When can an employer deduct amounts from its employee's wages?

Under the PRC law, an employer can only deduct amounts from an employee's wages in the following circumstances:

  • For withholding individual income tax and the portion of social insurance contributions (as well as statutory housing fund contributions, if applicable) to be borne by the employee
  • For deducting alimony or other court-decreed amounts
  • Where the employee takes no-pay leave (or sick leave under certain circumstances), or is absent from work without approval
  • Where the employee has acted in a manner which has resulted in economic loss to the employer (in which case the deducted amount must not exceed 20% of the employee's monthly salary, and the remainder must not be lower than the local minimum wage level)

What is the consequence for the employer of an illegal deduction from wages?

The employer will have to pay back the deducted wages to the employee, together with an additional compensation of 25% of the deducted amount.

In addition, the employee who has had his or her wages unlawfully deducted may claim constructive dismissal and economic compensation (which is generally one month's salary per each year of service), subject to local practice.

Can I structure a payment to an employee as a "forgivable loan", and require the employee to pay back all or part of such payment if such employee fails to serve our company for a specific period of time (e.g., one year)?

Strictly speaking this should be possible if properly structured. However, there is a risk that such payment could be considered as part of the employee's salary or bonus so care must be taken.

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