Labour Contract Law of the People's Republic of China": "An employer and an employee may terminate a labour contract where they reach a consensus through consultation." Therefore, it is sufficient to clearly state "termination of the labour contract upon the proposal by the employer and with the consent of the employee, following mutual consultation between both parties" for it to be recognised by the court as a mutually agreed termination, not constituting an unlawful termination. For example, in the case of Guangdong Southern Alkali Company Limited and Mr. Hu ( (2017) Yue 01 Min Zhong No. 11631): the company issued a termination notice to the employee due to the closure of the mining area and the abolition of the position. The court ultimately determined that, the termination was proposed for reasons attributable to the company (position abolition), and the employee accepted the notice and expressed agreement, meaning both parties had reached a mutual consensus to terminate, which did not constitute unlawful termination.
Simultaneously, it is recommended that the company retains relevant evidence that both parties reached a consensus through consultation; otherwise, it may be deemed an unlawful termination by the court. In the Supreme People's Court case ((2011) Min Ti Zi No. 32), Mr. Wan joined Riguang Electronics Factory in 1988 and signed an open-ended labour contract in 2007 (with a monthly salary of RMB 4,700). In December 2007, the Electronics Factory unilaterally terminated the contract and paid 12 months' salary (RMB 56,400) as compensation, but did not retain evidence of consultation between the parties. Mr. Wan disagreed, applied for arbitration requesting payment of the additional compensation, and the arbitration supported Mr. Wan’s claims. The Supreme People's Court held that the Electronics Factory could not prove that it had reached a consensus with Mr. Wan through consultation regarding the termination of the contract, and thus the unilateral termination was unlawful. Furthermore, both Mr. Wan's initiation of arbitration, and requesting the employer to pay the additional economic compensation, indicated that the parties had not reached a consensus regarding their mutual rights and obligations; therefore, this case could not be regarded as a situation where the employer proposed and both parties reached a consensus through consultation to terminate the labour contract.
Consequently, we propose that, on the one hand, avoiding specifying the specific background of the termination in the termination agreement, and on the other hand, retaining evidence of the consultation process, can better protect the company from unnecessary legal challenges.