BRIEF REPORT ON THE ISSUE OF COMPENSATION OF LABOR CONTRACT
1. Basic Principle of Compensation of Labor Contract
1.1 An employee shall be paid severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked. Any period of not less than six months but less than one year shall be counted as one year. The severance pay payable to an employee for any period of less than six months shall be one-half of his monthly wages.
1.2 If the monthly wage of an Employee is greater than three times the average monthly wage of employees in the Employer’s area as published by the People’s Government at the level of municipality directly under the central government or municipality divided into districts of the area where the Employer is located, the rate for the severance pay paid to this highly paid person shall be applied to three times the average monthly wage of the location of Employer instead of this person’s monthly wage. For instance, Shanghai area’s average monthly wage now is around RMB:2892, and plus 3 times it shall be around RMB:8676.
1.3 The term “monthly wage” means the employee’s average monthly wage for the 12 months prior to the termination or ending of his employment contract.
Monthly wage includes:
1. hourly wage (计时工资)
2. piece rate wage（计件工资）
3. bonus（奖金）
4. allowance（补助和津贴）
5. payment for overtime work（加班加点工资）
6. others （特殊情况下支付的工资）
2. Answer of Questions
Q1: How to calculate labor contract compensation relating to old & new labor contract laws ?
1.1 If the employment contract spans years 2007 and 2008, the contract shall be treated as two parts. The turning-point is Jan. 1, 2008. Therefore, the contract period before Jan 1 2008 shall be treated according to the old labor law; the contract period after that date shall be treated in accordance with the new labor contract law.
1.2 Pursuant to the old labor law, if the employer dissolves the labor contract in advance, the employer still shall pay labor contract compensation, and the standard is the same as the new labor contract law. However, if the labor contract has matured automatically, the employer shall not pay any labor contract compensation under the old labor law.
1.3 Pursuant to the new labor law, if the labor contract has matured automatically, the employer still shall pay the employee each year one month wage as the compensation of termination; if the employer dissolves the labor contract in advance with right legal reasons, the employer shall pay the employee the same each year one month wage including the years before Jan. 1, 2008 as the compensation of termination in advance; If the employer dissolves the labor contract in advance with no reasons or not legal reasons, the employee can ask the employer to keep the labor contract till it has matured or the employer pay the damages to the employee at twice the rate of the severance pay.
1.4 To explain this issue clearly, we’ll use an example as follows:
The labor contract period between the employee and the company is from April 1, 2006 to March 31, 2008.
a. If no special circumstance happens and the labor contract matures naturally, the labor contract compensation shall be calculated from Jan 1, 2008 to March 31, 2008. Therefore, the severance pay payable to the employee shall be one-half of his monthly wages as the period is less than six months.
b. If the Company dissolves the labor contract on Feb. 1, 2008 in advance with right legal reasons, the labor contract compensation shall be calculated from April 1, 2006 to Feb. 1 2008. In this case the total labor contract compensation shall be 2006 one month wage, 2007 one month wage, plus 2008 one-half month wage.
c. If the Company dissolves the labor contract on Feb. 1, 2008 in advance with no reasons or not legal reasons, the employee can ask the employer to keep the labor contract till March 31, 2008, or the employer pay the damages to the employee at twice the rate of the severance pay.
Q2: How to calculate labor contract compensation of a sales person ?
2.1 The standard calculation is the labor contract compensation for a sales person= (Employee’s wage for the 12 months prior to the termination or ending of his employment contract + total allowance + total commission) divide 12, and multiply the number of years worked.
2.2 If the employer has a special agreement with the employee, the calculation shall go with the agreement.
Q3: Regulations of annual bonus
There is no government regulations of annual bonus. Whether to pay annual bonus is at company’s discretion. However, if the methods of calculating annual bonus have been provided in the labor contract, handbook or other company documents, and the employee shall be paid according to such company regulations.
Q4: Regulations of pregnant women during lactation period
If a female employee in her pregnancy, confinement or nursing period, the company must not terminate the employment contract or fire her by the excuse of workforce reduction plan even if the company is willing to pay enough compensation.
Q5: The position only has one employee and he/ she does a good job. But this employee is a new person in the company; shall he/she be fired firstly under workforce reduction ?
5.1 No relating regulations to govern this issue. In our opinions, to compare the old or new between two employees shall be on the condition that they are in the same position at the time of workforce reduction.
5.2 Even if there are two persons in the same position at the time of workforce reduction, one is new and the other is old person, but the new is better than the old, the company still can keep the new person who does good job. (Although there are no relating regulations of this question, we made a phone call to ask relating labor bureau and the officer said yes.)
Q6: Whether the company facing workforce reduction can keep the new division and relating exclusive employee ?
According to the explanation of Q5, the answer of this question is yes.
3. Lawyer’s Suggestions
Because the labor matters are the areas which have regulated by government heavily, we suggest before the company takes any workforce reduction, the company shall follow up the following steps:
1. The properly notification in advance to all employees.
2. Reporting the company’s action of workforce reduction in advance to relating local labor bureau.
3. After the company has developed a detailed plan, the company shall go to relating local labor bureau again and get its approval or understanding.
This brief report is written by:
Ivy Hou, legal assistant,
Sunny Chen, legal assistant,
Allen Jiang, attoney at law,
Allen & John Law Firm
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