Preface:

In the process of human resource management, termination for incompetence has become a common method for employers to eliminate the weak and retain the strong. However, labor law imposes strict standards for determining when an employee is incompetent. In judicial practice, employers’ determinations of incompetence are often “unilateral” and “arbitrary,” resulting in generally low success rates. Termination for incompetence has become one of the difficulties and pain points in employer HR management. This article attempts to provide compliance guidance for employers on termination for incompetence through a detailed interpretation of relevant legal provisions.

I. Legal Provisions on Termination for Incompetence

Article 40(2) of the Labor Contract Law provides that where an employee is incompetent for the job and, after training or adjustment of the job position, remains incompetent, the employer may terminate the labor contract by giving the employee 30 days’ prior written notice or by paying the employee an additional month’s wages in lieu of notice. According to this provision, there are three key points for termination due to incompetence: (1) the employer must first prove that the employee is incompetent; (2) the employer must provide training or transfer the employee to another position; (3) the employer must prove again that the employee remains incompetent after training or job transfer. It is indeed difficult for employers to successfully satisfy the burden of proof for all three points, requiring the person handling the matter to possess considerable legal expertise.

II. Procedure for Termination for Incompetence

01

Proving the Employee Is Incompetent

How then is incompetence proved? The former Ministry of Labor’s General Office, in its “Explanation on Several Articles of the Labor Law,” defined “incompetence” as: “failure to complete the tasks agreed in the labor contract or the workload of workers in the same trade or same position as required. Employers shall not intentionally raise the quota standards to make it impossible for workers to complete the work.” From the references to “tasks,” “workload,” and “quota standards,” it is clear that the determination of incompetence needs to be supported by job results related to quantifiable metrics. In practice, if employers determine incompetence based on non-quantifiable indicators such as “lack of team spirit,” “lack of work enthusiasm,” or “not fitting the corporate culture,” they face significant risk of losing the case.

Thus, incompetence generally requires a results-oriented assessment from the perspective of work results:

First, the employer must first set reasonable work task indicators for the employee, then develop assessment methods and implement them, and conduct assessments according to the task indicators. Employees who fail to meet the task indicators are deemed “incompetent.” This meets legal requirements. It is important to note that task indicators and assessment methods should be confirmed by the employee’s signature or provided to the employee in writing in advance to be binding on the employee.

Second, the work task indicators set should be as specific and quantifiable as possible. For example, for sales personnel, indicators such as customer visits, new customer development, sales amount, and payment collection amount can be selected. For production personnel, indicators such as product pass rate, production efficiency, and safety production rate can be selected. For R&D personnel, indicators such as number of new products developed, R&D costs, and R&D cycle can be selected. For positions where such quantitative indicators are difficult to apply, indicators such as internal and external customer complaint rate, satisfaction rate, work error rate, rejection rate, and work efficiency can be selected.

Finally, the assessment results should be preserved in writing and confirmed by the employee’s signature. Only then can incompetence be proved. After the assessment results are issued, the employee should be asked to confirm them within a reasonable period in writing or through the company’s internal performance assessment electronic system. If the employee refuses to sign, the employer should use methods such as recording, email, or mail to prove delivery to the employee.

02

Training or Transfer for Incompetent Employees

When an employee is incompetent, does the employer or the employee have the right to decide whether to train or transfer the employee? According to a reply from the former Ministry of Labor’s General Office on May 30, 1996: “Changing or adjusting an employee’s job position due to incompetence falls within the employer’s autonomy.” Therefore, when an employee is incompetent, adjusting the employee’s job position is within the employer’s autonomy and does not require consensus with the employee. The choice rests with the employer. Thus, the employer may choose either training or job transfer.

03

Proving Incompetence Again

After the employer completes proving the employee’s initial incompetence, even if training or job transfer has been provided, the employer still cannot terminate directly. Only after experiencing incompetence and after training or job transfer, if the employee remains incompetent, may the employer unilaterally terminate. The method for proving the employee’s second incompetence is basically the same as the first proof method and will not be repeated here.

III. Common Issues in Training or Job Transfer

01

What constitutes lawful training?

Although China’s laws and regulations do not explicitly specify how employers should train employees after a determination of incompetence, based on the spirit of the above Labor Contract Law provisions, when an employee is found to be incompetent, the employer should provide targeted training on the knowledge or skills related to the specific aspects of incompetence. In other words, training should be targeted, addressing the specific content in which the employee is deficient. If the employee’s sales ability is insufficient, more sales skills training should be arranged. If the employee’s labor discipline is poor, more training on the employee handbook and company discipline should be arranged. If the employee’s professional skills are inadequate, training by senior supervisors or other employees should be arranged.

