[Case Brief]

Liang joined T Company in Guangzhou in May 2007 as the Section Chief of the cartography center. The term of the latest labor contract between the two parties commenced on June 1st, 2011 and was scheduled to end on May 31st, 2014. Clause 14 of Chapter 2, “Work Discipline” of T Company’s work rules provided as follows: “Employees shall strictly comply with the Company’s work attendance system…2. If an employee is late for a cumulative total of more than half an hour during a single month, a half-day’s salary shall be deducted; and if he or she is late for a cumulative total of more than one hour in a single month, a full day’s salary shall be deducted.

Liang was late for more than half an hour in May 2013, in response to which T Company deducted a half-day’s salary — RMB 69.66 in accordance with the work rules. In August 2013, Liang filed a written dispute over this deduction to T Company, asserting that the deduction of his labor remuneration was illegal and asking for a refund of his salary. Liang sent a resignation letter by email on August 22nd, alleging that since the Company illegally infringed upon his labor rights and interests and since the corresponding system does not conform to the law, he would legally terminate his labor contract.

On August 23rd, 2013 T Company organized a tripartite consultation among the company, Liang and the labor union. During the consultation, T Company agreed to refund Liang the deducted late-arrival penalty of RMB 69.66 to resolve the dispute.

In addition, T Company appointed Liang to a training program from September to December 2010 at its overseas affiliate and the two parties executed a Company Training Contract Record for this purpose. The terms of the Record provided that Liang’s term of service would end on December 17th, 2015. They also provided that if Liang violated the Service Agreement, he would be obligated to pay liquidated damages to T Company in accordance with the contractual standard.

On August 26th 2013, T Company notified Liang in writing that if he wanted to leave, he would have to pay the default fine for the training program in accordance with the Service Agreement; otherwise his resignation would not be accepted, and that quitting his job before paying the default fine would be treated as absence from work without due cause. Liang sent his resignation letter and failed to show up for work. On August 29th T Company sent Liang a Notice of Processing of Illegal Departure and dismissed him on the grounds of three consecutive days absent from work.

On August 28th, 2013 Liang filed for arbitration with the Labor Dispute Arbitration Committee, demanding that T Company refund the illegally deducted RMB 69.66 and pay economic compensation in the amount of over RMB 30,000 for terminating their labor relationship with him.

On September 6th, 2013, T Company also filed for arbitration with the Labor Dispute Arbitration Committee and demanded that Liang pay a default fine of over RMB 50,000 for breaching the Service Agreement.

[Issues in Dispute]

  1. Whether it was legal for the Company’s work rules to impose a deduction from the employee’s salary based on cumulative late arrival time;
  2. Whether sending the employee to an overseas-affiliated company constituted “special training” as set forth in Article 22 of the P.R.C. Labor Contract Law.

[Arbitral Award]

  1. The Arbitration Committee relied on Article 51 of the Guangdong Province Regulations on Labor Security and Supervision, i.e. “If an employer’s work rules provides for a monetary fine, or if the employer deducts from an employee’s salary without legal basis, the Human Resources and Social Security Administrative Department shall issue a warning and order the employer to reimburse the deduction.” Accordingly, the Arbitration Committee ruled that T Company’s deduction of Liang’s salary based on his late arrivals lacked legal basis, and the Committee supported Liang’s petition for a refund of the deducted RMB 69.66.
  2. Even though T Company deducted from Liang’s salary, however, the Committee did not consider the offense weighty enough to justify Liang terminating the Labor Contract. Consequently, the Committee did not support Liang’s petition for the economic compensation.
  3. The Committee held that since T Company failed to provide evidence proving the training qualifications of the affiliated company that provided the training program when it filed the arbitration case, and since it submitted no evidence proving that it provided “special training” to Liang, the Committee did not support T Company’s petition to order Liang to pay liquidated damages.

[Analysis and Research]

  1. Whether an employer’s work rules can impose a salary deduction based on an employee’s late arrivals.
  1. National Laws and Regulations

Obtaining labor remuneration is a basic employee right under the Labor Law. The national government promulgated a series of laws and regulations regulating employers and restricting them from arbitrarily deducting employee remuneration.

