Questions concerning dispute over unused annual leave

In the practice of labour and personnel management, disputes often arise over annual leave. This article discusses such disputes by referencing recent judicial decisions.

Q: Does part-time employment qualify for statutory annual leave?

A: Current laws and regulations do not specify this clearly. The prevailing view in judicial practice is that statutory annual leave is intended for full-time employees, excluding part-time employees. Certain regions like Jiangsu and Zhejiang explicitly state that part-time employees are not entitled to statutory annual leave. However, if a company explicitly agrees or stipulates in its regulations that part-time employees are entitled to statutory annual leave, there are no legal restrictions against this.

Q: How many times the daily wage should a company pay for unused annual leave?

A: Twice the daily wage. According to article 10 of the Implementation Measures for the Paid Annual Leave for Enterprise, the compensation for unused annual leave, calculated at 300% of the wage, already includes the regular wages paid during the normal working period. This means that one-third of this compensation is covered by the regular wages already paid. Therefore, when compensating for unused annual leave, companies are required to pay only an additional double the daily wage. This standard of doubling the wage is also the common view adopted in judicial decisions nationwide.

Q: What is the basis for calculating compensation for unused annual leave?

A: As per article 11 of the above-mentioned measures, the daily wage for calculating compensation is derived by dividing the employee’s monthly wage by the average number of working days in the month (21.75 days). The monthly wage refers to the average monthly wage paid by the employer in the 12 months preceding the payment for unused annual leave, excluding overtime pay. If the employee has worked less than 12 months, the average is calculated based on the months worked. In cases of employment termination, the calculation generally uses the average monthly wage from the 12 months preceding the termination, excluding overtime pay.

Q: What is the maximum period for which employees can claim compensation for unused annual leave?

A: The payment of twice the wages for unused annual leave serves as economic compensation for workers’ inability to enjoy their rights to rest and this payment is not considered labour remuneration. Consequently, disputes arising from this are subject to a one-year ordinary statute of limitations for arbitration. Employees can claim compensation for the current year starting from 1 January of the following year. If the employment relationship is terminated, the statute of limitations begins from the date of termination. However, if the employer permits the employee to carry over annual leave to subsequent years, the statute of limitations begins on 1 January of the year following the last permitted year. Therefore, an employee can typically claim compensation for up to two years of untaken statutory annual leave wages (i.e., for the current year and previous year). If the employer explicitly stipulates that annual leave can be arranged across years but ultimately fails to do so, the employee can at most claim up to three years (i.e., the current year, previous year, and the year prior to that) of untaken statutory annual leave wages.

Q: Can companies deduct periods when the employment relationship was suspended from the calculation of annual leave days?

A: Yes. The prevailing judicial opinion holds that during a suspension of the employment relationship, an employee does not provide any labour to the employer. Consequently, the employer may deduct the period of suspension when calculating the employee’s annual leave entitlement. For instance, in Ding v Yicheng Network Technology (2022), the employee was entitled to five days of statutory annual leave for the year 2021. However, since the employment relationship was suspended starting April 2021, the court determined that the calculation of the statutory annual leave for that year should only include the period up to March 31, resulting in an entitlement of just one day of annual leave.

Q: Is compensation required for unused welfare annual leave?

A: Welfare annual leave is an additional vacation provided by companies on top of the statutory annual leave. The prevailing judicial opinion holds that employees are not entitled to claim compensation for unused welfare annual leave unless the company has agreed to such compensation in a contract or policy. However, it is important to note that there are exceptions. Therefore, companies not intending to compensate for unused welfare annual leave should clearly state this in their policies and/or employment contracts.

Q: Can companies enforce policies that void unused statutory annual leave from the previous year without compensation?

A: Not necessarily. According to article 10 of the implementation measures, a company can only nullify unused statutory annual leave without compensation if two conditions are met: (1) the employer has proactively arranged for the employee to take leave, and (2) the employee is unable to take the leave due to personal reasons and has formally waived their right to paid annual leave in writing. If these conditions are not met, the prevailing judicial opinion tends to disfavour supporting companies in withholding compensation for untaken statutory annual leave based on such voiding policies.

Q: Can employees terminate their employment contracts unilaterally over unpaid statutory annual leave compensation and claim severance pay?

A: Typically not. The prevailing judicial opinion maintains that wages for unused annual leave do not constitute labour remuneration. Therefore, when an employer fails to pay for unused annual leave, it does not fall under the scenario described in article 38(2) of the Labour Contract Law, where an employer fails to pay full labour remuneration promptly. Consequently, employees cannot terminate their employment contracts on this basis and demand economic compensation from the employer. Exceptions to this view are extremely rare, with jurisdictions such as Chongqing being notable outliers. In these areas, wages for unused annual leave are considered labour remuneration, and courts may support an employee’s decision to terminate their contract and claim compensation.

Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng