Reliant on the Law - Breach Penalties

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 Reliant on the Law

Breach Penalties

Do I have to pay my employer to end my contract early?

If there are two employment bugbears for foreign workers in China’s education sector one is the cancellation letter （外国人来华工作许可注销证明 or 注销单 for short） that provides proof of cancellation of the Foreigner’s Work Permit and the other is the breach penalty. I have already given some brief background on the former in an earlier article, though I will likely soon revist that subject in more detail. Below I will discuss the latter.

China’s Labor Contract Law (LCL) has clear rules on breach penalties and the Implementation Regulations for the Labor Contract Law of the People’s Republic of China (Implementation Regulations) helps to clarify matters more.

LCL Article 25 puts clear limitations on breach penalties. It reads: “Except for the circumstances as prescribed in Articles 22 and 23 of this Law, the employer shall not stipulate in the labor contract that the worker shall pay the penalty for breach of contract.” So except in limited circumstances breach penalties are not legal for employers to impose on employees in China.

The exception in LCL 22 deals with training expenses. Where an employer both pays for training expenses for an employee and stipulates a service period in the contract with the employee, that employer may claim a breach penalty from the employee if that employee does not fulfill the service period. But, the amount of the breach penalty claimed cannot be more than the training expenses, and must be proportional to the length of the service period left unfulfilled. Thus if training expenses were RMB 12,000 and the service period was one year, and the employee left after six months the maximum amount of the breach penalty would be RMB 6,000. Here it is important to note a couple of details. First, as per Article 16 of the Implementation Regulations, the training expenses can also include travel expenses directly related to the training. Second, the contract period is not by default a service period. This is clear from Article 17 of the Implementation Regulations, which discusses what happens when the service period is longer than the contract term. Thus without a specifically stipulated service period in the contract, even training expenses cannot be claimed as a breach penalty. 

As per Article 26 of the Implementation Regulations, even in cases where there are legitimate training expenses and a stipulated service period, if the employee terminates the contract for the subjective serious fault of the employer, based on the reasons in LCL 38, then the employee is not subject to pay a breach penalty. Conversely, if the employer terminates the contract for the subjective serious fault of the employee, the reasons in LCL 39, and there is a stipulated service period the employee is liable to pay for training expenses in proportion to the amount of time remaining in the service period.

The exceptions in LCL 23 deal with confidentiality obligations, and non-competition agreements. As per LCL 24, employees who are senior managers or senior technicians can be subject to confidentiality obligations and non-competition obligations in the labor contract or in separate non-competition agreements. Violation of non-competition agreements or stipulations can incur a breach penalty for the former employee, but such agreements must specify a term of validity that cannot be longer than two years after the end of the labor contract, they must also specify a geographic scope. The amount of the damages for breach of the non-competition agreement must also be reasonable, and if it is deemed not to be it can be reduced or eliminated by Labor Arbitration Commissions or People’s Courts. Finally, employers must pay ex-employees monthly compensation for the time that the non-competition agreement is in force. According to Article 6 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Labor Disputes (4), if no amount of compensation is specified in the non-competition clauses of the labor contract nor in a separate non-competition agreement then the standard will be set at 30% of monthly wages based on the average monthly wages over the 12 months prior to the end of the labor contract.

Thus the types of breach penalties commonly seen in labor contracts for foreigners in the education industry in China are invalid and not enforceable. These include liquidated damages penalties for early termination of contract and outrageous fees for visas, work permits, or even recruitment agents. As a side note, there are no actual fees for work permit processing, and the fee for a residence permit for work is RMB 400 per year. So any fees beyond this are just an attempt to saddle employees with voluntary business expenses such as those for the use of visa and recruitment agents or pure extortion.

All of this raises a question:  If these breach penalties are not legal, why are they so common? Here I propose two types of answer one ideographic and the other nomothetic. One is that bad contract drafts containing invalid and illegal provisions are used and reused by employers steeped in a business culture that does not highly value legal niceties. No one bothers to correct or replace poorly written contracts and they linger like spectors generating fear, confusion, and anxiety in those who should have been able to rely on them for security. But there is also a broader explanation. These contracts simply feel right to employers within a work culture that stresses subordination, control, and punishment instead of one based on cooperation, motivation, and reward. Thus there are cultural elective affinities for employers who have never heard of prospect theory to favor the greater psychological power of a threatened loss in the form of a breach penalty, despite its illegality, over the motivational force of a, fully legal, contract completion bonus. Understanding breach penalties is yet another way that Reliant on the Law can help you protect your labor rights.

