Guangdong Province’s High People’s Court and Arbitration Committee jointly issued Several Opinions on Coordination Between Labour Arbitration and Litigation on 18 July 2018. The opinion took effect on the same day.
Severance payment calculations for pre-2008 service years should follow Employment Contract Law. With the recent repeal of the national Measures for Economic Compensation for Breach and Termination of Employment Contracts, employers have been uncertain about how to calculate severance for pre-2008 service years. The Guangdong opinions state that employers should follow local regulations in effect before 1 January 2008 to determine whether an employee is even entitled to severance for pre-2008 service years. More importantly, however, the opinion states that when calculating severance for employees who are so entitled, the employer should follow the PRC Employment Contract Law to calculate the severance for an employee’s pre-2008 service years.
When calculating severance for pre-2008 service years, employers should note the following:
- Salary base for severance. Normally, severance is calculated at one month’s “average monthly salary during the last calendar year” for each full year of service with the employer. If an employee’s average monthly salary exceeds 300% of the local municipal average monthly salary, then the employee’s salary base for severance will be capped at 300% of the local municipal average monthly salary. Additionally, when the employee’s salary base for severance is capped, the employer can also cap the employee’s service years at 12 years. This cap on service years is likely a cumulative cap on both pre-2008 and post-2008 service years together. In comparison, before the Guangdong opinions, in certain situations, such as mutual separation, the employee’s pre-2008 and post-2008 service years were subject to separate 12-year caps.
- Partial service years. Less than six months of service during a calendar year entitles the employee to severance equal to a half month’s “average monthly salary” for that partial service year. In comparison, six months or more of service in a calendar year is considered a full service year for severance calculation purposes, entitling the employee to one month’s average monthly salary as severance for that service year. Prior to this opinion, certain courts referred to pre-2008 local regulations when determining how to treat partial years of service.
Dispatch employees are entitled to open-term contracts. Dispatch employees in Guangdong are entitled to sign an open-term employment contract if they have signed two consecutive employment contracts after 1 January 2008 or have worked for the same employer for 10 years. In other words, their entitlement to an open-term contract would be the same as enjoyed by directly-hired employees.
Unilateral terminations allowed when employer suspends operations. An employer may terminate employees based on Article 40.3 of the Employment Contract Law (i.e., a major change in objective circumstances rendering continued performance of the employment contract impossible), if the employer suspends its operations because it suffers serious financial difficulties for reasons not attributable to the employees and may lose the ability to pay debts. Before the Guangdong opinions, termination on these grounds was normally limited to company restructurings.
Alternatively, instead of unilaterally terminating employees, the employer can negotiate with the employees for a set suspension period during which the employees will not be terminated and will not work. During the first month of suspension, the employees must be paid full salary. Starting from the second month of the suspension, the employees must be paid no lower than 80% of the local minimum wage. If the suspension exceeds the “reasonable standard” or the agreed upon term, the employees may terminate their employment contracts and claim severance. The Guangdong opinions do not define or further explain the meaning of “reasonable standard”.
In addition to these key highlights, the Guangdong opinions also provide further guidance on other important issues, e.g., how to calculate wages and salary for employees on maternity, paternity and work injury leave.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at email@example.com