Labour disputes over year-end bonuses to departing employees are rampant. Companies often believe they fall within the scope of independent management rights and so can choose not to distribute year-end bonuses to departing employees.
However, employees often believe that even if the employer is not required to distribute the full amount of the year-end bonus, given their actual labour contribution they should still receive a proportionate share based on their length of service during the year.
To assist companies in improving their year-end bonus management system, this article analyses and summarises factors that affect distribution of year-end bonuses to departing employees.
COMMITMENT OR DISCRETIONARY?
Although Chinese law stipulates that a year-end bonus is a component of total wages, there are no clear regulations on its distribution.
In other words, it is not a legal obligation for enterprises, and the specific distribution method depends on business decisions of the enterprise itself.
If a company has not made a commitment to its employees regarding the distribution of year-end bonuses – and instead chooses to award a certain amount of bonus based on its annual operating status – it generally does not need to pay the bonus to employees who leave before the end of the year.
In Sha v Shanghai Century Lianhua Supermarket at Liuying Road, Zhabei District, the labour contract between the parties did not specify a year-end bonus, and bank transaction details provided by the employee were not sufficient to prove the existence of an unconditional commitment to distribute such a bonus during the performance of the labour contract.
Therefore, the court decided not to support the employee’s claim for a year-end bonus.
However, if a company has made a commitment to distribute the year-end bonus to its employees through a labour contract or other written form, and such commitment does not have additional conditions, then the company should still distribute the bonus to employees who leave before the end of the year in accordance with its promise.
CONDITIONS FOR DISTRIBUTION
Conditions can be set by the company, but they must be fair and reasonable in content, democratic and legal in procedures, and must not harm employees’ legitimate rights and interests.
If a company requires its employees to pass an annual evaluation or work for a certain period of time before receiving a year-end bonus – and such provisions have been approved by employees, or have become effective through democratic publicity procedures – then the company generally does not need to distribute a bonus to an employee resigning early.
In the labour contract dispute of Li v Shanghai Jijia Investment, the employer’s regulations stipulated that the annual performance salary was based on assessment results, and employees resigning before distribution of a year-end bonus were deemed to have automatically waived the bonus.
As the employee resigned early, their annual performance salary was zero, according to both the Salary and Performance Assessment Management Measures and the employee handbook. Therefore, the court did not support the employee’s claim for a year-end bonus. If a company has not clearly stipulated conditions for the distribution of a year-end bonus, or if procedures for the introduction of relevant regulations do not meet the requirements, then it cannot unilaterally claim there is no need to distribute a bonus to the departing employee on this ground.
REASON FOR DEPARTURE
The reason for the employee’s departure is an important factor in determining whether the company should distribute the year-end bonus. If the labour contract is terminated or ended not due to the employee’s fault or resignation, the company generally cannot refuse to distribute the bonus based solely on the employee’s early departure.
In the labour contract dispute of Fang v Sino-US United MetLife Insurance, although the employer’s employee handbook stated that employees who resigned before the month of the year-end bonus distribution would not receive the bonus, the labour contract was terminated due to objective circumstances related to the employer’s organisational restructuring.
Therefore, the employer should still follow the principle of fairness and reasonableness, taking into account factors such as the employee’s reason for departure, time and work performance. Consequently, the court supported the employee’s claim for a year-end bonus.
However, if the labour contract is terminated or ended due to the employee’s fault or resignation, the employer can determine whether to issue the year-end bonus to the departing employee based on its own rules and regulations, but should keep the reasonable factual evidence for the decision.
In managing compliance on year-end bonuses, companies should consider the following aspects:
(1) Clarify the incentive nature of year-end bonuses. The establishment of year-end bonuses is designed to help companies retain talent and encourage employees to perform well in the next year.
(2) Set conditions for distribution of year-end bonuses, and establish situations where they will not be paid, based on management needs. Year-end bonuses are not fixed bonuses that are unconditionally distributed, but require comprehensive evaluations based on the company’s business situation, employee performance and other factors. At the same time, the calculation formula for year-end bonuses should avoid direct linkage to employees’ tenure for the year.
(3) Confirm the settlement status of payments. When employees leave the company, the company should sign a written agreement with them to confirm that their salary, bonuses, annual leave and other benefits have been settled.
(4) Pay attention to local judicial practices. The opinions of local judicial documents and precedents may differ, so companies should adjust their year-end bonuses management flexibly based on specific circumstances.
Wu Kun is a partner and Pan Hao is an associate at Blossom & Credit Law Firm
Blossom & Credit
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