A Guide to Economic Compensation for Employment Contract Termination: How to Lawfully and Compliantly Calculate Your Severance Pay

Severance after termination of a labor contract is not a simple matter of “paying a few months’ wages.” What truly determines the amount are whether the termination complies with the law, whether economic compensation or damages for unlawful termination apply, and whether the monthly wage base and years of service are calculated correctly. In practice, recurring disputes focus on three keywords: N, N+1, and 2N.
N usually corresponds to economic compensation for lawful termination or expiration, with the core formula being average monthly wages multiplied by years of service. N+1 is not an “extra reward,” but applies only to the three types of no-fault termination under Article 40 of the Labor Contract Law, where one month’s wages replace 30 days’ prior written notice. 2N is entirely different and may be claimed as damages for unlawful termination only when the employer’s grounds are unfounded, procedures are illegal, or statutory prohibitions on termination are violated.

Many employees lose in arbitration not because of math errors, but because they mistake voluntary resignation for compensable departure, or assume all dismissals warrant 2N, ignoring the strict distinctions in Articles 46, 47, and 87 of the Labor Contract Law regarding the nature of compensation. Equally important are the cap on compensable years, the high-wage ceiling, the 12‑month average wage standard, and subtle regional differences in judicial practice. Together, these factors determine whether a severance formula is valid, whether the amount is “discounted,” and whether entering arbitration is worthwhile. For ordinary employees, understanding the real logic of calculating economic compensation for termination is not just about gaining or losing tens of thousands of yuan, but about judging the legality of the employer’s actions, knowing the boundaries of one’s rights, and deciding whether to preserve evidence and take timely legal action.

-----

Conclusion First: Summary Table for N, N+1, and 2N Severance Calculations

When a labor contract is terminated or expires, common compensation outcomes mainly fall into N, N+1, or 2N. The key determination is not simply “whether the company gave advance notice,” but rather: whether the reason for termination is lawful, whether it falls under statutory compensation scenarios, and whether procedures are compliant. Generally, N and N+1 correspond to economic compensation under lawful termination or expiration, while 2N applies to damages for unlawful termination or unlawful expiration by the employer.

Quick definitions:
N = the employee’s years of service with the employer; S = the average monthly wage over the 12 months prior to termination or expiration of the labor contract.
Common formulas: N compensation = S × N; N+1 = S × N + last month’s wage × 1; 2N damages = S × N × 2.
In practice, “N, N+1, and 2N” are conventional terms. The specific determination should still be based on Articles 40, 46, 47, and 87 of the Labor Contract Law. For calculation standards, see the Wuxi Human Resources and Social Security Bureau’s explanation of N, N+1, and 2N and the Beijing Xinjie Law Firm’s overview of economic compensation calculations.

To quickly determine which category applies to you, follow this order: first, see who initiated the termination; second, check whether the employer has statutory fault or a statutory reason for termination; finally, examine whether the termination procedures are compliant. If it is a lawful termination falling under Article 46, it is usually N; only when it falls solely under the three scenarios of Article 40 and the employer did not give 30 days’ prior written notice might it be N+1; if the termination itself is unlawful, the discussion is typically about 2N damages, not ordinary economic compensation.
-----

Basic Formula for Calculating Economic Compensation

The core formula for economic compensation is not complicated. The key is to first calculate two variables accurately: average monthly wage S and years of service N.

Standard formula: Economic compensation = average monthly wage × years of service, i.e., S × N

Here, S usually refers to the average monthly wage over the 12 months preceding the termination or expiration of the labor contract. Note that it is generally not the “base salary” stated in the labor contract, but the wage the employee is entitled to receive. This typically includes time-based wages, piece-rate wages, bonuses, allowances, subsidies, and other monetary income. Court cases published by the Beijing Daily Beijing Account also indicate that bonuses such as year-end bonuses that should be paid may need to be converted on a monthly basis and included in the average wage for the 12 months prior to departure. Relevant cases summarize this as the calculation base being payable wages, including bonuses, allowances, and other monetary income.

Here, N refers to the employee’s years of service with the employer. According to Article 47 of the Labor Contract Law, the calculation can be understood as follows:

• For each full year: pay 1 month’s wage;
• More than 6 months but less than 1 year: calculated as 1 year;
• Less than 6 months: pay half a month’s wage.

Therefore, the calculation of economic compensation can be carried out in the following three steps:

1. Determine the wage base S
   Sum the total payable wages for the 12 months preceding the termination or expiration of the labor contract, then divide by 12. If the period of employment is less than 12 months, the average wage is usually calculated based on the actual number of months worked. Q&A materials from human resources and social security authorities also indicate that if the monthly wage is lower than the local minimum wage standard, the local minimum wage standard is used; if it exceeds three times the local average monthly wage of employees in the previous year, the corresponding cap rules apply. See Explanation on the Calculation of Economic Compensation for Termination of Labor Contracts.
2. Determine the years of service N
   Calculate from the date of entry to the date of termination or expiration of the labor contract. Do not rely on a rough estimate of “how many years of service”; be precise to the month, because whether it reaches 6 months will directly affect the number of compensable months.
3. Apply the formula S × N
   The result is the amount commonly referred to as “N” economic compensation. If subsequent issues involve “N+1” or “2N,” these are determined on this basis by further assessing whether additional payment in lieu of notice applies or whether it constitutes compensation for unlawful termination.

