Wages, Overtime and Compensation (Cont'd)

When can an employer make deductions from its employee's wages?

Under PRC law, an employer can only make deductions from an employee's wages:

  • to withhold 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 alimony payments or other court-decreed purposes;
  • if the employee has taken unpaid leave (or sick leave under certain circumstances), or has been absent from work without approval;
  • if the employee has acted in a manner resulting in economic loss to the employer (in which case the deducted amount must not exceed 20 percent of the employee's monthly salary for each month, and the remainder must not be lower than the local minimum wage level).

What are the consequences for an employer that makes an illegal deduction from wages?

The employer must pay the deducted wages to the employee, and may be ordered by the labour authority or the court to pay additional damages to the employee at a rate of not less than 50 percent and not more than 100 percent of the unlawfully deducted wages.

In addition, the employee who has had his or her wages unlawfully deducted may claim constructive dismissal and statutory economic compensation (i.e., Calculation Basis × Service Period, as discussed in our Bitesize of 15 May 2013).

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.