Does “Salary Package System” workable?

The company agreed with Zhou that his monthly salary would be CNY4,000, including overtime pay. After Zhou resigned, he filed for labor arbitration, demanding that the company pay him overtime pay. The company admitted that there was overtime work but argued that the agreed monthly salary already included overtime pay. The arbitration commission ruled that the company should pay the difference in overtime pay. This case was one of the typical labor and personnel dispute cases released by the Supreme People’s Court in 2022.

Some enterprises agree with their employees on a fixed salary amount which includes fixed normal working hours pay, and uncertain pay, such as overtime pay, performance bonuses and so on. This fixed salary amount is commonly known as the “salary package system”. The laws and regulations have not stipulated that whether such system is valid or not. In practice, HR professionals have different opinions. Therefore, we try to find answers from the practical viewpoints of labor arbitration and judicial departments.

Generally speaking, we can divide employees into two categories for discussion:

The first category is those employees with low-paid, such as front-line factory workers. The mainstream view in practice is to calculate the overtime pay based on the local minimum wage as the base, and then compare it with the amount of the “salary package”. If the overtime pay is insufficient, the difference should be made up. Beijing and Jiangsu clearly adopt this view. Article 23 of the “Minutes of the Seminar on the Application of Law in Labor Dispute Cases” issued by the Beijing High People’s Court and the Beijing Labor Dispute Arbitration Commission stipulates: “Although the employer and the employee have not explicitly agreed in writing whether the actually paid salary includes overtime pay, if the employer has evidence to prove that the paid salary includes the salary for normal working hours and overtime pay, it can be determined that the paid salary by the employer includes overtime pay. However, the salary for normal working hours after conversion shall not be lower than the local minimum wage standard.” Article 23 of the “Guiding Opinions on the Trial of Labor Dispute Cases” issued by the Jiangsu High People’s Court and the Jiangsu Labor Dispute Arbitration Commission stipulates: “If the salary actually paid by the employer to the employee does not clearly distinguish between the salary for normal working hours and overtime pay, but the employer has evidence to prove that the paid salary includes the salary for normal working hours and overtime pay, it can be determined that the paid salary by the employer includes overtime pay. However, this does not apply when the salary for normal working hours after conversion is lower than the local minimum wage standard or the labor quota in piece-rate wages is obviously unreasonable.” In the case mentioned at the beginning of this article, the court also adopted this view.

The second category is those senior executives. The mainstream view in practice is not to deny the essential validity of the “salary package system”. It specifically includes the following circumstances:

Many provinces and cities stipulate that if a company implements the flexible working hour system for senior executives, there is no need to go through the approval procedures, and thus, in relevant cases, the requests of senior executives for overtime pay would not be supported. For example, Article 16 of the “Measures of Beijing Enterprises for Implementing the Comprehensive Calculation of Working Hours System and the Flexible Working Hour System” (Jing Lao She Zi Fa [2003] No. 157), Article 8 of the “Guiding Opinions of the Anhui High People’s Court on Several Issues Concerning the Trial of Labor Dispute Cases”, the “Answers to Several Questions Concerning the Trial of Labor Dispute Cases by the Shanxi High People’s Court ” (Shaan Gao Fa [2020] No. 118), Article 23 of the “Answers to Several Questions Concerning the Trial of Labor Dispute Cases by the Third Division of the Adjudication Supervision of the Shandong High People’s Court “, etc..

Shenzhen is rather special. Article 15 of the “Trial Measures for the Examination and Approval of the Implementation of the Flexible Working Hour System and the Comprehensive Calculation of Working Hours System in Shenzhen” (Shen Lao She Gui [2009] No. 13) stipulates: “If the senior executives who meet the provisions of the Company Law in the employer implement the flexible working hour system, there is no need to go through the approval procedures.” Although this provision was repealed in 2018, this view is still cited in judicial cases, such as the case of (2021) Yue 0303 Min Chu No. 1811.

In addition, although there is no explicit provision in Shanghai, the Shanghai High People’s Court also reflects a similar view in individual cases. For example, in the case of (2021) Hu Min Shen No. 445, the court pointed out: “The basis for the determination of the flexible working hour system mainly lies in whether the content of the job position itself has the objective realistic characteristics of the flexible working hour system. Therefore, even without the approval of the labor administrative department, the court can legally determine whether a specific worker’s job position implements the flexible working hour system.”

In conclusion, the “salary package system” is not unworkable in practice. However, in order to apply this system, enterprises shall comprehensively consider factors such as the position, salary level, and the local practical rules of the arbitration institutions and courts.