China Employee Wage Deductions: Know Your Risks

Though China employers are generally not allowed to impose a penalty on an employee who causes his or her employer economic losses, the employer can require the employee compensate the employer for such losses by deducting funds from the employee’s wages. Nonetheless, because wage deductions are a big deal for China employees, special care by employers is required — just as with pretty much anything else involving China employees.

If a China employer is to succeed with deducting from an employee for economic loss, it should be sure to do the following so as to be able to prevail if sued by the employee:

First, the employer will need to be able to show all of the following: (1) the employee’s act caused the employer losses; (2) the basis for calculating the losses; and, (3) the amount of such losses. In other words, if challenged by the employee, the employer needs to be able to meet its burden of proof and failing to do so means the employer will be ordered to return the deducted amount to the employee.

Next, some locales require the employer provide the employee with advance written notice (times may vary) specifying the reason for the deduction and the amount to be deducted. Regardless of whether the employer’s specific locale imposes such a requirement, our China employment lawyers virtually always recommend to our employer clients that they provide a written notice regarding the wage deduction and seek to get the employee to acknowledge receipt of such notice before they proceed. Frankly, much of the time our recommendation is that the employer not even bother with the deduction because the risks outweigh the rewards.

Third, depending on the amount involved, usually the best way to proceed with an employee deduction is to break it out in equal monthly installments. This is because in many places employers are only permitted to deduct only up to 20% of an employee’s monthly wage. Further, the employer cannot deduct from an employee’s wages an amount that would cause the employee’s wages to fall below the local minimum wage. Moreover, some local rules mandate employers ensure their employees receive enough wages to cover expenses related to basic living needs, child care/education and elderly support, so you need to be sure the deduction will not bring you out of compliance with this rule. Provided an employer meets all applicable legal requirements, it can deduct from an employee’s wages every month until the amount that employee owes the employer has been paid in full or until the employee has left the company.

Fourth, if by the time the employment relationship is terminated the employee still owes the employer money, the employer can demand the employee make a one-time payment to the employer for the outstanding amount.

An employer can bring a legal action against an employee for damages caused by the employee, however in practice even if the employer meets its burden of proof, the court will consider a number of factors and balance the interests of both parties in determining the amount of the award, such as the employee’s intent (gross negligence vs. intentional misconduct), the employee’s wrongdoing, the amount of the employer losses, the employee’s income and ability to pay, any employer measures taken to prevent the potential loss, any employer trainings provided, whether the employer should bear this sort of risk during its normal course of business (the courts generally do not like the employer trying to impose such business risks on the employee). The employer rarely is awarded the full amount of damages it seeks.

The bottom line with employee deductions is that you as the employer should be careful in choosing your legal battles, especially now with China so worried about its economy. Do you have good evidence to support your claim for being able to deduct? Is it worth you spending the time and money and effort to pursue an employee for a small amount you probably will not be able to recover in full anyway? If you win in court will you be able to enforce the judgment against the employee? If the answer is no to these questions, you should probably just move on.

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.