Performance Appraisals in China: How Employers Can Legally Link It to Pay

Employers in China often ask how to include performance-based pay in employment contracts and calculate it based on appraisal results while staying compliant with labor laws. Many businesses assume they have full discretion over performance appraisals, but improper implementation can lead to labor disputes and claims of insufficient wage payment.

This article explains how to legally use performance appraisal systems in China, combining statutory requirements with judicial practice to help employers reduce compliance risks and manage compensation effectively.

What is considered a legitimate performance appraisal in judicial practice?

Legitimacy of the performance appraisal system

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Under Article 4 of the Labor Contract Law of the People’s Republic of China, rules and regulations that directly affect employees’ vital interests must undergo democratic procedures, such as discussion by the employee representative assembly or all employees, negotiation with the trade union or employee representatives, and public disclosure to employees.

Because performance appraisals directly affect labor remuneration, they are considered significant matters that require compliance with these procedures. If the appraisal system has not been properly formulated or communicated, it cannot serve as a valid basis for determining pay. Legitimacy includes both lawful and effective formulation procedures and the clarity, specificity, and legality of the system’s content.

Procedural fairness

Employers must strictly follow the appraisal procedures set out in their established system, exercise appraisal authority in a timely manner, and ensure procedural justice throughout the process. Failure to adhere to these procedures or delays in implementation can lead to labor disputes and undermine the enforceability of appraisal results.

Objectivity of results

Performance evaluations should be based on employees’ actual circumstances and supported by objective evidence. Results must be communicated to employees, and their right to raise objections should be respected. This transparency helps prevent risks associated with unilateral decision-making and reinforces the credibility of the appraisal process.

Burden of proof regarding performance appraisals

Under Article 6 of the Labor Dispute Mediation and Arbitration Law of the People’s Republic of China, parties to a labor dispute must provide evidence to support their claims. If an employee challenges an employer’s adjustment of payment based on appraisal results, the employee bears the burden of proof for key elements such as:

• The existence and basis of performance pay
• Applicable standards for performance pay
• Obvious unreasonableness in the employer’s appraisal
• Arbitrary deductions of performance pay without cause

Failure to provide sufficient evidence may result in adverse consequences for the employee.

However, pursuant to Article 6 of the Labor Dispute Mediation and Arbitration Law and Article 44 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (I), the employer bears the burden of proof for matters within its management and control, such as appraisal procedures and decisions to reduce labor remuneration. Employers cannot unilaterally reduce an employee’s pay solely on the grounds of failing to meet appraisal standards or disbursement conditions without supporting evidence. If the employer fails to provide such evidence, it will bear the adverse consequences.

Standardized approaches for employers using performance appraisals

To reduce legal risks associated with performance appraisals, employers should adopt a standardized approach across three key stages: before, during, and after the appraisal process.

Beforehand: Ensure lawful formulation and public disclosure

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Employers should strictly follow democratic procedures when formulating appraisal systems and retain evidence of compliance, such as meeting minutes, WeChat notifications, internal announcements, email records, and signed acknowledgment receipts. Performance appraisal systems generally fall within a company’s management rights, provided they do not violate laws or administrative regulations, are not clearly unreasonable, and contain clear, specific, and operable standards.

During: Follow procedures and document the process

Once the system is established, employers must adhere to the prescribed procedures and conduct appraisals promptly. Also, it is essential to retain process-related documentation, such as records of performance deficiencies or evidence of unmet performance pay conditions, to justify any deductions and avoid disputes over insufficient grounds.

Afterward: Communicate results and safeguard employee rights

Appraisal results should be objective, fair, and internally reviewed to prevent bias or unreasonable outcomes. Employers should promptly communicate results to employees and allow them to raise objections, responding in a timely manner. Final decisions on performance pay should be based on standardized and reasonable appraisal outcomes to avoid claims of arbitrariness.

Conclusion

A lawful and well-implemented performance appraisal system is not only a tool for exercising management rights but also a safeguard for employee interests. Employers should ensure compliance before, rigor during, and transparency after the appraisal process, thereby guaranteeing fairness and reducing legal risks through standardized operations.