A simple example: an employee’s average monthly wage over the 12 months before leaving is 10,000 yuan, and they have worked at the company for 3 years and 6 months. Since “more than 6 months but less than 1 year is calculated as 1 year,” the years of service N are calculated as 4 years:

If the working period is 3 years and 5 months, the portion of less than 6 months is calculated as half a month’s wage, so N is 3.5, and the economic compensation is 10,000 × 3.5 = 35,000 yuan. This is also the most common point of error in actual calculations: “3 and a half years,” if it has already reached 6 months, is usually compensated as 4 months’ wages; only if it has not reached 6 months is it compensated as 3.5 months’ wages.

When N, N+1, and 2N Apply

When determining severance, don’t rush to apply formulas. First determine whether the termination is lawful, who initiated it, and whether statutory procedures were followed. Simply put, N is economic compensation under lawful termination or expiration; N+1 replaces the 30‑day advance notice with “one month’s salary” in specific lawful termination scenarios; 2N is compensation payable when the employer unlawfully terminates or unlawfully ends the contract.

Quick guide:
Lawful termination with statutory compensation → N; Article 40 scenarios without 30 days’ written notice → N+1; unlawful grounds or procedures → 2N.

1. N: The most common—applies to “lawful termination where compensation is required by law”

N refers to economic compensation. The usual prerequisite is that the termination or expiration of the labor contract has a legal basis, but the law requires the employer to pay compensation. Common scenarios include:

• Termination by mutual agreement proposed by the employer. If the employer initiates termination and both parties sign a mutual termination agreement, economic compensation is generally payable.
• Economic layoffs. For example, when a company faces serious operational difficulties, meets statutory layoff conditions, and completes required procedures such as explanation, solicitation of opinions, and reporting, N generally applies.
• Contract expiration with non-renewal by the employer, or renewal on downgraded terms that the employee refuses; N is typically payable.
• “Forced resignation” by the employee. For example, where the employer fails to pay wages in full and on time, fails to contribute to social insurance as required, or fails to provide agreed labor protection or conditions, the employee may lawfully terminate and claim N. Practical summaries also include these cases within employee-initiated termination with economic compensation; see Classification of N, N+1, and 2N in labor disputes.

Note that employees who voluntarily resign for personal reasons generally are not entitled to economic compensation. Examples include “found a new job,” “personal development reasons,” or “family reasons.” These typically do not fall under Article 46. However, if the real reason for resignation is employer fault such as wage arrears or unpaid social insurance, the termination notice should clearly state the facts and legal basis to avoid being characterized as an ordinary voluntary resignation.

2. N+1: Limited to the three scenarios under Article 40, and only when the employer did not give 30 days’ written notice

The “+1” in N+1 is not an extra bonus; it is pay in lieu of notice. It applies only to the three non-fault termination categories specified in Article 40 of the Labor Contract Law, and only when the employer failed to give 30 days’ written notice. Interpretations by the Wuxi human resources and social security authorities also clearly state that N+1 is limited to these three scenarios and does not apply to all terminations without advance notice; see the pay-in-lieu-of-notice rules.

Specifically:

1. After the medical treatment period expires, the employee cannot perform the original job or any other job arranged
   For example, an employee suffers a non-work-related injury; after the medical period expires, assessments show they cannot perform the original role, and the employer has arranged other reasonable positions that the employee still cannot perform. The employer may lawfully terminate but must give 30 days’ written notice; if not, pay in lieu of notice is required.
2. Incompetence for the job, remaining so after training or reassignment
   The key is not the employer’s subjective view of “poor performance.” Typically, evidence is needed such as job requirements, performance records, training or reassignment arrangements, and re-evaluation results. If the employer terminates directly for “incompetence” without training or reassignment, there may be a risk of illegality.
3. A material change in the objective circumstances on which the contract was based, and negotiations to amend fail
   For example, cancellation of a business line, major changes in the operating model, or the original position genuinely no longer exists, and the parties fail to reach agreement on reassignment or contract modification. N+1 is implicated only if the employer terminates without 30 days’ written notice.

A common point of confusion: 30 days’ advance notice and the “+1” payment are alternatives, not cumulative. If the employer has already given 30 days’ written notice in an Article 40 scenario, typically only N applies, without an additional “+1.” Also, although economic layoffs have procedural requirements such as explaining circumstances to the union or all employees 30 days in advance, this does not mean the employer can replace statutory layoff procedures with a “+1” payment.

3. 2N: Applies when the employer unlawfully terminates or unlawfully ends the contract

2N refers to compensation, not an upgraded version of economic compensation. Under Article 87 of the Labor Contract Law, if an employer violates the law in terminating or ending a labor contract, it must pay compensation at twice the standard of economic compensation.

Common risks of unlawful termination include:

• Unfounded termination grounds: For example, lack of evidence of serious misconduct or gross negligence, or dismissal for “violations” based on rules that were not lawfully formulated or publicized.
• Unlawful procedures: For example, failure to carry out required procedures such as advance notice, consultation, seeking union opinions, or layoff reporting.
• Forced termination during legally protected periods: For example, while the employee is in a medical treatment period; during pregnancy, maternity, or lactation for female employees; or where the employee has worked continuously for 15 years and is less than five years from statutory retirement age, and the employer terminates in a manner inconsistent with legal requirements. Relevant severance tables also classify these as unlawful termination risk scenarios and note that compensation is typically calculated at twice the economic compensation standard; see the 2024 Employee Severance Compensation Overview.