References

Labor Contract Law of the PRC

http://english.www.gov.cn/archive/laws_regulations/2014/08/23/content_281474983042501.htm 

中华人民共和国劳动合同法

http://www.gov.cn/flfg/2007-06/29/content_669394.htm 

Article 22 

Where an employer pays special training expenses exclusively for a worker, as well as the special technical training, it may conclude an agreement with the worker concerning the service period.

Where any worker is in violation of the service period stipulation, he shall pay the employer a penalty for breach of contract as stipulated. The amount of penalty for breach of contract shall not be in excess of the training fees as provided by the employer. The penalty for breach of contract that the worker pays as required by the employer shall be no more than the training expenses caused in the service period unperformed.

In the case of any stipulated service period between the employer and the worker, it shall not influence the increase of the remuneration of the worker during the probation period under the normal wage adjustment mechanism.

第二十二条 

用人单位为劳动者提供专项培训费用，对其进行专业技术培训的，可以与该劳动者订立协议，约定服务期。

劳动者违反服务期约定的，应当按照约定向用人单位支付违约金。违约金的数额不得超过用人单位提供的培训费用。用人单位要求劳动者支付的违约金不得超过服务期尚未履行部分所应分摊的培训费用。

用人单位与劳动者约定服务期的，不影响按照正常的工资调整机制提高劳动者在服务期期间的劳动报酬。

Article 23 

Employers and workers may stipulate such issues as keeping confidential the business secrets and intellectual property of the employer in the labor contract.

With respect to a worker who has the obligation of keeping secrets, the employer may stipulate limitation of competition clauses with the worker in the labor contract or in the confidentiality agreement and stipulate that economic compensations shall be given to the worker within the period of limitation of competition in terms of months after the labor contract is discharged or terminated. Where the worker is in violation of the stipulation on limitation of competition, he shall pay a penalty for breach of contract to the employer.

第二十三条 

用人单位与劳动者可以在劳动合同中约定保守用人单位的商业秘密和与知识产权相关的保密事项。

对负有保密义务的劳动者，用人单位可以在劳动合同或者保密协议中与劳动者约定竞业限制条款，并约定在解除或者终止劳动合同后，在竞业限制期限内按月给予劳动者经济补偿。劳动者违反竞业限制约定的，应当按照约定向用人单位支付违约金。

Article 24 

The personnel under limitation of competition shall be limited to senior managers, senior technicians and other personnel who have the obligation to keep secrets in the entity. The range, geographical scope and time limit for limitation of competition shall be stipulated by the employer and the worker. The stipulation relating to limitation of competition shall not violate any law or regulation.

After the discharge or termination of a labor contract, the period of limitation of competition for any of the persons referred to in the preceding paragraph to work for any other employer producing or engaging in products of the same category or conducting business of the same category as this employer shall not be more than two years.

第二十四条 

竞业限制的人员限于用人单位的高级管理人员、高级技术人员和其他负有保密义务的人员。竞业限制的范围、地域、期限由用人单位与劳动者约定，竞业限制的约定不得违反法律、法规的规定。

在解除或者终止劳动合同后，前款规定的人员到与本单位生产或者经营同类产品、从事同类业务的有竞争关系的其他用人单位，或者自己开业生产或者经营同类产品、从事同类业务的竞业限制期限，不得超过二年。

Article 25 

Except for the circumstances as prescribed in Articles 22 and 23 of this Law, the employer shall not stipulate in the labor contract that the worker shall pay the penalty for breach of contract.

第二十五条 

除本法第二十二条和第二十三条规定的情形外，用人单位不得与劳动者约定由劳动者承担违约金。

Implementation Regulations for the Labor Contract Law of the People’s Republic of China

http://www.fdi.gov.cn/1800000121_39_521_0_7.html 

中华人民共和国劳动合同法实施条例

http://www.gov.cn/zwgk/2008-09/19/content_1099470.htm 

Article 16 

The training expenses as mentioned in Paragraph 2 of Article 22 of the Employment Contract Law include the training expenses spent by the employer on providing professional technical trainings for an employee, the travel expenses during the training and other direct expenses spent on the employee as a result of the training.

