Compensation for breaching ‘hukou’ employment period

By Shaw Zhao and Mia Wang, Jingtian & Gongcheng
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In China’s job market, many employers seek to attract and retain talent by assisting recruits to obtain local hukou, the official household registration that formally identifies an individual as a resident of the area. As hukou is closely tied to a person’s education, job and housing prospects, its derived benefits are especially enticing in cities like Beijing.

To retain talent and dissuade new recruits from leaving as soon as hukou is obtained, employers often insist on a hukou-related employment service period, with a default penalty for breaching it.

This article takes Beijing as a prime example and analyses how courts approach disputes arising from employees breaching the service period agreement after receiving their assisted hukou.

HUKOU SERVICE PERIOD

Service period refers to a timeframe on the continual labour relationship agreed between the employer and employee with special binding effects on the employee as a result of special benefits. Article 22 of the Labour Contract Law states: “Where an employer pays special training expenses for the special technical training of his employees, the employer may enter an agreement with his employees to specify their service time period.”

Shaw Zhao, Jingtian & Gongcheng
Shaw Zhao
Partner
Jingtian & Gongcheng

Does this provision technically rule out service periods established over special treatment other than technical training, such as hukou? Courts in Beijing do not necessarily think so. Considering the provision an authorising norm, they believe it entitles employers to decide whether to set a service period after technical training, but does not restrict such training as the only valid premise of a service period.

No small number of employers set service periods with new employees on providing housing or hukou. From the perspective of social effect, arbitrary invalidation of all service periods other than those related to technical training would destabilise other labour relationships and violate the principle of fairness.

Therefore, employers should consider applicable requirements under article 22 of the Labour Contract Law when determining the rights and obligations on both sides after providing special treatment equal in weight to technical training.

In addition, according to the Minutes of the Seminar Held by the Beijing High People’s Court and Beijing Arbitration Committee Concerning the Application of Law to Labour Disputes: “where the employer requires payment of default penalty based on its agreement on service period and default penalty with the employee after assisting the employee with local household registration, such a requirement should not be supported. However, if the employee has verifiably violated the principle of good faith and caused damages to the employer, he/she should make compensation.”

Clearly, on one hand Beijing courts do not support hukou-related default penalties based on restrictions over penalty under article 25 of the Labour Contract Law. But by not negating the validity of hukou service periods, they nevertheless leave the door open for employers to claim monetary compensation for sustained damages.

DEFINING COMPENSATION

Mia Wang, Jingtian & Gongcheng
Mia Wang
Associate
Jingtian & Gongcheng

The consensus among Beijing courts and arbitral tribunals is that where the employer has helped its recruited employee obtain local hukou, with a service period agreed, if the employee caused damages to the employer by breaching the principle of good faith, he/she should compensate.

For example, in Kang Jie v Anxin Property & Casualty Insurance (2021), the Second Intermediate People’s Court of Beijing Municipality held that hukou accorded to Kang, the employee, was a scarce resource and form of special treatment that Anxin, the employer, was under no legal obligation to provide.

On a voluntary basis, Kang entered into a supplementary agreement with Anxin, agreeing to the five-year service period. Kang’s premature departure was not only a breach of good faith, but would also inevitably cause company losses of hukou quota, time, manpower and capital, as well as negatively affect its internal management and staff stability. Accordingly, Kang was held liable for her breach of contract.

Based on judgments researched by the authors, where employers are unable to provide evidence of sustained damages, courts determine a compensation amount based on the principles of fairness and good faith. Comparisons may be made between actual length of service and period originally committed, and remuneration of the hukou-obtaining employee compared to employees of similar seniority and qualifications without hukou assistance. Loss of talent and the amount of agreed default penalty or service pay are also used as references.

Where employers submit evidence to support their claim for losses – including recruitment costs, training expenses, costs incurred for hukou registration, direct economic losses and other indirect losses – courts tend to base their decision on the relevancy of the employee’s departure to such losses, as well as the probative value of the evidence.

Comparing verdicts of Beijing courts before the pandemic, it can be seen that the amount of supported default penalty for breaching the hukou service period is rising, with a recent case compensating RMB300,000 (USD44,300). This rising trend possibly reflects national efforts to promote stable labour relationships for economic recovery in the wake of the pandemic.

STRIKING A BALANCE

Striking a dynamic balance between the principle of good faith and the interests of employees is delicate. If more employees opt to depart soon after obtaining their hukou, companies will become less willing to provide such benefits. Consequently, a few acts of bad faith may have a magnifying effect, impairing the collective interests of the overall workforce.

Therefore, safeguarding the interests of parties who remain faithful with their agreements by way of default penalty and compensation goes a long way to maintaining an environment of healthy and steady labour relationships, which ultimately serves to protect the lawful rights of all employees.

Shaw Zhao is a partner and Mia Wang is an associate at Jingtian & Gongcheng

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Jingtian & Gongcheng

34/F, Tower 3, China Central Place
77 Jianguo Road, Beijing 100025, China

Tel: +86 10 5809 1026

Fax: +86 10 5809 1100

E-mail: zhao.xiao@jingtian.com
wang.miao@jingtian.com

www.jingtian.com

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