Two practical pitfalls deserve special attention:

• “2N+1” usually has no legal basis. 2N presupposes unlawful termination, while “+1” presupposes a lawful Article 40 termination without advance notice; their logic differs. Many local interpretations also note that so-called 2N+1 or 2(N+1) are not statutory payment models.
• Not every dismissal equals 2N. If the employer’s grounds are valid, evidence sufficient, and procedures compliant, it may be N only; and in Article 39 scenarios involving serious misconduct, no economic compensation may be required.

Therefore, when you receive a termination notice, first look at three things: what grounds are stated, which legal basis the employer cites, and whether procedures and evidence are complete. The amount of compensation ultimately depends on whether the termination is a “lawful compensation type” or an “unlawful compensation type.”

N: Circumstances Where Standard Economic Compensation Applies

N is the most basic and most common type of economic compensation, applicable when an employer legally terminates or ends a labor contract under statutory circumstances. Simply put, N is usually calculated based on “years of service with the employer”: for each full year, 1 month of wages is paid; more than 6 months but less than 1 year is counted as 1 year; less than 6 months is paid as half a month of wages. The Wuxi Municipal Human Resources and Social Security Bureau has also clarified in its explanation of N, N+1, and 2N that economic compensation is generally calculated as “years of service × average monthly wage over the 12 months prior to departure.” When a labor contract expires and the company does not renew it, N is usually paid (Wuxi Municipal Human Resources and Social Security Bureau).

Common situations where N compensation applies include:

• Termination of the labor contract by mutual agreement, initiated by the employer
  For example, a company proposes termination due to organizational restructuring, and the employee agrees to leave and signs a mutual termination agreement. In such cases, compensation is usually calculated as N. In practice, special attention should be paid to the wording of the agreement: if it is written as “the employee voluntarily resigns for personal reasons,” it will significantly increase the difficulty of later claiming economic compensation.
• Economic layoffs or layoffs due to business difficulties
  When an employer lawfully reduces staff due to reasons such as bankruptcy reorganization, severe production or operational difficulties, transformation of production, or major technological innovation, N usually needs to be paid to the laid-off employees. A practical article on the calculation of economic compensation by Guangdong Hancheng Law Firm also lists “layoffs carried out by the employer in accordance with the Enterprise Bankruptcy Law or due to severe production and operational difficulties” as circumstances requiring the payment of economic compensation (Guangdong Hancheng Law Firm).
• Expiration of the labor contract, where the employer does not renew or lowers the renewal conditions causing the employee not to renew
  Contract expiration does not mean “natural end with no compensation for either side.” If the company decides not to renew, or proposes new contract terms that are worse than the original contract and the employee therefore does not renew, N should generally be paid. Conversely, if the company maintains or improves the original conditions and the employee personally chooses not to renew, this is generally not a typical situation requiring the employer to pay N.

Here is a more practice-oriented example: a manufacturing company conducts an economic layoff in accordance with the law due to a decline in orders and the merger of production lines. Employee Li has worked at the company for 5 years, and his average monthly wage over the 12 months prior to departure is RMB 9,000. If there are no special circumstances such as high-salary caps or segmented calculations, the economic compensation Li can receive is approximately:

N = 5 months × RMB 9,000 = RMB 45,000

The most common misunderstanding here is: it is not true that “any departure entitles you to economic compensation.” If an employee voluntarily resigns for personal development, family reasons, job-hopping, etc., and the company has no statutory fault such as wage arrears or failure to pay social insurance, there is usually no N. The key to determining whether compensation applies is not “whether there is a departure,” but whether the reason for terminating or ending the labor contract falls within the compensation circumstances stipulated by law.

N+1: Compensation for Advance Notice or Payment in Lieu of Notice

N+1 does not mean “the company pays one extra month whenever it dismisses an employee.” Rather, it is a specific lawful termination method under Article 40 of the Labor Contract Law: the employer may choose to terminate the labor contract by giving the employee 30 days’ prior written notice; if no such 30-day notice is given, the employer must additionally pay one month’s wages as “payment in lieu of notice.”

Simply put: N+1 = N statutory economic compensation + 1 month of payment in lieu of notice.
Here, N is calculated based on the average wage over the 12 months prior to termination or expiration; the “+1” is usually calculated based on the employee’s wage for the immediately preceding month, rather than another 12‑month average.

According to the interpretation of “N+1” by the Wuxi Municipal Human Resources and Social Security Bureau, its application is limited to three scenarios, and only when the employer has not provided 30 days’ prior written notice:

All three scenarios fall under non-fault termination as referred to in Article 40 of the Labor Contract Law. That is, the employee has not committed serious misconduct or major fault, but legally recognized obstacles have arisen that prevent continued performance of the labor contract. CCTV Online, in interviews with labor dispute lawyers, has also emphasized that the application of N+1 has strict prerequisites, mainly limited to these three scenarios: expiration of the medical treatment period, incompetence for the job, and material changes in objective circumstances. If the employer provides 30 days’ prior notice, typically only N applies, not N+1.

An example calculation:

Employee Li has worked at the company for 4 years and 8 months. The average wage over the 12 months before termination is RMB 10,000, and the wage for the immediately preceding month is RMB 12,000. Due to the cancellation of a department, the company fails to reach an agreement with Li on reassignment and decides to terminate the labor contract immediately, without providing 30 days’ prior written notice.

