Calculation and Payment of Economic Compensation (cont'd)

In this week's PRC Bitesize, we continue to look at the calculation of economic compensation.

Does the formula for calculating statutory economic compensation under the PRC Labour Contract Law apply in respect of an employee's pre-2008 period of employment?

The basic formula is similar (i.e., Calculation Basis × Service Period, as discussed in our previous PRC Bitesize); however, due to the difference between the Labour Contract Law and the relevant pre-2008 rules on calculation of severance pay, the statutory economic compensation payable to an employee who joined the employer before 2008 may have to be calculated differently based on the pre-2008 period and post-2008 period. This is subject to the local judicial practise. Below are examples of how statutory economic compensation can be calculated.

Case Study 1

An employee joined the Company in Shanghai on 1 August 2006 under an employment contract stated to expire on 30 April 2013. The Company does not renew the employee's employment after its expiration. The employee's average monthly salary during the 12 months prior to the expiration of the employment contract is RMB15,000. How much statutory economic compensation is payable to the employee?

According to the pre-2008 rules, no statutory economic compensation is payable to the employee where the employment contract ceases due to expiry of its stated duration. Therefore, the employee in our example is only entitled to economic compensation calculated based on his or her post-2008 service period.

As to the post-2008 period, a) the Calculation Basis is capped at 300 percent of the Local Average Monthly Salary in Shanghai, which is currently RMB4,692 x 3 = RMB14,076; and b) the years of service after 1 January 2008 are 5 years and 4 months, which should be counted as 5.5 years.

See details of the calculation in the table below:

Click here to see table.

Case Study 2

Adopting the same facts as above, except that the employee has agreed to terminate his employment with the Company by mutual separation on 30 April 2013, how much the statutory economic compensation is the employee entitled to?

For pre-2008 period, a) the Calculation Basis is the employee's actual average monthly salary during the previous 12 months (i.e., without a cap); and b) the actual period of service of 1 year and 5 months can only be deemed as 1 year for the purpose of the Service Period (as under the pre-2008 rules, any period of less than 6 months does not count for the calculation of severance pay).

As to the post-2008 period, a) the Calculation Basis is capped at 300 percent of the Local Average Monthly Salary in Shanghai (i.e., RMB12,993); and b) the actual years of service after 1 January 2008 are 5 years and 4 months, which should be counted as 5.5 years.

Click here to see table.