Common Mistakes Related to Wages In lieu of Notice

Zhao was a sales manager of a Shanghai company, and his monthly base salary was RMB17,000. In September, his actual income was RMB37,650, which included the monthly base salary and the sales commission. Due to the adjustment of the management structure, on 3rd October, the company made the decision to cancel Zhao’s position, and then informed Zhao to dissolve the labor contract after 15 days. Afterwards, Zhao filed an arbitration request, in which he insisted the company failed to notify him in written 30 days in advance, and required the company to pay the “Wages in lieu of Notice” (hereinafter refers to the “Special Wages”).

The “Special Wages” refers to the responsibilities of an employer to notify an employee in written 30 days in advance or to pay an extra monthly wage, which is stipulated in Article 40 of the “Labor Contract Law”. In practice, many employers may make mistakes while paying the “Special Wages”.

Firstly, the circumstances for the “Special Wages”. According to the “Labor Contract Law”, only when an employer dissolves a labor contract in accordance with Article 40, then it is possible for the employer to pay the “Special Wages”. In practice, if an employer proposes to dissolve a labor contract, and the relevant employee agrees, then the employer shall not be liable to pay the “Special Wages”, because this dissolution is based on Article 36, which means both parties are agreed upon negotiation.

Secondly, the standard of the “Special Wages”. Many people believe the “Special Wages” shall be calculated like the economic compensation, which means the one month wages shall be the employee’s average monthly wages for the 12 months prior to the dissolution of the labor contract. However, this opinion is wrong. The “Regulations on the Implementation of the Labor Contract Law” has prescribed that the “Special Wages” shall be determined according to the employee’s wages in the last month.

Another question comes, whether the employee’s wages in the last month shall be his actual income or monthly base salary? For example, for those commissioned employees and piece-rate employees, their wages might be quite different bewteen the slack season and peak season. Normally, the judicial department would require the employer to pay the “Special Wages” equal to the actual income. While there is a huge difference between the actual income and monthly base salary, some local judicial departments have released guidelines in adjusting such difference. Such as, Article 5 of the “Opinion of the Shanghai High People’s Court on Several Issue concerning Labor Contract Law” [Hu Gao Fa No. 73 (2009)] states: “Considering the legislative spirit of the ‘Labor Law’ and the ‘Labor Contract Law’, the ‘employee’s wages in the last month’ shall refer to the normal salary of the employee. If the ‘employee’s wages in the last month’ could not reflect the employee’s normal salary level, then the ‘Special Wages’ could be determined as the employee’s average monthly wages for the 12 months prior to the dissolution of the labor contract.”
In addition, whether the “Special Wages” shall be limited within the 3 times of the average monthly salary of local social worker? There is no laws or regulations has given answer to this question. In practice, the judicial departments uphold negative opinion.

Considering the economic burden and risk of the “Special Wages” for companies, we would recommend the following principles in dealing with the “Special Wages”: (1) normally, a company shall notify the employee in written 30 days in advance while applying Article 40 the “Labor Contract Law”; (2) if a company has to dissolve a labor contract as soon as possible, in order to loose the economic burden, the company shall investigate the opinion of the local judicial department on the difference between the actual income and monthly base salary.