• Length of service for N: 4 years and 8 months, rounded to 5 months;
• N economic compensation: 10,000 × 5 = RMB 50,000;
• Payment in lieu of notice: 12,000 × 1 = RMB 12,000;
• Total N+1: 50,000 + 12,000 = RMB 62,000.

The most common mistake here is confusing N+1 with 2N. N+1 applies when the employer lawfully terminates under statutory circumstances but fails to provide 30 days’ notice; 2N is compensation for unlawful termination. The two have different legal natures and cannot simply be combined into “2N+1.” Interpretations by Tenghe Law Firm on labor disputes also note that so-called “2N+1” or “2(N+1)” are not statutory payment models; payment in lieu of notice applies only in specific lawful termination scenarios.

Therefore, when an employer proposes “N+1,” attention should focus on three key points: first, whether the reason for termination falls within the three scenarios under Article 40; second, whether the employer has fulfilled necessary steps such as training, reassignment, or negotiations to amend the contract; and third, whether the “+1” is paid based on the wage of the immediately preceding month. If the termination reason itself is untenable, the issue should not be limited to calculating N+1, but should further consider whether the termination may constitute unlawful dismissal.

2N: Compensation for Unlawful Termination of an Employment Contract

2N is not a “higher-tier economic compensation,” but rather compensation borne by the employer for unlawfully terminating or unlawfully ending an employment contract. Its core legal basis is Article 87 of the Labor Contract Law: where an employer terminates or ends an employment contract in violation of the law, it shall pay compensation at twice the economic compensation standard stipulated in Article 47. Public cases released by the Ganxian District Bureau of Justice also clearly explain that “2N” is generally understood as compensation for unlawful termination of an employment contract, calculated as twice the economic compensation.

Common situations of unlawful termination include:

• No legitimate grounds for termination: For example, the employee has not committed serious misconduct, serious dereliction of duty, or demonstrated incompetence as required by law, yet the company directly dismisses the employee citing reasons such as “business adjustment,” “management dissatisfaction,” or “the position is no longer needed.”
• Insufficient basis for termination or invalid internal rules: For example, the company dismisses an employee for “serious violation of company rules,” but the rules were not lawfully publicized, not adopted through democratic procedures, or the employee’s conduct does not reach the threshold of “serious.”
• Failure to perform statutory procedures: For example, in an economic layoff, the employer fails to explain the situation in advance, solicit opinions from the labor union or employees, and report to the labor administrative authority; or terminates for incompetence without first providing training or adjusting the position.
• Unlawful termination during a legally protected period: For example, the employee is in a medical treatment period, or a female employee is during pregnancy/maternity/breastfeeding, or other situations protected due to occupational disease or work-related injury, yet the company still terminates the contract through non-fault termination or economic layoff. It should be noted that if the employee has statutory fault such as serious misconduct, the protected period does not automatically preclude all terminations.

The calculation formula can be understood as:

Compensation for unlawful termination = 2 × economic compensation = 2 × N × monthly wage base

Here, N is still calculated based on the employee’s years of service with the employer: each full year equals 1 month of wages; more than 6 months but less than 1 year is counted as 1 year; less than 6 months is counted as half a month. The monthly wage base is usually the average wage over the 12 months prior to termination or ending of the contract. For high-income employees, attention should also be paid to the local cap of three times the average social wage and limits on the number of years. Explanations from the Wuxi Human Resources and Social Security Bureau also summarize “2N” as: where an employer unlawfully terminates or ends an employment contract, compensation is paid at twice the economic compensation standard.

For example: an employee has worked at the company for 4 years, with an average monthly wage of 12,000 yuan over the 12 months prior to termination. The company directly dismisses the employee without lawful grounds, and arbitration or negotiation confirms it constitutes unlawful termination. Then:

• Normal economic compensation (N): 4 × 12,000 = 48,000 yuan
• Compensation for unlawful termination (2N): 2 × 48,000 = 96,000 yuan

However, one misconception must be especially guarded against: not all “dismissals” entitle the employee to 2N. If the company has sufficient grounds and follows lawful procedures—for example, where the employee committed serious misconduct with complete evidence—it may not need to pay economic compensation at all. If the termination falls under lawful termination pursuant to Article 40 of the Labor Contract Law and the employer fails to provide 30 days’ prior notice, the discussion is usually about N+1, not 2N.

In practice, 2N often needs to be confirmed through the following steps: first review the reasons stated in the termination notice; then verify the company’s evidence, internal rules, assessment records, position adjustment and training records, labor union procedures, or layoff procedures. If the dispute between the parties is significant, it usually needs to be resolved through labor arbitration, court proceedings, or by clearly specifying the nature of compensation in a negotiated termination agreement. After receiving a dismissal notice, employees should try to retain evidence such as the termination notice, payroll records, employment contract, attendance records, performance materials, and communication records, and then determine whether to claim compensation for unlawful termination.

The “Dual Cap” Rule on Compensation Years and Wages

Economic compensation is not an unlimited accumulation where “the higher the monthly salary and the longer the tenure, the more compensation.” Article 47 of the Labor Contract Law sets a key restriction: when an employee’s average monthly wage over the 12 months before departure exceeds three times the local average monthly wage of employees in the previous year, the calculation base for economic compensation is changed to “local average wage × 3,” and the compensable years are capped at a maximum of 12 years. This rule is commonly referred to as the “3× local average wage cap + 12-year cap.”