02

Is a PIP considered training?

A PIP (Performance Improvement Plan) is a systematic plan aimed at requiring employees to improve and enhance their work capabilities and complete relevant work performance within a specified period, focusing on areas where the employee needs improvement. It is commonly used in the HR management of foreign-invested enterprises. However, if a PIP does not contain training content, it is not equivalent to incompetence training. A PIP without embedded training content cannot be relied upon by the employer to directly terminate for incompetence, even if the employee fails to meet the standards after the PIP. For a PIP to be considered valid training, it must embed incompetence training content. It is recommended that employers enter into a PIP with the employee by consensus, specifying the reasons, content, form, timing, and frequency of the performance improvement training, strictly execute the PIP as agreed, and maintain records of the entire training process.

03

What constitutes lawful job transfer?

In the author’s view, the standards for a reasonable job transfer can be参考 as follows:

1. The adjustment of the employee’s position is necessary for the employer’s production and operational needs, and the adjusted position is基本 matched to the employee’s existing work capabilities, without excessive disparity. For example, transferring a former sales manager to a front desk position may lack reasonableness.
2. The salary level after the job transfer is not excessively disparate compared with other employees in the same position.
3. The transfer is not insulting, discriminatory, or punitive.
4. There are no other circumstances that violate laws or regulations.

Furthermore, considering the complexity of job transfer situations, employers need to analyze each case individually and cannot generalize.

04

What if the employee refuses training or job transfer?

If the employer’s training or job transfer is lawful and reasonable, but the employee refuses, what should the employer do? The author believes that since the employer has the right to train or transfer an incompetent employee, the employee should comply with the company’s arrangement. Refusing training or job transfer constitutes a violation of labor discipline, and the employer may impose corresponding disciplinary sanctions. The author recommends that employers formulate lawful and complete rules and regulations,明确 that negative behaviors such as refusing job transfer, refusing training, disobedience to company arrangements, and failure to report to the new position constitute disciplinary violations and provide for penalties. The rules should also specify that repeated offenders may be terminated.

IV. Elimination of the Last-Place Employee and Termination for Incompetence

Elimination of the last-place employee is a performance management system whereby employers, based on their strategy and specific goals and the actual circumstances of each position, set an assessment indicator system and eliminate employees who score at the bottom according to the assessment results. The practice of employers dismissing employees through “last-place elimination” is essentially a unilateral termination of the labor contract. In Guiding Case No. 18 of the Supreme People’s Court, concerning the labor contract dispute between ZTE (Hangzhou) Co., Ltd. and Wang Peng, the adjudication point was: “An employee ranking at the bottom in an employer’s hierarchical assessment is not equivalent to ‘incompetence’ and does not meet the statutory conditions for unilateral termination of the labor contract. Employers cannot unilaterally terminate the labor contract based on last-place elimination.” Therefore, employers cannot unilaterally terminate labor contracts on the grounds of last-place elimination.

According to the above adjudication point, employees ranked at the bottom in an employer’s performance assessment are not necessarily incompetent. In a competition among 10 employees, all 10 may be competent, but one will always be at the bottom. Conversely, all 10 may be incompetent, and even the first-place employee may be deemed incompetent.

Therefore, when applying “last-place elimination,” employers should conduct a comprehensive evaluation combining the employee’s work task indicators, assessment results, indicator completion status, and overall work performance. Employers may consider the last-place ranking as one of the factors in determining incompetence, combined with other quantitative and qualitative indicators and the employee’s overall performance, to collectively demonstrate whether the employee falls under the circumstances of incompetence.

V. Conclusion

In summary, termination for incompetence is characterized by high legal risk and strict management requirements. When terminating for incompetence, employers should first strictly follow the three key points of the termination process mentioned in this article, all of which are indispensable. Employers must ensure that records are maintained throughout the entire process of initial incompetence assessment, incompetence training or job transfer, and second incompetence assessment. Second, when terminating for incompetence, employers must pay economic compensation to the employee and provide one month’s advance notice (or one month’s wages in lieu of notice). Finally, given the high legal risk and management costs of termination for incompetence, it is recommended that employers, when opting for termination for incompetence,最好 proceed under the guidance of professional lawyers to ensure legality and compliance.