The term “year-end bonus” generally refers to the material incentive a company gives to its employees to reward them for their good performance and contribution to its development. With continuous economic growth a goal of many companies, more and more employers are offering, and more employees are expecting, year-end bonuses. This trend raises various legal issues.

I. Legal nature of year-end bonus

A “year-end bonus” is usually the bonus paid by an employer, as specified by its rules and regulations or as otherwise agreed, to an employee at end of year or another agreed-upon date. Year-end bonuses may be paid in the form of: (1) a fixed amount, equivalent to a month’s salary, or as 13th- and 14th-months salaries (widely adopted by foreign enterprises), to which all employees are entitled, as long as the employees are all awarded the bonus payment, regardless of individual performance or company profits; (2) a floating bonus, which is a performance bonus paid on the basis of annual individual performance appraisal results and company profits; or (3) a “red packet,” generally determined by the boss, without a fixed rule, which might be related to the individual employee’s contribution, qualifications, relation with the boss or other factors.

No matter which form is chosen, a year-end bonus is a material incentive to employees. Then what is the essential legal nature of a year-end bonus?

According to Articles 4 and 7 of the “Provisions on the Composition of Total Salary” promulgated by the National Bureau of Statistics,1 a year-end bonus is a component of "Total Salary" and part of "labor remuneration."

Once the legal nature of the year-end bonus is clear, we have the answers to many questions. For example, disputes about year-end bonuses are typical labor remuneration disputes; therefore they fall into the scope of acceptance of labor dispute cases. Moreover, being in the category of salary, a year-end bonus should be included in the salary counting. Finally, a year-end bonus is taxable as normal wage income.

II. Agreed-upon forms of year-end bonus

Because a year-end bonus is a part of salary, the various forms it can takes are similar to those of base salary and, like base salary, should be agreed upon by both the employer and the employee at the time of hiring or during the employment.

Common forms of agreement with respect to year-end bonuses are:

1. Agreed to individually. As with an individual's base salary, a year-end bonus is agreed to between the employer and the employee and is documented in the employment contract or other agreement.

2. Stipulated by rules and regulations. During employment, the employer, to stimulate the employees’ enthusiasm for work, pays a year-end bonus to certain, or even all, employees, in a form stipulated by its rules and regulations. At its core a matter of collective motivation, this form of bonus is much easier to negotiate than a program designed to account for individual differences.

3. Agreed in the collective contract. Like the form governed by rules and regulations, year-end bonus provisions in the collective contract also apply to certain groups of, and even all, employees.

If a year-end bonus is agreed or stipulated to as above, and the employee meets the agreed-upon conditions, the employee will be entitled to the year-end bonus. A question arises, however, as to precisely when a year-end bonus is paid.

First, from the term “year-end,” we may learn that the appraisal period is from the beginning of a year to the end of the year. For this purpose, “year-end” refers to the appraisal period instead of the time of payment of bonus.

Second, “year” does not necessarily mean calendar year and is likely to be a company’s fiscal year. To avoid uncertainty, a year-end date should be expressly agreed to by the parties and that should apply for appraisal purposes.

Third, the time of payment of the year-end bonus should also be subject to the agreement between the parties.

Therefore, a year-end bonus is not necessarily required to be paid at the end of a calendar year.

III. Legal questions about year-end bonuses

1. Should a year-end bonus be included in the calculation of economic compensation?2

A year-end bonus is a part of salary so it should be included in the calculation of economic compensation.

2. Should the year-end bonus be included in the calculation of double pay if there is no signed written employment contract?

In accordance with the Employment Contract Law and the Regulation on the Implementation of the Employment Contract Law, an employer who fails to enter into a written employment contract with an employee more than one month and less than one year from the date of employment shall pay double salary to the employee every month. However, no national law or regulation specifies whether the year-end bonus is included in double salary under these circumstances. The courts are divided on this question and different precedents have arisen, with some employers having been ordered to pay full salary, others base salary, and still others the salary after deduction of risk and welfare allowances.

3. Is an employee who is employed for less than one year entitled to a year-end bonus?

Conditions for payment of a year-end bonus should initially be subject to the terms of the agreement between the parties. If an employee employed for less than one year is entitled to a year-end bonus by express agreement or as provided for in the employer’s rules and regulations, then as long as the contract terms are reasonable, the parties will be required to perform and observe such agreement or provision in good faith.

Ideally, entitlement to a year-end bonus for employment of less than a year should be expressly agreed to. Some companies stipulate that such employee is not entitled to the current year’s year-end bonus; some stipulate that such employee is entitled to the year-end bonus on a pro rata basis pegged to the date of employment; and some stipulate that such employee is entitled to the full year-end bonus.

4. Is an employee who leaves before expiration of his employment contract entitled to the year-end bonus?

Conditions for payment of the year-end bonus under these circumstances should be subject to the terms of the agreement between the parties. If it is expressly agreed to by the parties or is provided for in the employer’s rules and regulations, as long as the terms are reasonable, the parties are expected to perform and observe such agreement or provision in good faith.

5. Is an employee who takes maternity, sick or other leave entitled to the year-end bonus?

It is specified by the prevailing employment laws and regulations that maternity leave shall be deemed as normal attendance. Therefore, bonuses based on the appraisal of attendance as a full attendance bonus and the year-end 13th month’s salary should be fully paid.

For a performance-based year-end bonus, the company cannot assert that an employee has poor performance because he or she took maternity or sick leave. Moreover, whether an employee taking the maternity or sick leave is entitled to a performance bonus is subject to its rules or agreement and is controversial in judicial practice, particularly when it is not expressly specified by rules and regulations or agreed by the parties.