China presumes employers are more powerful than their employees and so it explicitly favors employees. For example, not only does the law permit employees to unilaterally terminate their employment contracts by giving notice of leaving (unless one of the very limited exception applies), employees also may terminate their employment contract and demand statutory severance for an employer’s employment law violation. Employees commonly resign and seek severance against an employer that failed to pay the employee in full and on time.
Consider this hypothetical. An employer and one of its employees enter into an employment contract which provides that the employer will pay the employee once a month for her salary earned in the preceding month. After several years of employment, as of mid-June the employee still has not received her salary for April. The employee resigns and brings a labor arbitration claim for all her unpaid salary from April 1 through her resignation date and severance for the termination. Will the employee prevail?
The short answer is yes. In a recent case based on facts similar to those above, the Hebei-based employer lost and lost big. The employer argued that its salary payment procedures were a common practice, but the court rejected that argument. The court went on to say that the law on this issue is clear: if the remuneration for labor is not paid in full or on time, the employee may terminate the employment contract and the employer must pay the employee statutory severance. Here, the employer’s failure to fulfill to pay the employee her remuneration on time exactly fits the situation stipulated in the law and the employer must pay the employee severance for her involuntary departure.
Note that there are a few exceptions to the law mentioned above, such as when an employer is unable to pay salary on time due to natural disasters, wars or other unforeseeable causes that cannot be resisted by human forces (which may cover COVID-19-caused delays); or the employer experiences difficulties in production and operation and its capital turnover is affected and after obtaining the consent of the workers’ union, it delays salary payments. But even in these instances, the employer’s failures to pay will be subject to the maximum period set by the local labor authorities.
Some Chinese provinces and cities have new COVID-19-related laws that provide limited exceptions to the general rule. For example, Shanghai’s new employment laws provide that if an employer’s failure to pay wages in full and on time results from circumstances beyond the employer’s control, an employee’s severance claim for termination of employment will be rejected. Note that most of the major cities in China are getting back to normal which means the pandemic-based exemptions will likely start disappearing.
What all of this means is that you as a China employer are not justified in delaying salary payments unless you fall under one of the limited exceptions and if you are right now behind on payments to your employees you should do whatever you can to fix that before the employee pursues legal action against you.
We are finding that oftentimes salary reductions are the best solution to an inability to pay employees in full and on time. As we have been writing, many local governments are fairly lenient about salary reductions because they so much prefer those to layoffs. See BREAKING NEWS: China Releases Twelve Opinions on How Companies Resuming Normal Operations Should Treat Their Employees. But see also China Employee Salary Reductions: It’s Complicated.
Just remember that failing to pay your employees on time will allow them to resign (meaning you lose the talent) and sue you for severance (meaning you lose time and money). Salary reductions may be a solution, but you should never ever reduce any employee’s salary without first consulting with your China employment lawyer.
To learn more on how to handle China employment law matters, I urge you to attend my free webinar this Tuesday, June 23. For more about this webinar and how to sign up, please go to FREE WEBINAR – China Employment Law: What Your Company Needs to Know.