The order of determination is important: first check whether your average monthly wage exceeds three times the local average monthly wage of employees; only if it does will the “dual cap” be triggered.

Here, “monthly wage” generally refers to the average wage over the 12 months before the labor contract is terminated or expires; if the employment period is less than 12 months, it is calculated based on the actual months worked. In many HR and social security Q&As, the relevant rules are summarized as follows: if the monthly wage is higher than three times the local average monthly wage of employees in the previous year, economic compensation is paid at three times that amount, and the payable years are capped at 12 years. For details, see Explanation of Economic Compensation Calculation for Termination of Labor Contracts.

Example:

Assume an employee’s average monthly wage in the 12 months before departure is RMB 40,000, and the local average monthly wage of employees in the employer’s location in the previous year is RMB 10,000.

1. First calculate three times the local average wage:
   10,000 × 3 = RMB 30,000
2. Compare the employee’s monthly wage with the capped base:
   40,000 > 30,000, so RMB 40,000 cannot be used as the compensation base; it should instead be calculated at RMB 30,000 per month.
3. Then consider the years of service:

• If the employee worked at the company for 8 years: economic compensation is 30,000 × 8 = RMB 240,000
• If the employee worked at the company for 15 years: since the years are capped at 12, economic compensation is 30,000 × 12 = RMB 360,000

If the same employee worked for 15 years but had an average monthly wage of only RMB 25,000, which does not exceed three times the local average wage, the calculation would usually use RMB 25,000 as the base and would not automatically be capped due to “exceeding 12 years”:
25,000 × 15 = RMB 375,000.

This is also the most commonly misunderstood aspect of the “dual cap”: the 12-year cap does not apply uniformly to all employees; it is tied to the condition that the wage exceeds three times the local average wage. In practice, two common mistakes are often seen:

• Mistaking the “local average wage” for the national average wage or the company’s average wage. In fact, the relevant figure is the average monthly wage of employees for the previous year published by the people’s government of the municipality directly under the central government or the city with districts where the employer is located.
• High-wage employees being calculated directly based on their actual monthly salary. Once the three-times threshold is exceeded, the compensation base should be replaced with “local average wage × 3,” rather than continuing to use the actual monthly salary.

For example, in Beijing, the compensation cap base has been determined based on data released by statistical authorities. According to 2024 labor and social security industry information compiled by HaoTian Law Firm, Beijing’s average monthly wage of employees in 2023 was RMB 15,701, making the compensation cap base 15,701 × 3 = RMB 47,103. If an employee’s wage exceeds this amount and their years of service exceed 12 years, the upper limit of economic compensation can be calculated as 47,103 × 12. See their explanation of the Beijing Economic Compensation Cap Base for details.

Therefore, when calculating economic compensation upon departure for high-wage, long-tenure employees, three figures should be identified first: the employee’s average monthly wage in the 12 months before departure, the local average monthly wage of employees in the previous year, and the years of service at the company. As long as the employee’s monthly wage exceeds “three times the local average wage,” one cannot simply apply “employee’s monthly wage × total years of service,” but must recalibrate the calculation using the “dual cap.”

Complete Calculation Examples: Step-by-Step Guide to Determining Your Severance Pay

When severance pay is calculated incorrectly, it is usually not because the formula is wrong, but because one of three variables is misidentified: the salary base, years of service, or type of compensation. In practice, it is recommended to lay out the following materials first, and then apply the formula:

• Start date and termination/expiration date: used to calculate N, i.e., years of service with the employer;
• Salary records for the 12 months prior to termination: pay slips, bank statements, individual income tax filings, bonus payment records;
• Termination notice or mutual termination agreement: to determine whether N, N+1 applies, or whether unlawful termination compensation may be involved;
• Local average monthly wage of employees for the previous year: for high-income employees, this is needed to determine whether the 3× social average wage cap is triggered.

Common formulas for economic compensation can be remembered as follows:
N Compensation = S × N
N+1 Compensation = S × N + last month’s salary
Where S is usually the average salary for the 12 months prior to termination or expiration. The salary base is generally calculated based on payable wages, including bonuses, allowances, subsidies, and other monetary income. If the employment period is less than 12 months, the average salary is calculated based on the actual months worked. For relevant standards, see the explanation of the monthly salary base for economic compensation in the Ministry of Human Resources and Social Security Q&A.

Case 1: Standard N Compensation, Calculated as “Average Salary × Years of Service”

Assume Employee A:

• Start date: March 10, 2020;
• Termination date: August 31, 2024;
• Average payable salary for the 12 months prior to termination: 12,000 yuan/month;
• Type of termination: proposed by the company and mutually agreed; both parties confirm that economic compensation N should be paid.

Step 1: Determine the salary base
Employee A’s average salary for the 12 months prior to termination is 12,000 yuan, which does not exceed 3× the local social average wage, so 12,000 yuan is used directly as S.

Step 2: Determine years of service N
From March 10, 2020 to March 9, 2024: a full 4 years;
From March 10, 2024 to August 31, 2024: less than 6 months;
Therefore, N = 4 + 0.5 = 4.5.

Step 3: Determine the compensation type
This is standard economic compensation, calculated as N.

Step 4: Calculate the result
12,000 × 4.5 = 54,000 yuan

Therefore, the economic compensation payable to Employee A is 54,000 yuan.

