Pay Your China Employees on Time to Avoid Lawsuits and Penalties

As I have previously written, a China employer must pay its employee statutory severance when that employee resigns because of the employer’s failure to pay his or her compensation on time or in full. For example, when an employer owes an employee three months’ salary, the employee can probably unilaterally terminate the employment relationship and demand all unpaid salary owed to him or her. What constitutes  “on time payment” can often be tricky.

Note that in most places in China, employers must pay their employee at least once every month. One question I am often asked is what happens when the employer and the employee contractually agree on a longer payment cycle? In those circumstances, can the employee quit and get statutory severance? The short answer is usually yes. Let’s take a look at an actual recent case in Shenzhen.

In this case, the employer and employee entered into an employment contract explicitly stating that the employer would pay the employee on the 20th of each month for the employee previous month’s services. The employer was never late in making payment as per the terms of this contract and the employee never objected to the payment terms. But after working for the employer for a while, the employee quit his job and sued the employer for having failed to timely pay him. The company asserted two defenses to the employee’s claims: (1) the principle of freedom of contract should apply and the parties’ written arrangement on the payment cycle should be upheld; and (2) many employers have financial troubles and pay their employees late and making employers strictly comply with this employee payment law would be unduly harsh for China employers.

The Shenzhen court found against the employer and for the employee.

The court cited the applicable employee payment regulations in Shenzhen, which essentially require pay dates be no later than seven days after any agreed payment cycle. In other words, an employee must be paid no later than by the seventh day following the month in which he or she provided the service. And if for some reason the employer is unable pay by the agreed payment date, it may extend that date for up to five days. If after that the employer is still having financial difficulties, it must obtain written consent from either the labor union or the employee to extend the payment date even further, but in no event may the employer be more than 15 days late in paying.

The court went on to say that even though the regulations allow an employer to make late payment under certain circumstances, this is a very specific exception to the general rule and the employer in this case violated the law by routinely paying late without justification and without following the rules for late payment. Because the employer violated the late payment law, the employee’s termination was caused by the employer’s failure to compensate him on time. The employee was therefore entitled to tens of thousands of RMB in statutory severance — an amount based on the employee’s total years of service for the employer and his monthly salary.

The employer in this case probably never thought it would have to pay this money because it performed its obligations pursuant to the terms of its contract with its employee.

There is much to be learned from this case about China employment law, including the following:

  • It pays to have a qualified lawyer conduct an HR audit of your company and to have this done before your employment problems arise. I would estimate that at least 80 percent of the China employment problems for which my law firm is retained involve issues we easily would have spotted with a simple and relatively inexpensive HR audit. But instead of a relatively leisurely and inexpensive audit, we are instead confronting an angry employee (oftentimes employees) who is threatening to sue or has already sued. One of the first things our China employment lawyers do on a China HR audit is to review our clients employment contracts and the employer rules and regulations to make sure what is in those critical documents actually accords with all applicable laws, including most importantly, the local laws.
  • Timely pay your employees and in full. To do this, you need to know what your local jurisdiction means by “timely.”
  • Many China employment laws cannot simply be contracted away. It is important that you know what can be changed by contract and what cannot be and it is important that you also realize that all of this can vary depending on where you are and even depending on the type of employee with which you as the employer are contracting. Just by way of a quick example, you will generally have more flexibility in contracting with a COO you are paying USD$40,000 a month than with a factory worker you are paying less than USD$40,000 a year.
  • And just to throw in one more that is very much based on a recent employment matter I just handled: just because other employers (especially Chinese employers) get away with it does not mean you will too.
  • If anything, China gets tougher on employers every year and that — unfortunately — is even more true of foreign companies doing business in China.