第十六条　

劳动合同法第二十二条第二款规定的培训费用，包括用人单位为了对劳动者进行专业技术培训而支付的有凭证的培训费用、培训期间的差旅费用以及因培训产生的用于该劳动者的其他直接费用。

Article 17 

Where an employment contract expires when the term of service stipulated by the employer and the employee according to Article 22 of the Employment Contract Law has not expired yet, the employment contract shall be performed until the expiration of the term of service, unless it is otherwise stipulated by both parties.

第十七条

劳动合同期满，但是用人单位与劳动者依照劳动合同法第二十二条的规定约定的服务期尚未到期的，劳动合同应当续延至服务期满；双方另有约定的，从其约定。

Article 26 

If an employer and an employee have agreed on the period of service in the employment contract, when the employee dissolves the employment contract according to Article 38 of the Employment Contract Law, it is not against the stipulation of the period of service, and the employer is not entitled to ask the employee to pay a penalty for breach of contract.

The employee shall pay a penalty for breach of contract to the employer if the employer dissolves the employment contract which has stipulated the period of service under any of the following circumstances:

(1) The employee seriously violates the rules and procedures set up by the employer;

(2) The employee seriously neglects his duties or engages in malpractice for personal gains and has caused severe damages to the employer;

(3) The employee simultaneously enters an employment relationship with any other employer and thus seriously affects his completion of the tasks assigned by the employer, or the employee refuses to correct after the employer has pointed out the problem;

(4) The employee, by means of deception or coercion or by taking advantage of the employer’s difficulties, forces the employer to conclude or change the employment contract against the employer’s true will; or

(5) The employee is under investigation for criminal liabilities.

第二十六条　

用人单位与劳动者约定了服务期，劳动者依照劳动合同法第三十八条的规定解除劳动合同的，不属于违反服务期的约定，用人单位不得要求劳动者支付违约金。

有下列情形之一，用人单位与劳动者解除约定服务期的劳动合同的，劳动者应当按照劳动合同的约定向用人单位支付违约金：

　　（一）劳动者严重违反用人单位的规章制度的；

　　（二）劳动者严重失职，营私舞弊，给用人单位造成重大损害的；

　　（三）劳动者同时与其他用人单位建立劳动关系，对完成本单位的工作任务造成严重影响，或者经用人单位提出，拒不改正的；

　　（四）劳动者以欺诈、胁迫的手段或者乘人之危，使用人单位在违背真实意思的情况下订立或者变更劳动合同的；

　　（五）劳动者被依法追究刑事责任的。

Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Labor Disputes (4)

最高人民法院关于审理劳动争议案件适用法律若干问题的解释（四）

http://www.court.gov.cn/zixun-xiangqing-5064.html

Article 6 

Where the parties have stipulated restrictions on competition in the labor contract or confidentiality agreement, but they have not agreed on an amount of economic compensation to give workers after the labor contract is terminated or expires, and the workers have fulfilled their obligations to restrict competition, the People’s Court shall support the request of the workers for the former employer to pay monthly compensation based on the standard of 30% of the average monthly salary for the 12 months preceding the termination or expiry of the labor contract.

Where 30% of the average monthly salary specified in the preceding paragraph is lower than the minimum wage standard at the place where the labor contract is performed, compensation shall be paid in accordance with the minimum wage standard at the place where the labor contract is performed.

第六条 

当事人在劳动合同或者保密协议中约定了竞业限制，但未约定解除或者终止劳动合同后给予劳动者经济补偿，劳动者履行了竞业限制义务，要求用人单位按照劳动者在劳动合同解除或者终止前十二个月平均工资的30%按月支付经济补偿的，人民法院应予支持。

前款规定的月平均工资的30%低于劳动合同履行地最低工资标准的，按照劳动合同履行地最低工资标准支付。

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This article is the author’s original, non-profit work product. The original author and publishing information must be retained in any reproductions. For commercial use, please contact the author: [e-mail].

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How Reliant can help
We can help you get better results when in a China labor dispute. We offer nationwide strategy consulting, planning, translation, and editing services, as well as work permit processing and consulting, and we can act as an agent for many matters in Beijing.About Reliant
Reliant’s co-founders are Josh and Lee. Josh is a former Fullbright Scholar educated at Yale and Tsinghua University. He is a native English speaker who has been featured on Chinese language television programs for his Mandarin language abilities, and has lived and worked in China since 1999. A native of Beijing, Lee was educated at Renmin University and holds a Chinese Human Resources Professional certificate. As specialized labor consultants we know China labor laws and administrative regulations. We are not lawyers but we work with attorneys as needed.

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