China’s Labor Law on Salary Reduction
By Weining Hu
Unlike the US’ at-will employment system, China uses contract employment. This means employers must make formal written employment contracts with all of their full-time employees. Further, during any term of contract, employers can only terminate employees’ contracts under certain circumstances in accordance with China’s Labor Contract Law (LCL).
China is highly protective of employees’ employment rights. When it comes to salary reduction, employers will encounter many legal restraints when making a potential unilateral pay cut. Employers and HR managers should understand China’s regulatory details before making reduction in an employer’s remuneration, so that they can effectively avoid labor-related legal risks.
Employer and employee agreement
Employee salary is an indispensable element of the employment contract. Therefore, modification of salary can be perceived as modifying an organic part of a contract. According to Article 35 of the LCL, an employer can modify an employment contract only if the employer has made successful consultation with the employee, and have agreed upon the modification. An employer should document the changes in written form, and both parties should retain a hard copy of the agreement.
Successful consultation here means that the employee accepts, or expresses no objection to the employer’s pay cut decision. It is often a common practice for the employer to obtain the employee’s signature on a written payroll modification or pay cut notification following the consultation. This notification services as additional written evidence of the employee’s consent on top of the contract.
China’s LCL does not explicitly state that the employer has the right to make a pay cut to an employee’s salaries if they are proved incompetent in his or her role. However, the extended implication of Article 40.2 indicates that the employer can unilaterally change the employee’s position if he or she proves incompetent for their job.
The right to assign a new role not only entitles the employer the legal right to adjust the job duties, but also HR management rights, such as deciding a salary for the new role. However, this unilateral salary adjustment right must be made in accordance with consolidated internal rules and policies.
If the employer does not have an explicit set of internal payroll management rules, then the employer’s unilateral action is not permissible under China’s LCL. In such circumstance, the employer should seek prior agreement with the employee before making the demotion and pay cut decision.
Proceed with caution
China’s LCL provides several conditions when an employer can unilaterally terminate an employment contract, but only one condition is explicitly stipulated in the law for the employer to execute a pay cut. That means if an employer exercises pay cut without agreement with the employee, even if the employee proves incompetent, the employer might stand the chance of losing at court if the arbitrators or judges deem the action unreasonable. Considering there are numerous legal restraints on the reduction of an employee’s salary, the employer must stay cautious or seek legal consultancy before taking actions to decrease the salary of its employees.
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