When an employment relationship ends, financial compensation is often a key concern. Here are some frequently asked questions for references.

1. Do employers have to pay compensation for not renewing a contract?

Under China's Labor Contract Law, when a fixed-term labor contract is terminated, the employer must pay economic compensation to the employee if it decides not to renew the contract, unless the employee refuses to renew the employer's offer with conditions equal to or better than the existing terms.

2. How to calculate the economic compensation?

As outlined in China's Labor Contract Law, economic compensation is based on an employee's length of service with the company. Employers must pay one month's wages for each full year of service.

For employees with service periods between six months and one year, the period is rounded up to one year. Those with less than six months of service are entitled to half a month's wages.

It should be noted that, when calculating the number of years for economic compensation, periods before Jan 1, 2008 — when the Labor Contract Law took effect — are not counted.

In addition, the monthly wage used in the calculation is the employee's average monthly income for the 12 months preceding the contract's termination or expiration.

3. "N+1" financial compensation for terminated employees in China

Under China's Labor Contract Law, employers are required to provide financial compensation to employees under certain conditions when terminating an employment contract.

The amount of compensation is calculated based on the number of full years an employee has worked for the employer, with one month's salary paid for each year of service.

In this context, the "N" in "N+1" refers to the total number of full years the employee has worked for the employer. The "1" represents an additional month's salary that must be paid if the employer fails to provide the required 30-day written notice before terminating the contract. This extra payment is calculated based on the employee's final full-month salary.

For example:

An employee has worked for 5 years and 8 months with an average monthly salary of 10,000 yuan ($1,380) and is laid off without prior notice. The compensation would be:

N = 6 (as 5 years and 8 months rounds up to 6 years)

N + 1 = 7 months of salary

Total compensation = 70,000 yuan

Importantly, the "N+1" compensation does not include regular wages the employee earned during the final working days before departure.

The employer must issue a certificate of contract termination and, within 15 days, complete the employee's file transfer and social insurance settlement. Economic compensation must be paid upon the employee's departure, in accordance with legal requirements and any mutual agreements.

4. Financial compensation related to medical treatment period

Does the company need to pay financial compensation if it proposes to terminate the employment contract after the medical treatment period ends?

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Updated Sept 22, 2026