Implications of the rescission of circular No. 481 in China

The Measures Concerning Financial Compensation for Breach and Termination of Labour Contract (circular No. 481) issued by the former Ministry of Labour was rescinded by a circular of the Ministry of Human Resources and Social Security dated 24 November 2017. There are three major differences between circular No. 481 and the Labour Contract Law:

MAJOR DIFFERENCES

Additional compensation. According to circular No. 481, if an employer fails to pay wages or overtime pay, or if a wage paid to an employee is lower than the local minimum wage, then in addition to the overdue amount or difference payable, the employer must also pay financial compensation equal to 25% of the overdue amount or difference payable. Where an employer fails to pay severance as stipulated after a labour contract is terminated, then in addition to a full payment of the severance, the employer must also pay additional financial compensation equal to 50% of the severance amount. Article 85 of the Labour Contract Law, however, requires an employer to pay additional compensation “above 50% to below 100% of the amount payable” under the above circumstances, if and when “the labour administration orders [the employer] to pay compensation within a prescribed period but the employer fails to comply with the order”.

Severance payment. The calculation base of severance payment, according to circular No. 481, should be “the average monthly wage during the 12 months immediately preceding the termination of the labour contract”. Where a labour contract is terminated because the employee is neither able to resume his original work nor engage in any other work arranged for him by the employer after the expiration of the prescribed medical treatment period for an illness or non-work-related injury, or because of a material change in the objective circumstances that underlie the labour contract, or because of an economic layoff of the employer, then in as far as the average monthly wage of the employee is lower than the average monthly wage of the employer’s staff as a whole, the severance must be calculated based on “the average monthly wage of the employer’s staff”.

In contrast, the “monthly wage” under the Labour Contract Law is defined as “the employee’s average monthly wage during the 12 months immediately preceding the termination or expiration of the labour contract”. It is further defined under the Implementing Regulations of the Labour Contract Law as the “wage receivable by the employee” not lower than the local minimum wage, which is comprised of “any monetary incomes, including but not limited to wages based on an hourly rate or unit rate, and bonuses, allowances and subsidies”. The calculation base of severance is capped at three times the average monthly wage of local workers in the previous year, if the “monthly wage” of the specific employee is higher than this amount.

According to circular No. 481, where a labour contract is terminated by mutual consensus, or because the employee is incompetent at the job, and where the employer should pay severance equal to one-month’s wage for every full year of past service, the total severance for the employee’s years of service will be subject to a cap of 12 months’ wages. But there are no such requirements under the Labour Contract Law.

Medical allowance. According to circular No. 481, where a labour contract is terminated because the employee is neither able to resume his original work nor engage in any other work arranged for him by the employer after the expiration of the prescribed medical treatment period for an illness or non-work-related injury, then in addition to severance for the employee’s years of service, the employer must pay a medical allowance in an amount not less than six months’ wages. Furthermore, additional medical allowance is required in cases of serious or terminal illness. In contrast, there are no such provisions about medical allowance under the Labour Contract Law.

JUDICIAL PRACTICES

The rescission of circular No. 481 will not have a material impact on judicial practices, given the well established preference of judges to apply several implied rules in order to address the conflicts between circular No. 481 and the Labour Contract Law.

Additional compensation. In a relevant ruling in 2016 issued in response to an employee’s claim for a 25% additional compensation payment under circular No. 481 (on the ground that the employee’s employer was in arrears on owed wages), the Supreme People’s Court said while circular No. 481 “is still effective, the PRC Labour Contract Law enacted in 2008 sets out different provisions regarding the same issue”. In doing so, the court decided to refute the employee’s claim, explaining that “his failure to prove that the competent labour administration has ordered payment of overdue wages by the employer within a prescribed period made the claim for compensation on the ground of arrears unsubstantiated”. According to this ruling, an employee will be entitled to additional compensation only if, first, an order requesting payment within a prescribed period is issued (to the employer) by a labour and security administration, and second, if the employer fails to comply with such an order. There are also similar rulings by the Higher People’s Court of Jiangsu province, the Higher People’s Court of Zhejiang province and an intermediate people’s court of Shanghai, which each support the application of the Labour Contract Law, holding that the provisions of circular No. 481 concerning rate and base of compensation calculations have been superseded and replaced by the Labour Contract Law and its implementing regulations.

Severance payment. In connection with disputes arising out of the termination or expiration of employment relationships in or after 2008, where such employment relationships were entered into prior to 2008, courts generally consider the effective date of the Labour Contract Law (i.e., 1 January 2008) to be the applicable transition date, and will calculate severance based on different standards for the periods before and after this date. In practice, where a labour contract is terminated by mutual consensus between an employer and an employee that has worked for the employer for an extended period, it is highly unlikely that the employee will agree to using the 12-month capped rate for the calculation of his or her severance payment.

Medical allowance. The rescission of circular No. 481 does not imply cancellation of medical allowance, because in Jiangsu, Shanghai, Hubei, Shandong and many other places, there are still local regulations imposing medical allowance obligations, despite the lack of explicit provisions under the Labour Contract Law. However, the rulings of several higher courts have held that, given the lack of such explicit provisions under the Labour Contract Law, employees may not claim medical allowance unless they have gone through the appraisal process via labour appraisal committees.

Patrick Gu is a partner at DaHui Lawyers

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