China’s labor laws require employers provide their employees paid vacation days based on their total years of service. Employers are legally obligated to ensure their employees take their vacation days and to the extent the employer fails to do so, it must pay the employee an additional 200% of her normal wages for each unused vacation day.
The law also requires China employers pay their employees for unused vacation days at the time of termination. One question our China employment lawyers are often asked is whether an employer has the same payment obligation when it unilaterally terminates an employee for employee breach. The governing law is silent on this. But since it says that at the time of termination, an employer must pay employee compensation for unused vacation days, a strict interpretation would dictate such a payment must be made. As is typical of almost everything China employment law related, the real life answer depends on where the employer is located and even at which court the labor dispute will be adjudicated. For example, the general view of the Shanghai courts is that an employee terminated for her own fault is not entitled to payment for unused vacation days, because she is at fault for being terminated before she could use all of her vacation days.
This though gets complicated when the unused vacation days are spread among several years. For example, suppose an employee terminated in 2017 due to employee breach did not use any vacation days in 2017 prior to her termination. Assuming the employer’s unilateral termination decision was held to be lawful, the employer will probably not be required to pay the employee for unused vacation days in that year. But suppose that same employee was never paid for unused vacation days in 2016 either. In that case, the employer very well may be required to pay for unused vacation days — assuming the employee did not voluntarily relinquish her vacation time via a clear writing and the statue of limitations has not otherwise run out against the employee.
Employees usually do not pursue labor arbitration just to try to collect money for a few unused vacation days. These claims typically show up as part of a claim challenging the lawfulness of the employee termination. So this is yet another reason why unilateral termination can be so problematic. Employers that unilaterally terminate their China employees often find themselves caught up not just in one lawsuit but in several proceedings—labor arbitration, trial, appeal, and sometimes a retrial and in most of those proceedings, it has to defend itself against not just its termination decision but also against multiple other ancillary claims. “Mutual” terminations with a clear written settlement agreement avoid the employer having to jump (stumble) through so many hoops.
Also, like most aspects of China employment law, vacation time is not an area where it makes sense getting creative. For example, don’t just assume that a provision in your rules and regulations stating that your employees forfeit their unused statutory vacation time by not taking that time. Think twice before you ask your China employees to give up something to which they are legally entitled. If you are unable to secure a separate written agreement (in Chinese) from your employee saying she voluntarily chooses not to take her vacation time (who would, really?), you must pay her for those days or find a way to let her take the paid time off.
Last but not certainly least, we also are sometimes asked whether employees under the flexible working hours system are entitled to statutory vacation time just like employees under the standard working hours system. The answer to that is a resounding yes.