China Vacation Pay: How not to get Sued

Foreign company employers in China constantly get sued over employee vacation days. The very short version of the general rule regarding vacation days in China is that any employee who works continuously for a year is legally entitled to annual paid leave (a/k/a paid vacation days). This is not news to China-based foreign employers as their parent companies all have vacation policies. However, what is not so well known is the legal requirement that they make arrangements for the employees to be able to enjoy their statutory vacation days. What this means is that employers in China must stay on top of how their employees take (or fail to take) their vacation days and, more importantly, they must pay their employees for unused vacation days, unless they can prove the relevant employee voluntarily gave up such vacation days.

Foreign employers in China too often assume their employees cannot prevail on claims for payment for unused vacation days if the employee has waited “too long.” But this typically depends on how the statute of limitations is calculated. Some Chinese courts treat compensation for unused vacation days as normal wages and give employees one year after their employment is terminated to sue for all such compensation. Some courts treat unused vacation time compensation as a penalty payable by the employer and apply a shorter statute of limitations. Some courts completely ignore any statute of limitations and rule that an employer that cannot produce evidence to show its employee actually took the vacation days at issue must pay for any “unused” vacation days, no matter how long ago.

Our China employment lawyers advise our clients not to focus on how a particular Chinese court in a specific city will apply the statute of limitations on any given day, especially since courts in different districts in the same city have been known to use different standards. Rather, we tell them to focus on doing what is necessary to prevent the problem entirely. From day one, your HR department should be keeping track of how each of your employees takes his or her vacation days and clean up any lingering issues or claims by getting your employees to execute an agreement (in Chinese!) making acknowledging having been paid in full for any unused vacation days.

Though employees in China should plan their own vacation days and though they do have the freedom to relinquish their vacation days, it is not a good strategy for employers to leave it to their employees to track and/or accumulate their vacation days without checking. When employees sue for vacation time accrued years earlier, you want to have good evidence that no payment is owed.