Article 51 of the Labor Law provides that salary paid to an employee may not be deducted or delayed without justification.

Article 15 of the Interim Provisions on the Payment of Salary promulgated by the Ministry of Labor provides that no employer may deduct from the salary of an employee, except under the following circumstances:

(i) the employer deducts individual income taxes;

(ii) the employer deducts various social insurance premiums that should be borne by the employees themselves;

(iii) the employer deducts payment for child support and/or parental support in accordance with a decision or judgment by a courts or

(iv) the employer deducts other expenses as required by law.

Article 3 of the Ministry of Labor Supplementary Provisions on Relevant Issues Concerning Interim Provisions on the Payment of Salary provides as follows: “For the purpose of Article 15 of the Interim Provisions, "deduction" shall mean a withholding from an employee's salary (meaning all labor remuneration that the employer is obligated to pay to the employee based on the standard set forth in the labor contract and on the premise that the employee has provided normal labor) by the employer without justification, with the exceptions that the salary:

(i) is deducted as expressly provided in applicable national laws and regulations;

(ii) is deducted as expressly provided in a labor contract signed in accordance with applicable law;

(iii) is deducted as expressly provided in factory regulations and disciplinary rules formulated by the employer in accordance with applicable law and approved by the employee congress;

(v) must be reduced when the total salary offered by the enterprise is related to its economic value, and this value depreciates (notwithstanding that the salary paid to the employee may not be lower than the local minimum legal salary); and

(vi) salary is deducted on a pro rata basis when an employee takes personal leave or another corresponding form of leave.

From the perspective of national regulations, what the law prohibits is deduction from an employees’ salary without justification. The Supplementary Provisions of the Ministry of Labor on Relevant Issues Concerning the Interim Provisions on the Payment of Salary list the justifications for deducting from employee salary including express provisions of the labor contract, factory regulations or disciplinary rules approved by the Employee Congress. Factory regulations and disciplinary rules may be understood as codes of practice. Indeed, we may understand the provisions this way: as long as punitive measures such as salary deductions are provided for late arrivals in the labor contract or in work rules formulated in accordance with the law, they are justified as long as the employee’s basic right of subsistence is ensured.

  1. Local Laws and Regulations

Some provincial labor administrative departments have also promulgated provisions on the payment of employee salaries; however but such provisions differ on the question of to what extent employers are entitled to deduct from employee salary.

Article 19 of the Shanghai Municipality Measures on Enterprise Payment of Salary provides as follows: “No employer may deduct from the salary of an employee. An employer may withhold salary from an employee under any of the following circumstances:

(i) the employer withholds individual income taxes that should be paid by the employee;

(ii) the employer withholds social insurance premiums that should be paid by the employee;

(iii)  the employer withholds child or parental support payments that must be withheld in accordance with a decision or judgment by a court; or

(iv) the employer withholds other expenses from the salary of an employee as stipulated by law.

Article 40 of the Guangdong Provincial Regulations on the Payment of Salary provides as follows: “An employer may withhold the following amounts from the salary of an employee pursuant to the relevant provisions:

(1) individual income taxes owed by the employee;

(2) social insurance premiums and housing reserves funds that should be paid by the employee;

(3) alimony, child support payments and other support payments that are required to be withheld under a ruling or judgment of a People’s Court; or

(4) other fees that may be deducted from the salary of an employee as provided by law or agreed to between the parties.”

Article 51 of the Guangdong Provincial Regulations on Labor Security and Supervision provides as follows: “If an employer’s work rules provides a monetary fine, or if the employer deducts from salary without legal basis, the Human Resources and Social Security Administrative Departments shall issue a warning and order the employer to remedy such fine or deduction.”

