China Severance: What Do N, N+1 and 2N Mean?

N is statutory severance in China: one month’s wage for each year of service. N+1 is N plus one month’s pay instead of 30 days’ notice, and it only arises for three specific dismissal grounds. 2N is damages for an unlawful dismissal, and it replaces N rather than being added to it.

This guide is for employers ending an employment contract in mainland China.

N, N+1 and 2N are outcomes, not options

An employer doesn’t choose between these. The legal route the exit takes decides what is owed.

N is economic compensation under Article 47 of the Labor Contract Law, owed in the situations listed in Article 46.

The +1 comes from Article 40. For the three grounds in that article, the employer must either give 30 days’ written notice or pay one extra month’s wage instead. That month is set by the employee’s previous month’s wage standard (Implementing Regulations, Article 20), which can differ from the 12-month average used for N. Outside Article 40 there is no national +1.

2N applies when a termination breaks the law. If the employee asks to keep the job and that is still possible, the employer has to continue the contract (Article 48). If not, the employer pays damages at twice the Article 47 rate (Article 87). Damages replace economic compensation, with service counted from the first day of employment (Implementing Regulations, Article 25). The Ministry of Human Resources and Social Security’s explainer on the three terms puts it the same way.

Which exits trigger which payment

The Article 40 grounds are narrower than their labels. Illness requires that, after the medical treatment period, the employee can do neither the original job nor other work the employer arranges. Incompetence requires training or reassignment first, and continued inability afterwards. A change in circumstances must make the contract impossible to perform, and the parties must have tried and failed to agree changes. “Restructuring” on its own isn’t a ground. Article 41 redundancies also need a statutory economic reason, 30 days’ explanation to the union or all staff, the plan reported to the labor authority, and priority retention for certain employees.

Three points turn otherwise lawful exits into 2N claims:

• Protected employees. Article 42 bars Article 40 and 41 exits for employees in a medical treatment period, pregnant or on maternity or nursing leave, with occupational disease or work injury that reduced their capacity, exposed to occupational hazards without a pre-departure health check (or suspected of occupational disease under diagnosis), or with 15 continuous years at the employer and under five years to retirement. A fixed term that expires in those circumstances is extended until they end (Article 45).
• Union notice. Any unilateral dismissal requires telling the union the reasons in advance (Article 43). Where a union exists and the employer skipped this, the employee can claim damages unless the employer corrected the procedure before the claim was filed (SPC Interpretation (I), Article 47).
• The second fixed-term contract. After two consecutive fixed-term contracts, an employee who asks to renew is entitled to an open-ended contract unless an Article 39 or 40(1)–(2) ground applies (Article 14). The Supreme People’s Court’s selected Q&A says that right must be protected, and a refusal is treated as an unlawful termination. Letting a second contract “expire” is not the safe exit it looks like.

How N is calculated

Service. One month’s wage for each full year. A remainder of six months or more counts as a full year; under six months counts as half a month (Article 47). Service with a previous employer counts when the employee was moved for reasons other than their own, unless the previous employer already paid compensation for it (Implementing Regulations, Article 10).

The monthly wage. The average of the 12 months before the contract ends, using gross wages earned, including bonuses, allowances and subsidies. It can’t fall below the local minimum wage, and someone with less than 12 months’ service is averaged over the months actually worked (Implementing Regulations, Article 27). That is why a 13th-month salary or year-end bonus can raise N.

The cap. If the employee’s monthly wage is more than three times the local average monthly wage, N is calculated at three times that average, for at most 12 years (Article 47). Cities define the average differently. Shanghai uses the previous year’s full-scope urban average (Shanghai HRSS); Beijing uses the average wage at legal-person units (Beijing HRSS), which is not the figure used for social insurance. Use the figure that applies on the exit date. The +1 has its own base and isn’t capped this way.

Service before 2008. For long-serving staff, service before 1 January 2008 may need a separate calculation under the transition rules (Article 97), so don’t apply the modern formula to the whole period without checking.

