Answer: Several issues need attention in calculating economic compensation and compensation:
Firstly, the number of months calculated corresponding to service years is handled based on the rule of “rounding up on four and rounding up on five,” instead of the common mathematical rule of “rounding down on four and rounding up on five.” For example, Mr. Zhang worked for 9 years and 2 months. As the 2 months is less than half a year, it will be rounded up to half a year. Mr. Zhang’s length of service is regarded as 9 and a half years, so he should get 9.5 months’ wage. If Mr. Zhang worked for 9 years and 6 months or 7 months, Mr. Zhang’s length of service should be rounded up to 10 years.
Secondly, unless otherwise agreed upon, the length of service for calculating economic compensation for an employee should only count for the recent continuous length of service for the employer. For example, although the total service years Mr. Zhang has worked for the employer is 15 years, his recent continuous service years is only 9 years and 2 months as he resigned and rejoined the company. Mr. Zhang can only get 9.5 months of wages as economic compensation instead of 15 months (unless the employer recognizes the otherwise).
In case where an employee undergoes a position transfer that is not controlled by the employee, for example being transferred by the their former employer to an affiliated or even non-affiliated company, the length of service of the employee should be calculated continuously, although there is a change of employer. 1 Article 46 of the Interpretation of the Supreme People’s Court on the Application of Law in the Trial of Labor Dispute Cases (I) (Fashi (2020) No.26).The employee’s length of service shall not be affected by renaming, changes of shareholders, or division or merger, of the employer. Additional, long-term unpaid leave does not dissolve the employment relationship; the employee’s length of service for the employer therefore continues to accrue during the long-term unpaid leave. However, the nominal wages during the leave, being used for average monthly wages from the previous 12 months for computing economic compensation, shall be set at local minimum wages. 2The former Ministry of Labor and Personnel and the State Economic Commission issued the Notice on the Issue of Long-term unpaid leave for Employees of Enterprises. Original Ministry of Labor, Notice on Several Issues on Implementing Labor Contract System. Article 7, “during the long-term unpaid leave, an employee remains the employment relationship with the employer, and the employee’s service years continue counting; but the wage payment and welfare are different from that of the employment relationship.” Reply of the Department of Labor and Social Security of Guangdong Province on the Calculation and Payment Base of Economic Compensation for the Termination of Employment contract between the Enterprise and the Former Employee on Long-term Unpaid Leave (Yue Lao She Han (2000) No.155) “In principle, the calculation and payment base of economic compensation or living allowance for the former employees on long-term paid leave can be calculated and paid according to the minimum wage standard of the year published by the local government which the enterprise is under”.
Thirdly, the average monthly wages from the 12 months should be based on due wages (including monetary incomes such as bonuses, allowances, overtime wages, excluding the value of tangible items provided by the employer), instead of received wages.3Article 27 of the Regulations on the Implementation of the Employment Contract Law of the People’s Republic of China stipulates: “The monthly wage of economic compensation stipulated in Article 47 of the Employment Contract Law shall be calculated according to the due wages of workers, including hourly wages or piecework wages, as well as monetary income such as bonuses, allowances, and subsidies.”.Non-monthly incomes such as year-end bonus and quarterly bonus should be included in the base,4Most courts apportion the year-end bonus to the income from the first 12 months. However, Liaoning Shenyang Intermediate People’s Court appears to have a decision that the year-end bonus should not be included in the average monthly wage (Wang Zhihua, Foshan Abis Health Care Industry Co., Ltd. and Guangdong Jingxing Health Care Industry Co., Ltd. Civil Judgment of Liaoning Shenyang Intermediate People’s Court (2022) Liao 01 Min Zhong 13376), while another case of Shenyang Intermediate People’s Court held that year-end bonus should be counted into average monthly wage: Shenyang yuanda Intelligent Industry Group Co., Ltd., Fu Mingyu Labor Dispute Civil Judgment of Second Instance Civil Judgment of Shenyang Intermediate People’s Court of Liaoning Province (2023) Liao 01 Min Zhong No.2133. and they should be proportionally allocated into bonus-related duration as the part of the income thereof, before the computation of 12-month average monthly wages.5Shenzhen Yishihuolala Technology Co., Ltd. Beijing Branch, Shenzhen Yishihuolala Technology Co., Ltd. and other civil judgments of the second instance of labor disputes Civil Judgment of Linyi Intermediate People’s Court of Shandong Province (2023) Lu 13 Min Zhong No.1173.In addition, the economic penalties legally deducted from employees’ wages can be excluded from the incomes for computing the average monthly wage base.6Huang Jian v. Shenzhen Xichong Workers’ Holiday Village Labor Dispute Case Civil Ruling of Guangdong Provincial People’s High Court (2014) YGFMSZ No.2161.Afterall, this month’s average wage base should not be lower than the local minimum wage standard; if employees work overtime, all wage income divided by work hours should not be lower than local minimum hourly wage. Please note that if the employee’s paid months is less than 12 months before the termination, the calculation of average monthly wages shall be based on actual paid months.