A common mistake is to treat “4 years and more than 5 months” as 5 years. Only when the remaining period reaches “6 months or more but less than 1 year” is it counted as 1 year; less than 6 months is usually calculated as half a month’s salary.

Case 2: N+1 Compensation — Note That “+1” Is Not Necessarily the 12-Month Average Salary

Assume Employee B:

• Start date: April 1, 2021;
• Termination date: January 15, 2025;
• Average salary for the 12 months prior to termination: 15,000 yuan/month;
• Salary for the month immediately preceding termination: 16,500 yuan;
• Type of termination: qualifies for N+1, but the company did not provide 30 days’ prior written notice and chose to pay an additional month’s salary.

Step 1: Determine the salary base S for economic compensation
Employee B’s average salary for the 12 months prior to termination is 15,000 yuan, which is used to calculate the N portion.

Step 2: Determine years of service N
From April 1, 2021 to March 31, 2024: a full 3 years;
From April 1, 2024 to January 15, 2025: more than 6 months but less than 1 year;
Therefore, N = 3 + 1 = 4.

Step 3: Determine the compensation type
This scenario is not pure N, but N+1. In practice, N+1 usually refers to “economic compensation N” plus “one additional month’s salary.” Many summaries of severance compensation also express this as S × N + last month’s salary × 1. See Methods for Calculating Employee Severance Compensation.

Step 4: Calculate the result
N portion: 15,000 × 4 = 60,000 yuan
+1 portion: 16,500 × 1 = 16,500 yuan
Total: 60,000 + 16,500 = 76,500 yuan

Therefore, the severance compensation payable to Employee B is 76,500 yuan.

The most confusing point here is the base for the “+1.” The N portion uses the average salary for the previous 12 months, while the “+1” is usually calculated based on the employee’s salary in the immediately preceding month. If there were abnormal deductions, one-time bonuses, or suspension/standby arrangements in the last month, disputes often arise over this figure. Pay slips and bank statements should be retained.

Case 3: High-Income Employee — Replace the Salary Base First, Then Determine Whether the Years of Service Are Capped

Assume Employee C:

• Start date: June 1, 2011;
• Termination date: September 30, 2025;
• Average salary for the 12 months prior to termination: 40,000 yuan/month;
• Local average monthly wage of employees for the previous year: 10,000 yuan;
• 3× local social average wage: 10,000 × 3 = 30,000 yuan;
• Type of termination: economic compensation N should be paid.

Step 1: Determine whether the salary cap is exceeded
Employee C’s average monthly salary is 40,000 yuan, which is higher than 3× the local social average wage of 30,000 yuan.
Therefore, 40,000 yuan cannot be used directly; S should be replaced with 30,000 yuan.

Step 2: Determine actual years of service
From June 1, 2011 to May 31, 2025: a full 14 years;
From June 1, 2025 to September 30, 2025: less than 6 months;
Under the standard calculation, N would be 14.5.

Step 3: Determine whether the years-of-service cap is triggered
Because Employee C’s monthly salary exceeds 3× the local social average wage, under the high-income rule the compensable years of service are capped at 12 years. For a practical discussion of the dual limits of “3× social average wage + 12 years,” see the analysis of the upper limit rules for economic compensation.

Step 4: Calculate the result
30,000 × 12 = 360,000 yuan

Therefore, the economic compensation payable to Employee C is 360,000 yuan.

If one were to incorrectly use the actual salary and actual years of service, the result would be:
40,000 × 14.5 = 580,000 yuan.
However, once the high-income cap is triggered, this amount usually cannot be directly claimed as economic compensation. The difference is precisely the core of many disputes between high-income employees and their employers.

For a final review, you can check in this order: first verify that the salary records are complete, then calculate the years from start date to termination date, then confirm whether N or N+1 applies, and finally determine whether the 3× social average wage and 12-year cap are triggered. After completing these four steps, the vast majority of severance compensation amounts can be calculated within a relatively clear range.

If the Company Refuses Compensation: The Labor Arbitration Rights Protection Process

When a company refuses to pay statutory compensation, the key is not to argue repeatedly in words, but to quickly turn the dispute into an arbitrable claim that is provable, calculable, and submit-able. The general path is: first negotiate to fix each side’s position, then apply for labor arbitration; if you disagree with the arbitration result or need enforcement, proceed to court litigation or compulsory enforcement. In some cases where facts such as unpaid wages or economic compensation are relatively clear, workers may also choose to file a complaint with labor inspection authorities. Relevant Supreme People’s Court cases also note that workers have some discretion between labor arbitration and labor inspection; however, where the legality of termination, the type of compensation, or the amount is disputed, labor arbitration is usually the core channel.

Limitation Reminder: The limitation period for applying for labor arbitration is generally 1 year. It is typically calculated from the date the worker knew or should have known that their rights were infringed. In disputes over separation compensation, it is advisable to count backward from milestones such as the termination notice, separation handover, or the company’s explicit refusal to pay compensation, to avoid evidence loss or missing the deadline.

