Answer: In case that an employers illegally terminate an employee and the employee does not elect to claim for reinstatement, the employer is liable to pay punitive damages.
The calculation method for punitive damages is twice the amount of the economic compensation computed according to “How to calculate economic compensation?” (the so-called 2N punitive damages). For example, if the length of service of Ms. Li’s employee is 9 years and 2 months and the wage is RMB 5,000, the punitive damages is RMB 95,000 (5000 * 9.5 * 2).
The calculation of punitive damages, just as that of economic compensation, also involve the same cap rule. That is to say, if the employee’s monthly wage exceeds three times the local average employees’ salary from the previous year, the monthly wage standard for calculating punitive damages is three times the local employees’ average wages of the previous year, and the maximum number of months for calculating punitive damages is 12 months. This is the so-called double cap for punitive damages. For example, if Ms. Li has worked for 15 years for the employer, and the average wage from the 12 months immediately before the illegal termination is RMB 40,000, while the average wage of local employees from the previous year is RMB 5,000. She is entitled to received a punitive damages of RMB 180,000 (5,000 * 3 * 12) instead of RMB 1,200,000 (40,000 * 15 * 2).1Civil Judgment of Second Instance of Labor Dispute between Zhenyi Electronics (Shenzhen) Co., Ltd. and Yao Chaozhi Civil Judgment of Shenzhen Intermediate People’s Court of Guangdong Province (2020) Yue 03 Min Zhong No.12083. Civil Ruling on Labor Dispute Civil Application for Retrial by Yao Chaozhi and Zhenyi Electronics (Shenzhen) Co., Ltd. Civil Ruling of Guangdong Provincial People’s High Court (2021) Yue Min Shen No.4525.
The double-capping rule setting was meant to restrict overly high compensational burden to employers. However, it could have unintended consequences for some lawmakers. For example, two employees of an employer, Mr. Zhang and Ms. Li, both had 30 years of service and was both dismissed illegally by the employer. Mr. Zhang’s average monthly wage from the 12 months before his departure, RMB 14,999, was narrowly less than three times the local employees’ average monthly wage of the previous year, RMB 15,000, while that of Ms. Li’s was RMB 15,000. Mr. Zhang’s punitive damages shall be RMB 899,940 (14,999*30*2). However, Ms. Li’s punitive damages is RMB 360,000 (15,000 * 2 * 12). These two employees with virtually the same situation (the difference of the two employees’ monthly average wages is only RMB 1), but the amount of punitive damages is several times different, rendering the result obviously unfair. This is another evidence for China’s employment law legislation being busy creating rules while lacking prediction on practice.
Beginning in 2019, the cap for economic compensation and punitive damages in Beijing has been changed to three times the average monthly wage of employees in enterprise entities in Beijing (the cap standard in 2023 is 178476/12 * 3 = RMB 44,619), rather than three times the average social wage of the previous year.2Notice of Beijing Human Resources and Social Security Bureau on Calculating the Economic Compensation Cap Base According to the Average Wage of Employees in Legal Entities in 2019.Other regions, including Shanghai, Shenzhen, Guangzhou, Tianjin, Chongqing, Chengdu, and most other provinces and cities still apply the rule of three times the average monthly wage of employees from the previous year.
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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.
Email: wangdong@royalaw.com
- 1Civil Judgment of Second Instance of Labor Dispute between Zhenyi Electronics (Shenzhen) Co., Ltd. and Yao Chaozhi Civil Judgment of Shenzhen Intermediate People’s Court of Guangdong Province (2020) Yue 03 Min Zhong No.12083. Civil Ruling on Labor Dispute Civil Application for Retrial by Yao Chaozhi and Zhenyi Electronics (Shenzhen) Co., Ltd. Civil Ruling of Guangdong Provincial People’s High Court (2021) Yue Min Shen No.4525.
- 2Notice of Beijing Human Resources and Social Security Bureau on Calculating the Economic Compensation Cap Base According to the Average Wage of Employees in Legal Entities in 2019.