What else goes in the final payment

N is one line of the final payment. The others usually are:

• Wages to the last day. In Shanghai they are paid in one sum when the exit formalities are completed, unless the parties lawfully agreed otherwise (Shanghai Measures, Article 7).
• Unused annual leave. The exit-year entitlement is prorated (days elapsed ÷ 365 × annual entitlement, minus leave already taken), and any fraction under a full day isn’t paid. Unused days are paid at 300% of the daily wage, which includes the normal wage already paid, so the extra cost is usually 200%. The daily wage is the monthly average over the previous 12 months, excluding overtime, divided by 21.75. If the employee declined leave in writing for personal reasons, only normal pay is due (Annual Leave Measures, Articles 10 to 12).
• A prorated bonus, where the contract, the company rules or a local default provide one. Shenzhen’s default is covered in our 13th-month guide.
• The +1, only for an Article 40 dismissal without notice.

The timings differ. Economic compensation is paid when the work handover is completed. The termination certificate is issued at termination, and the personnel file and social insurance are transferred within 15 days (Labor Contract Law, Article 50). An unfinished handover isn’t a reason to hold back the certificate or wages already earned.

How severance is taxed

A qualifying one-off payment for ending employment is exempt from individual income tax up to three times the local previous-year average annual wage. The excess isn’t added to the employee’s annual income; it’s taxed separately using the comprehensive income rate table (财税〔2018〕164号, item V(1)). Because it’s taxed separately, it stays out of the employee’s annual reconciliation (State Taxation Administration), so the employer’s withholding needs to be right the first time.

This “three times” is an annual figure set for tax purposes, not the monthly average behind the severance cap. Confirm the local threshold and classify each part of the payment before withholding. Unpaid wages and leave pay are taxed as wages, and the treatment of 2N damages depends on how the payment is classified.

Three worked examples

Each example assumes ordinary full-time employment, service after 2008, a correctly calculated wage base below the cap, and that the grounds and procedure for the route are fully established. Amounts are gross and exclude wages, leave and other final-pay items.

Example 1 uses two bases: the 12-month average for N, the previous month for the +1. Example 2 shows that expiry isn’t free. Beijing also requires the employer to give 30 days’ written notice before expiry of whether it will renew, and late notice costs one day’s average wage for each day of delay (Beijing Labor Contract Provisions, Articles 40 and 47). Example 3 assumes the employee chose damages; had they asked to return, the contract would have continued.

Before you tell the employee

• Name the legal route and gather the evidence for it: performance records, the training or reassignment offered, the change in circumstances and the attempt to agree changes.
• Check Article 42 status, and whether this would be a second fixed-term contract.
• Notify the union of the reasons before a unilateral dismissal.
• For Article 40 only, decide between 30 days’ notice and a month’s pay instead.
• Itemize the final payment: N, any +1, wages, leave, bonus, and the tax treatment of each.
• If you’re negotiating a separation, put every payment in the agreement and negotiate it fairly.
• Prepare the termination certificate and the 15-day file and social insurance transfers.

How NNRoad supports this

With China Employer of Record, a registered Chinese employer holds the labor contract and NNRoad runs payroll and HR. Companies with their own China entity can use China payroll for the final payroll run, withholding and contributions. Our China employment law guide covers contracts, notice and leave more widely.

FAQ

Can we end employment during probation without paying severance?

Only on an Article 39 ground, such as a proven failure to meet the stated hiring conditions. A probation dismissal under Article 40(1) or (2) still owes N and notice or a month’s pay instead, and the employer must explain its reasons (Labor Contract Law, Article 21).

Can a separation agreement pay less than N?

A negotiated settlement can be enforceable, but signing doesn’t by itself validate a below-statutory payment. It must not breach mandatory law or involve fraud, coercion or exploitation, and it can be set aside for major misunderstanding or obvious unfairness (SPC Interpretation (I), Article 35).