Article 19 of the Liaoning Provincial Regulations on the Payment of Salary provides as follows: “No employer may deduct from the salary of an employee except in cases where applicable law so permits; and any employer deduction from an employee’s salary shall conform to the terms of the collective contract and/or the labor contract or the provisions of the employer’s work rules as formulated in accordance with the law. The monthly deduction shall not exceed 20% of the employee’s salary for the current month; and the amount remaining after the deduction shall not be lower than the local minimum salary standard.

Among the foregoing three local regulations, the regulations issued by Guangdong Province and Shanghai Municipality are identical, i.e. in the absence of enabling provisions in substantive law, employer work rules cannot allow deductions from employee salary. In contrast, the Liaoning provincial regulations permit the employer’s work rules to impose deductions from employee salary even if deductions are not expressly permitted by law.

  1. Thoughts on the Imposition of Punitive Measures for Employee Tardiness

Based on the foregoing regulations, differences can be easily found between official attitudes at the local and national level towards employee late fines imposed by employer work rules. We learned after consulting local labor supervision authorities that Shanghai and Guangdong object to employer work rules that impose additional grounds justifying employee salary deductions beyond the scope of those provided by law. The rationale for this objection is that since (i) employee salaries guarantee the employee’s basic right of subsistence; (ii) the Labor Law and the Labor Contract Law do not list circumstances allowing employers to deduct from employee salaries, and (iii) the Interim Provisions on the Payment of Salary promulgated by the Ministry of Labor and its Supplementary Provisions are of lesser legal authority, there is no legal basis for employer work rules to deduct from employee salary based on late arrival.

In view of the foregoing, and especially in regions where local regulations do not support monetary fines to enforce employee punctuality, employers may well turn to another approach to encourage employee punctuality. We note that some employers offer a sum called an “attendance bonus” to reward employees who have good attendance records. If an employee’s monthly attendance record meets the employer’s requirements, the employee will be awarded an attendance bonus; if the employee fails to fully meet the requirement (i.e. occasionally late during the month), the bonus will be awarded pro rata; and if the employee’s attendance performance is unsatisfactory the bonus will not be awarded. In our opinion, while the law does not specifically provide terms for awarding such bonuses, companies are definitely entitled to institute regulations governing such a bonus system. This will allow employers can avoid labor disputes arising from employee attendance management by means of salary deductions.

  1. Whether the employer can conclude a Service Agreement with an employee based on special training provided by its overseas affiliate

Article 22 of the P.R.C. Labor Contract Law provides as follows: “Where an employer provides special training fees to an employee for training in special skills, it may conclude an agreement with the employee to specify the terms of service.” Although training under the Labor Contract Law is limited to ’special technical training’ only, the qualifications of the institution providing the training are not specified. In other words, if an employer sends an employee to its overseas affiliate, pays the training expenses, and conforms to all the other applicable legal requirements, such training constitutes “special training” under the Labor Contract Law.

Based on the foregoing understanding, more emphasis should be placed on whether the content of the training is “special” when determining whether training should be considered “special training” under Article 22. In our opinion, the term “special” should be defined relative to ordinary vocational training that the employer provides its employees. Special technical training should be conducted at a special time and in a special manner, and should be distinct from the employer’s routine vocational or in-house training. For example, in the foregoing case, since T Company sent Liang overseas for three months’ training, the training should be considered “special” training for a specified period of time.

On the other hand, when an employer alleges that the employee breached the service agreement and claims liquidated damages, it should also be required to prove that it paid for the employee’s training. Training expenses may include the training fee paid to the training institution; the course fee, and transportation, accommodation and living expenses. The dispute in this case is whether the expenses paid by the affiliate for the employee’s special training should be accepted as training expenses. In our opinion, if the employer and the overseas affiliate have concluded a retainer or similar agreement with respect to the employee’s training, the training expenses actually paid by the employer under such an agreement should be accepted as a portion of special training expenses under the Labor Contract Law.

In addition, if the employer submits further evidence to prove that the affiliate possesses the relevant qualifications for conducting technical training, and submits documentation proving that the employee was actually sent to the overseas affiliate for training instead of work, the employer’s case will be greatly buttressed.