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.
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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 firstname.lastname@example.org