Labor arbitration can be pursued through the following steps:

1. Negotiate First, but Leave a Written Trail
   Use email, enterprise messaging apps, SMS, or written letters to confirm with the company: the reason for termination, the separation date, the type of compensation, the calculation base, and the payment deadline. The purpose of negotiation is not to “plead,” but to fix whether the company refuses to pay and on what grounds.
   For example, if the company orally states “you resigned voluntarily, so there is no compensation,” try to request written confirmation; if the company refuses, preserve chat records, recordings, termination notices, handover documents, and other materials.
2. Clarify Arbitration Claims: N, N+1, or 2N
   Do not simply write “request compensation” in the arbitration application. Specify the exact claims and amounts, for example:

• Request payment of economic compensation for termination of the labor contract: monthly wage base × years of service;
• Request payment of payment in lieu of notice: usually claimed based on the wage of the month prior to separation;
• Request payment of compensation for unlawful termination of the labor contract: economic compensation standard × 2.
  “2N” applies where the company unlawfully terminates or unlawfully ends the labor contract. Article 87 of the Labor Contract Law provides that where an employer unlawfully terminates or ends a labor contract, it shall pay compensation at twice the economic compensation standard; local judicially published cases also provide typical explanations distinguishing “N+1” and “2N.”

1. Prepare Evidence: Focus on Four Issues—Labor Relationship, Wages, Tenure, and Reason for Termination
   Arbitration is not about who sounds more reasonable, but who can prove their case. It is recommended to organize evidence by disputed issues:

In practice, the wage base and the reason for termination often become focal points of dispute. For example, where a company claims “serious misconduct,” it usually must prove that the rules are lawful, the employee was informed, the misconduct facts are sufficient, and the handling procedure is reasonable; if there is only internal oral assertion, the probative value is often insufficient.

1. Submit the Labor Arbitration Application
   Typically, you need to submit the arbitration application, proof of identity, information on the employer’s legal entity, an evidence list, and copies of the evidence. The application should include:

• Basic information of both parties;
• Arbitration claims and amounts;
• Facts and reasons;
• Evidence list.
  Amount calculations should be as clear as possible, for example: “My average wage for the 12 months prior to separation was RMB 10,000, my years of service were 5.5 years, and the company unlawfully terminated the contract; therefore, I claim compensation of 10,000 × 5.5 × 2 = RMB 110,000.”

1. Attend the Hearing: Focus on Responding to the Company’s Defenses
   Hearings usually focus on evidence and cross-examination regarding entry date, wage standard, reason for termination, termination procedure, and whether there was mutual agreement. Workers should avoid expressing only emotions and instead focus on key points:

• What reason is stated in the company’s termination notice? Did it change its story at the hearing?
• Can the company produce institutional bases and employee acknowledgment records?
• Can the company prove grounds such as misconduct, incompetence, or material changes in objective circumstances?
• Do wage statements cover the 12 months prior to separation? Should bonuses, allowances, and commissions be included in the average wage?

1. Wait for the Award and Handle Enforcement or Litigation
   After the arbitration award is issued, if the company still fails to perform, you may apply to the court for compulsory enforcement in accordance with the law. If the case falls within the scope of litigation, either party dissatisfied with the award may file a lawsuit with the court within the statutory period. Once litigation begins, early evidence organization will still directly affect the outcome; therefore, do not treat the arbitration stage as a casual “trial run” when submitting materials.

A typical example helps illustrate how “2N” can be supported through arbitration: Wang Wu worked at a property management company for 12 years and 1 month with a monthly wage of RMB 3,000. The company terminated his labor contract on the grounds that he held a part-time job. During the proceedings, it was found that the company had not imposed clear institutional restrictions on part-time work, nor did it prove that the part-time activity had a material adverse impact on his primary job. The arbitration commission supported his claim for compensation for unlawful termination. Published cases show that the compensation in this case was calculated as 2 × (RMB 3,000 × 12.5 years) = RMB 75,000. The core of such cases is not whether the employee engaged in behavior the company disliked, but whether the company can prove that both the grounds and procedures for termination were lawful.

It should be noted that labor arbitration is not an “automatic payout” process. If the company raises defenses such as “voluntary resignation,” “mutual agreement,” “serious misconduct,” or “failed performance,” the worker must respond with evidence by breaking down the issues: who initiated the termination, whether the grounds are established, whether the procedure is complete, and how wages and tenure should be calculated. The earlier you fix termination documents, wage statements, and communication records, the more you can reduce subsequent evidentiary risks.

Common Calculation Pitfalls and Practical Issues

In disputes over severance pay, many discrepancies do not stem from the “big formula,” but from details such as the wage base, length of service, type of termination, and date 기준. Before calculating, eliminating the following high-frequency pitfalls is often more important than directly applying a template.

• Pitfall 1: Calculating economic compensation based only on base salary

This is the most common—and the easiest way to underestimate the amount. The monthly wage base for economic compensation is usually not the “base salary” stated in the labor contract, but the average payable wage over the twelve months preceding the termination or expiration of the labor contract. In practice, monetary income such as sales commissions, year-end bonuses, position allowances, and transportation/meal subsidies that meet the characteristics of wages are often included in the base.

The correct approach is to pull the payroll details for the 12 months prior to departure and verify based on “payable wages” rather than “net pay received.” Employee-borne social insurance, housing fund contributions, and individual income tax should not be simply excluded because they were not received in cash. Human resources and social security Q&A materials also clarify that the monthly wage for economic compensation is calculated based on the average wage over the twelve months prior to termination or expiration, including bonuses, allowances, and subsidies; if the employment period is less than 12 months, the average is calculated based on the actual months worked. You may refer to this explanation on the calculation base for economic compensation.

• Pitfall 2: Ignoring year-end bonuses, quarterly bonuses, and sales commissions

Some employers argue that “year-end bonuses are benefits” or that “commissions are not fixed, so they don’t count.” Such claims are not universally valid. As long as the income is related to labor contribution, job performance, or the wage system, and has actually occurred or should legally be paid, it may be included in the average wage.

A more prudent practical approach is:

• Year-end bonuses are usually prorated to the corresponding period and allocated monthly, rather than counted only in the month paid;
• Sales commissions should be calculated in conjunction with the commission policy, performance confirmation records, payslips, and bank statements;
• For delayed bonus payments, examine which period’s labor results they correspond to.

Beijing court cases have also clarified that payable year-end bonuses should be averaged annually when included in the wage base. Relevant explanations can be found in a Beijing Daily–published economic compensation calculation case.

• Pitfall 3: Treating “net pay” as the calculation base

Net pay is the amount received after deducting employee social insurance, housing fund contributions, and individual income tax, and is usually lower than gross payable wages. Using net pay as the base may depress the compensation amount.

The correct approach is to prioritize reviewing the following materials: payslips, income records in the tax app, social insurance contribution bases, bank statements, bonus payment notices, and performance confirmation forms. If these materials are inconsistent, you should not simply choose the lowest figure; instead, make a comprehensive judgment based on the wage system and actual payment records.

• Pitfall 4: Miscalculating length of service, especially the “six-month” threshold

Length of service is not simply “years subtracted.” The hire date, termination/expiration date, whether the period spans January 1, 2008, and whether there were interruptions in the labor relationship all affect the result.

Pay special attention to two boundaries:

• Less than six months versus six months or more but less than one year, which correspond to different numbers of compensable months;
• For employees hired before 2008, certain situations involve the transition between old and new rules and cannot be mechanically calculated using a single standard throughout. Beijing court cases indicate that economic compensation spanning before and after 2008 may require segmented assessment rather than simply subtracting the hire year from the departure year.
• Pitfall 5: Treating all “voluntary resignations” as having no compensation, or all as having N compensation

Voluntary resignation must be distinguished by cause. If an employee leaves voluntarily for personal development, family arrangements, or seeking other employment, economic compensation usually does not arise. However, if the resignation is due to the employer’s failure to pay wages on time, failure to pay social insurance as required, failure to provide labor conditions, or unlawful rules harming employee rights, and the employee terminates in accordance with the law, it may constitute “forced termination,” with a possibility to claim economic compensation.

Therefore, do not rely solely on “personal reasons” written on the resignation form. If the true reason is unlawful employment practices by the employer, leave evidence in termination notices, communication records, wage arrears evidence, and social insurance records. For the boundaries of applicability of N, N+1, and 2N, you may refer to Tenghe Law’s overview of N, N+1, and 2N in labor disputes.

• Pitfall 6: Interpreting all “employer terminations” as N+1

It is not the case that a “+1” must be paid whenever the company fails to give 30 days’ prior notice. Payment in lieu of notice applies only to specific termination circumstances prescribed by law, such as inability to perform original work or alternative work after the medical treatment period, incompetence after training or reassignment, or major changes in objective circumstances where consultation on contract modification fails; and only if the employer did not provide 30 days’ prior written notice.

In scenarios such as mutual termination by agreement, economic layoffs, or non-renewal upon contract expiration, whether there is a “+1” depends on statutory conditions or the parties’ agreement and cannot be applied automatically. Wuxi Human Resources and Social Security has also noted that “2N+1” has no statutory basis; see its published explanation on N, N+1, and 2N.

• Pitfall 7: Confusing 2N compensation with N economic compensation

N is economic compensation under statutory circumstances, while 2N is damages for unlawful termination or unlawful expiration by the employer. They differ in nature and cannot be arbitrarily combined. In practice, some employees claim “2N+1” or “2×(N+1),” but under statutory rules these usually lack a legal basis. When enterprises voluntarily offer N+3 or N+6, this is more often negotiated compensation or an exit package and does not equate to the statutory minimum.

• Pitfall 8: Ignoring the difference between the departure date and the notice date

Length of service is generally calculated up to the actual date of termination or expiration of the labor contract, not simply up to the “date the notice was issued.”

Common scenarios can be assessed as follows:

This issue is especially critical when approaching thresholds such as “six months” or “one year.” For example, if an employee’s hire date is March 1 and the company issues a termination notice on August 25 but agrees to terminate on September 1, you cannot look only at August 25, because the actual termination date may affect the length-of-service bracket. Conversely, if the termination notice clearly states termination on the same day and completes wage and social insurance settlement, and subsequent steps are merely handover procedures, it is not appropriate to automatically treat the handover completion date as the labor relationship termination date.

Quick self-check checklist:

• Is the wage base you have gross payable wages or net pay received?
• Have year-end bonuses, commissions, allowances, and subsidies within the 12 months before departure been included?
• Are there special situations where wages are below the local minimum wage standard or above three times the local average social wage?
• Are the hire date, termination/expiration date, last working day, and social insurance cessation date consistent? If not, which date has written evidence?
• Does the length of service fall exactly on key thresholds such as six months, one year, or twelve years?
• Was the departure due to personal voluntary resignation, or forced termination due to the employer’s unlawful practices?
• When the company claims N, N+1, 2N, or N+X, has it specified the corresponding legal or contractual basis?
• Does the termination agreement include clauses such as “the parties have no further disputes” or “waiver of other claims”? Was the amount fully verified before signing?