After an employee has been illegally terminated, a court or arbitrator may order their employer to reinstate them and compensate them for lost wages. How will the amount of lost wages be calculated, given that the employee was not actually working for the employer during the relevant time period?

We will give a brief introduction to this topic through a review and analysis of Judgment no. 11644, (2014), Civil Tribunal, Beijing Second Intermediate People’s Court.

1. Summary of the Case

Employee A joined Company B on July 11, 2011. The labor contract between the two parties stated that A would be paid a monthly base salary of RMB 12,100 and a monthly performance bonus of RMB 9,900 (in the PRC, performance bonuses are generally fixed sums). As of January 2012, the base salary and performance bonus had been adjusted to RMB 14,520 and RMB 11,880 respectively (26,400 RMB in total). Company B terminated its labor contract with A on July 30, 2012.

Claiming that Company B had terminated the labor contract illegally, A referred the matter to the Labor Dispute Arbitration Commission in Fengtai District, Beijing. A asked the Commission to order Company B to reinstate him and pay compensation for the wages he lost in the interim. After examining the case, the Arbitration Commission ordered Company B to reinstate A and pay RMB 616,000 in compensation for lost wages. This amount was calculated based on a monthly salary RMB 26,400. Company B was dissatisfied with the award and filed a suit with the Fengtai District People’s Court. The Court examined the case and ordered Company B to repay A in the amount of RMB 358,686, based on a salary rate of Beijing’s average monthly salary multiplied by three. A then appealed to the Beijing Second Intermediate Court.

2. Summary of the Final Judgment

Company B submitted evidence proving that A’s salary in 2012 had been adjusted to a base of RMB 14, 520 and a performance bonus of RMB 11,880. However, A disagreed with this salary breakdown and argued that his monthly salary was simply RMB 26,400. The Second Intermediate Court rejected this argument, noting that this salary was over three times Beijing’s monthly average salary in 2013, and that A did not work for Company B from August 1, 2012 to July 10, 2014. As Company B had no objections to the initial judgment, the Second Intermediate Court proceeded to uphold the initial judgment.

3. Comments on the Judgment

Discussions of how to calculate salary loss from wrongful termination are quite rare among judgments on reinstatement of employment and repayment of wages lost due to wrongful termination.

The Labor Contract Law stipulates that employers shall compensate employees for salary loss incurred due to illegal termination of labor contracts. However, the law is silent on how to calculate this loss. Local regulations and judicial practice have not offered solutions; different provinces make use of different standards:

  • Shanghai[i]/ Guangdong Province[ii];: the average monthly salary of the employee before the termination of employment;
  • Liaoning Province[iii]: the average local monthly salary;
  • Hebei Province[iv]: living expenses.

So far, judgments in Beijing on this issue remain inconsistent. Beijing courts might adopt any of the following bases for calculating lost wages due to wrongful termination:

  • The salary written in the labor contract;
  • Basic living expenses – calculated as 70% or 80% of Beijing’s minimum wage;
  • A standard salary, as confirmed by the court;
  • A salary amount confirmed by both parties to a lawsuit;
  • Salary claimed by the employee (when the employer fails to provide evidence proving the salary amount);
  • Beijing’s monthly average salary.

In practice, courts generally use the monthly salary written in the labor contract as a basis for calculating lost wages. Courts may also occasionally adopt the standard of basic living expenses. The other bases for calculation of lost wages are adopted much less frequently.

The judgments which base lost wages awards on basic living expenses always reason that, since the employee did not actually work for the employer during the relevant time period, the employer should only be asked to pay for living expenses – no more. Judgments that base lost wages awards on the amount stipulated in the labor contract reason that, although an employee did not work for the employer during this time period, the employee has lost their stipulated salary because of the employer’s actions. Therefore, the employer should still be obligated to pay the employee their salary as set out in the labor contract.

The judgment in the above case, where an award of lost wages was calculated based on a rate of three times the local monthly average salary, is highly unusual. This judgment is a rare instance of a judge exercising their freedom of discretion.

We suggest that employers review local regulations and judicial practice on this issue if they are facing a claim for lost wages connected with wrongful termination. If there is no standard local method for calculating lost wages, it is likely that the employee’s average monthly salary as written in the labor contract will be adopted as the rate on which an award should be based.

Note:

  1. See Measures of Shanghai Enterprise on Payment of Wages (???????????) Article 23.
  2. See Regulations of Guangdong Province on Payment of Wages (?????????) Article 29.
  3. If the salary of the employee is higher than the average monthly wage of local employees in the same market, the standard will be adjusted to their average wage over the last 12 months of their employment. See Regulations of Liaoning Province on payment of Wages (????????), Article 36.
  4. The living expense standard is 80% of the local minimum wage. See Regulations of Hebei Province on Payment of Wages (?????????) Article 28.