China Employee Salary Reductions: It’s Complicated

Can an employer in China unilaterally reduce the salary of one or more of its employees? Like so much having to do with China employment law, it depends.

Because labor remuneration is an often-litigated issue in China, employers should be very careful when reducing an employee’s salary and should take that action only when prepared to defend it before an arbitrator or a judge. As with China-based employee terminations, the best way to proceed and avoid employment disputes will usually be to do it via a mutual agreement (in Chinese) structured as an amendment to the existing employment contract. If you as the employer can get your employee to agree in writing to a salary reduction, that will both minimize your risk of later being sued for reducing your employee’s pay and it will increase your chances of prevailing should such a lawsuit occur anyway.

The tricky question though is whether an employer can reduce an employee’s salary without that employees prior written consent. It is possible, but how you can do it will depend on the local employment laws and even to a certain extent on the local employment bureau. But even if allowed where you are, to maintain its legality, you must do a number of things (and document them) to make this work. In the real world, very few employers take the time and effort to do these things and those who don’t virtually all lost in labor disputes.

China’s Labor Contract Law does not explicitly give an employer the right to unilaterally reduce an employee’s wages because the employee is not competent at his or her job. The Labor Contract Law instead speaks to employer’s being allowed to unilaterally adjust an incompetent employee’s position, provided the employer meets all local requirements in making such adjustment. The Labor Contract Law also calls for the employer to provide 30 days’ written notice or an additional month’s salary in lieu of notice, if the employer can prove the employee is incompetent and remains so after training or assignment to another position. The employer may also reduce an employee’s salary in response to an employee’s breach of the employer’s rules and regulations.

The below are a few of the things employers typically (I say typically because these things vary depending on locale) must do for its unilateral salary decision to hold:

First, the employer needs to make sure its employment contract gives it the right to adjust an employee’s position and remuneration. Make sure the employment contract is fully executed by both parties. With China cracking down on employers lately (particularly foreign employers) our China employment lawyers have been doing a ton of employment audits and we are stunned by how many times we are seeing employment contracts  signed only by the employee, signed only by the employer, or never signed by either party. Get your employment contracts signed by both parties and retain copies of those signed employment contracts in a safe and accessible place!

The employer then needs to ensure that its Rules and Regulations set forth its salary reduction policies. Forget about unilaterally reducing one of your employee’s salaries if you do not have a China-centric set of employer rules and regulations. And just as our employer audits are revealing a ton of foreign companies that do not have their employment contracts in good order, many do not have their Rules and Regulations in good order either. Some companies either did not know which was their current version or could not find their current version. And far too many had no written proof of ever having given their Rules and Regulations to their employees. Even with your salary reduction policies in writing, if you never obtained the employee’s written acknowledgment of having received a copy of such a policy, you will likely have a hard time getting a Chinese court or arbitrator to allow that to provide the authority for your reducing a salary.

But if you do have a proper set of Rules and Regulations that gives you the right to reduce the employee’s pay for violations of the Rules and Regulations and you can prove employee did in fact violate your Rules and Regulations, you may be able to reduce the employee’s pay on that basis. For this to work (and even then only in some locales), your Rules and Regulations must clearly specify the Rules and Regulations breach that will lead to a salary reduction and, as I wrote before, such provisions in your Rules and Regulations must be reasonable and not violate any Chinese laws.

If you as employer can get past all of the above hurdles, you next need records proving why the employee deserves a salary reduction. Something like written performance evaluations are usually best, and if signed as received by your employee, all the better. Make sure though that your performance evaluations are in Chinese or have been translated into Chinese; do not wait until your employee brings a legal action against you before you put this into Chinese as that will not be viewed as a contemporaneous document and it may be rejected entirely by the court or at least viewed with much less credibility.

Even if you satisfy all of the above requirements you still have another one: reasonableness. Was the adjustment you made for this particular employee reasonable. For example, is the new position suitable for the employee? Is the reduced pay appropriate for the adjusted position? Does it meet local minimum wage standards? Keep in mind the local differences: e.g., what is considered reasonable in Dalian may not be deemed reasonable in Beijing.

Finally, when you notify your employee of your salary reduction decision, you typically will need to provide him or her with an explanation for your doing so, so the employee can understand what led to your adjustment decision. Again, doing so in a writing in Chinese and getting that writing signed by your employee will almost always be the best way to do this.

Reducing a China employee’s salary is like pretty much everything else employment law related in China: it’s local and it’s not so simple, but done right, it’s possible.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.