By Linda Liang and Hongchuan Li King & Wood Mallesons’ Commercial & Regulatory group

On 24 November 2017, the Ministry of Human Resources and Social Security of the People’s Republic of China (“MOHRSS”) issued the fifth list of documents to be annulled. The Measures for Severance Payment due to Violation or Termination of Employment Contracts[1]  (“No. 481”) is in this list.

This marks the official departure of the nearly 23 year old No.481 from the historical stage. How will its annulment affect employers and employees?

“Sub-calculation of severance payment” will not be changed fundamentally

Does the annulment of No.481 do away with sub-calculation of severance payments?

The answer is no.

The Employment Contract Law establishes the rules of sub-calculation, stating:

“If an employment contract, existing on the implementation date of this Law, is terminated or expires and severance payment is payable under Article 46 of this Law the years of service for the severance payment shall be calculated from the implementation date of this Law. If, pursuant to previous regulations, an employee was entitled to severance payment from their employer, those regulations shall apply.”[2]

If an employee has years of service with their employer prior to 31 December 2007, calculation of the severance payment is separated into two parts, using the implementation date of the Employment Contract Law as the dividing point. For years of service before 31 December 2007, the severance payment is calculated according to the law at the time (regardless of whether it is now annulled).

Therefore, in the “post-No.481 era”, we do not expect fundamental changes to sub-calculation rules. Local rules regarding sub-calculation that have been established in various regions will remain unchanged unless modified officially by competent authorities.

No. 481’s special rules for severance payment no longer apply to years of service after 2008

No. 481 has the following special rules for calculation of severance payments:

  • 12-month cap: severance payments shall not exceed 12 months where there has been either mutual termination or termination for incompetence;
  • Salary during normal production: severance payments are calculated using the average monthly salary from the twelve months prior to termination of an employee’s contract under “normal production conditions”;
  • Enterprise-average-salary minimum guarantee: where a contract has been terminated due to illness, non-work related injury, major changes in circumstances or economic layoff, the payment shall not be less than the “monthly average salary of the enterprise”.

Prior to the complete annulment of No. 481, employment arbitration commissions and courts generally held that No. 481 was “partially annulled” because of its conflict with the Employment Contract Law. But, it remained controversial in individual cases, for example in deciding whether or not to consider “enterprise average salary” and “salary during normal production” when deciding on the monthly salary basis. In addition, both employers and employees held inherent ideas about the “12-month cap” and “enterprise-average-salary minimum guarantee”, triggering unnecessary disputes when cashing out years of service after 1 January 2008.

These disputes will be eliminated with the annulment of No. 481. The Employment Contract Law and the Implementation Rules of the Employment Contract Law shall prevail in calculating severance payments from 1 January 2008, unless otherwise provided for in local laws and regulations.

25%/50% of additional compensation has no legal basis

No. 481 establishes a “25%/50%” additional compensation system, where an employer:

(i) Deducts or delays payment of a salary for no reason; refuses to pay overtime; pays a salary that is below the local minimum wage.

In addition to making up the difference, the employer must pay additional compensation of 25% of the difference.

(ii) Fails to pay a severance payment.

In addition to making the severance payment, the employer must pay additional compensation of 50% of the payable amount.

The Employment Contract Law that came into force on 1 January 2008 made the following changes:

  • Name – integrates the two types of additional compensation, and collectively refers to them as “compensation”;
  • Standard – increases the penalty rate from “25%/50%” to “50% to 100%”;
  • Procedure. The Law adds a procedural prerequisite that “local labor administration orders the payment shall be made within a specified time limit but the employer fails to make it by the deadline”.

In fact, 10 years after the Employment Contract Law came into force, employment arbitration commissions and courts have steadily unified the application of law. If an employee claims the 25%/50% additional compensation by referring to No. 481, he/she will be informed that this claim will “be handled by local labor administration first”, or otherwise it will be dismissed.

The annulment of No. 481 means that the 25%/50% of additional compensation system no longer has any legal basis and officially confirms the aforementioned understanding adopted by employment arbitration commissions and courts in recent years.

Medical treatment allowances  remain in doubt

No. 481 provides that eligible employees suffering illness or non-work related injuries are entitled to medical treatment allowances when employment ends. Medical treatment allowances include those which are not less than six months’ salary, those for seriously-ill employee’s medical treatment allowances s not to be less than nine months’ salary, and for terminally-ill employee’s medical treatment allowances not to be less than twelve months’ salary.

Since No. 481 has been annulled, and the Employment Contract Law is silent about medical treatment allowances, does that imply the abolishment of the medical treatment allowances system?

Not really.

No. 481 is not the sole basis for paying medical treatment allowances. Currently effective documents like the Opinions on Several Issues concerning the Implementation of the Employment Law of the People’s Republic of China (Lao Bu Fa 〔1995〕 309), the Reply to Instruction Requests Concerning Issues on Medical Treatment Period Management due to Illness or Non-work Related Injuries (Lao Ban Han 〔1996〕 40) and the Circular on Several Issues concerning the Implementation of the Employment Contract System(Lao Bu Fa 〔1996〕 354) all provide  employees with an entitlement to medical treatment allowances as at the termination or ending of their employment contract.  However the medical treatment allowances system needs to be further clarified by the MOHRSS or reflected in adjudication practice.

[1] Lao Bu Fa〔1994〕481

[2] Article 97(3)