Fourthly, if the employee’s average monthly wage from the previous 12 months is equal to or over three times the local employees’ average wages of the previous year, the average monthly wages for computing economic compensation or punitive damages shall be the three times the local employee’s average monthly wages of the previous year (rather than the employee’s own average wage); and besides, the number of months for calculation shall not exceed 12 months even if the employee’s service years is over 12 years. This is the so-called double cap for economic compensation and punitive damages calculation. That is to say, if Mrs. Li’s the average monthly wage is RMB 40,000 and her service years is 15 years, and the local employees’ average monthly wage of the previous year is RMB 5,000, Mr. Li’s the monthly wage base for calculating economic compensation shall be 15,000 (5000 * 3) instead of RMB 40,000, and her compensational service years shall be 12 years instead of 15 years. Therefore, Mrs. Li’s economic compensation is RMB 180,000 (15000 * 12) instead of RMB 600,000 (400,000*15).
The fifth issue is the differential treatment of the length of service before and after January 1, 2008, the date the Employment Contract Law came into effect and started to implement. If an employee joined an employer before the date, different policies for calculating economic compensation should be implemented for the two periods of service before and after January 1, 2008. Please refer to How to distinguish the calculation of economic compensation for service years before and after 2008?
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Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
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- 1Article 46 of the Interpretation of the Supreme People’s Court on the Application of Law in the Trial of Labor Dispute Cases (I) (Fashi (2020) No.26).
- 2The former Ministry of Labor and Personnel and the State Economic Commission issued the Notice on the Issue of Long-term unpaid leave for Employees of Enterprises. Original Ministry of Labor, Notice on Several Issues on Implementing Labor Contract System. Article 7, “during the long-term unpaid leave, an employee remains the employment relationship with the employer, and the employee’s service years continue counting; but the wage payment and welfare are different from that of the employment relationship.” Reply of the Department of Labor and Social Security of Guangdong Province on the Calculation and Payment Base of Economic Compensation for the Termination of Employment contract between the Enterprise and the Former Employee on Long-term Unpaid Leave (Yue Lao She Han (2000) No.155) “In principle, the calculation and payment base of economic compensation or living allowance for the former employees on long-term paid leave can be calculated and paid according to the minimum wage standard of the year published by the local government which the enterprise is under”.
- 3Article 27 of the Regulations on the Implementation of the Employment Contract Law of the People’s Republic of China stipulates: “The monthly wage of economic compensation stipulated in Article 47 of the Employment Contract Law shall be calculated according to the due wages of workers, including hourly wages or piecework wages, as well as monetary income such as bonuses, allowances, and subsidies.”.
- 4Most courts apportion the year-end bonus to the income from the first 12 months. However, Liaoning Shenyang Intermediate People’s Court appears to have a decision that the year-end bonus should not be included in the average monthly wage (Wang Zhihua, Foshan Abis Health Care Industry Co., Ltd. and Guangdong Jingxing Health Care Industry Co., Ltd. Civil Judgment of Liaoning Shenyang Intermediate People’s Court (2022) Liao 01 Min Zhong 13376), while another case of Shenyang Intermediate People’s Court held that year-end bonus should be counted into average monthly wage: Shenyang yuanda Intelligent Industry Group Co., Ltd., Fu Mingyu Labor Dispute Civil Judgment of Second Instance Civil Judgment of Shenyang Intermediate People’s Court of Liaoning Province (2023) Liao 01 Min Zhong No.2133.
- 5Shenzhen Yishihuolala Technology Co., Ltd. Beijing Branch, Shenzhen Yishihuolala Technology Co., Ltd. and other civil judgments of the second instance of labor disputes Civil Judgment of Linyi Intermediate People’s Court of Shandong Province (2023) Lu 13 Min Zhong No.1173.
- 6Huang Jian v. Shenzhen Xichong Workers’ Holiday Village Labor Dispute Case Civil Ruling of Guangdong Provincial People’s High Court (2014) YGFMSZ No.2161.