Closing a Wholly Foreign-Owned Enterprise (WFOE) in China involves not only administrative processes but also caring for the employees who have worked hard for you. Learn the steps to properly handle employee relations after your WFOE closes.
When conducting business and operating companies in China, you might decide to close your established WFOE based on various reasons. In our previous blog, we introduced how to properly close a WFOE. In this blog, we will introduce another important aspect you need to consider during the WFOE closure process: how to correctly and legally handle employee relations of the WFOE during the company closure process.
At Hongda, this blog will answer how you should complete contract termination, salary settlement, and compensation payment matters with your employees after company deregistration. Of course, if you are an employee of a Chinese company and are required to terminate your labor contract by your employer, you can also use the content introduced in this article to claim your entitled rights.
Issue 1: Notifying Employees of Contract Termination
According to the provisions of the Labor Contract Law, company dissolution is one of the statutory circumstances for terminating labor contracts. This means that if you decide to close and dissolve your company, you need to promptly notify your employees and pay attention to the following key points:
- Advance notice: According to legal requirements, you must formally notify the employee in writing at least thirty days before the labor contract termination. Otherwise, employees can claim compensation for losses.
- Clear communication: You need to clearly inform employees of the decision to dissolve and close the company, the reason for labor contract termination, the labor contract termination date, employees' rights (e.g., economic compensation), and subsequent arrangements (work handover, resignation procedures).
- Confirmation of delivery: You need to ensure your written notice is effectively and accurately delivered to your employees and retain proof, such as signed receipts or postal records, as evidence of delivery.
Issue 2: Salary Settlement
After deciding to terminate labor contracts with employees, you need to handle salary settlement matters with employees. According to legal provisions, you need to pay employees all their entitled work remuneration before and including the termination date of the labor contract, including
- Unpaid wages: Including base salary, position salary, performance salary, commission bonuses, etc.;
- Overtime pay: Any unpaid overtime wages;
- Unused annual leave compensation: If employees have unused statutory paid annual leave, you need to pay 300% of the employee's daily wage (i.e., an additional 200% compensation);
- Other statutory benefits or allowances: The company should continue paying social insurance and housing provident fund according to standards. Meanwhile, if the company has promised specific benefits and subsidies (such as transportation allowance, communication allowance, meal allowance, etc.), these should also be settled through the termination date according to the labor contract termination notice.
Issue 3: Severance Payment ("N" Compensation)
According to legal provisions, if labor contract termination results from employer dissolution, the employer must pay employees economic compensation. Under current Chinese regulations, legally terminating labor contracts due to company dissolution requires paying employees’ compensation according to the following standards, which should be paid in one lump sum upon labor contract termination or during asset liquidation (the specific payment timing must be clearly communicated to employees):
- N: According to the employee's years of service in the company, pay one month's wage for each full year worked;
Issue 4: Social Insurance and Housing Provident Fund Settlement
During company dissolution, you still need to pay social insurance (including pension, medical, unemployment, work-related injury, and maternity) and housing provident fund contributions for your employees through the termination month of the labor contract and complete employee reduction (减员) or account freezing (封存) procedures for social security and housing fund accounts. For already paid portions, they can be handled as follows:
- Social insurance: Since employees' personal account balances generally cannot be withdrawn (exceptions: retirement, emigration, or foreign employees leaving China), employees can transfer and continue payments through new employers during subsequent employment.
- Housing provident fund: Employees can apply to withdraw personal account balances or transfer to new employer accounts using resignation certificates and other materials, in compliance with local policies.
Issue 5: Cancelling Work Permits for Foreign Employees
If your company employs foreign staff while complying with the above legal requirements, you also need to properly handle matters such as canceling work permits for foreign employees.
- Cancel foreigner work permit: You need to apply to cancel the work permit for foreign employees on their last working day.
- Cancel work-type residence permit: Your foreign employees need to go to the Entry-Exit Administration Bureau to cancel their residence permits and apply for other types of visas within 10 days of receiving the work permit cancellation certificate. If foreign employees have accompanying family members, they must also simultaneously apply for cancellation or conversion; they may face risks of illegal stay.
Issue 6: Other Important Matters
- Issue resignation certificates: After terminating labor contracts with employees, you need to legally issue Termination/Resignation of Labor Contract Certificates (also known as 离职证明) to employees, stating the labor contract period, termination date, position, and length of service at the company. This is an essential document for employees to process unemployment registration and seek new employment. Please be sure to prepare and deliver it to employees on time.
- Non-compete clauses (if applicable): If employees have signed valid non-compete agreements, after the company decides to close, economic compensation is usually no longer paid, and the agreement automatically becomes invalid. However, employees must be clearly informed. If the agreement has special provisions or the company wants certain employees to still comply during the liquidation period, compensation must be paid according to the agreement; otherwise, employees do not need to comply with non-compete restrictions.
- Confidentiality obligations: If you signed confidentiality agreements with employees when they joined, you need to remind employees to continue fulfilling the confidentiality obligations stipulated in the contract.
Conclusion
Closing your WFOE involves more than just deregistration paperwork—it’s about fulfilling legal obligations to employees with zero shortcuts. If you need any help, consult Hongda’s experts for a customized closure roadmap.
