by Maggie Kong, Shane Lou, Susan Shan, Kent Xu, Grace Yang, Anderson Zhang and John Zhou
The year-end bonus becomes a hot topic within offices around China at the end of the year. Due to the lack of relevant laws and regulations, there is a great deal of misunderstanding relating to the bonus. This newsflash combines present laws and regulations with human resource practices to discuss these front-burner issues for the reference of the enterprises that face similar scenarios.
1. What is a 'year-end bonus'?
In a broad sense, a year-end bonus refers to the annual bonus or remuneration paid by employers in addition to the basic salary. It commonly arrives in the following three forms: the first is to pay an extra month's salary (i.e. the thirteenth salary or double salary at the year-end); the second is to give a one-time annual bonus after considering the operation income of the enterprise, departmental performance and personal performance; the third is the presentation of red envelopes filled with money, given at random by the boss.
The first form, where there is a fixed thirteenth salary or double salary, requires the employer to pay the bonus as either a part of the employment contract agreement or as stipulated in the internal rules and regulations. Although some employees may resign in the middle of the year, the employer may still be required to pay the bonus in proportion to the actual amount of time worked under the relevant employment contract. As for the last two forms, the employers have greater discretionary power over the factors to be considered and whether a year-end bonus will even be paid.
In a narrow sense, the year-end bonus is interpreted using the definition provided by the tax regulation 1 . That is, although still a form of remuneration 2 , the year-end bonus is similar to the traditional understanding of a 'bonus'. For example, employers give out a one-time bonus that is calculated according to the whole year's economic benefits and the annual evaluation of employees.
2. How is the year-end bonus paid?
- Standard of Year-end Bonus
The standard of year-end bonus is formulated by enterprises according to their operational conditions. The standard is a matter that has a direct bearing on the immediate interests of the employees and is pursuant to the regulation of Article Four of the Employment Contract Law. That is, the employers must form written rules and regulations and go through a democratic procedure when determining the standard of the bonus in order to avoid potential legal risks.
Two commonly raised questions regarding the standard of the year-end bonus include: 'can employees who resign before the end of year get the bonus?' and 'can employees who do not get the year-end bonus claim the bonus if it is enjoyed by other employees of the same post, in accordance with the principle of Equal Pay for Equal work?' In response to these questions, there are two conflicting opinions in judicial practice.
Some are of the opinion that the year-end bonus is a form of remuneration. That is, employees have paid out their work, so they should be offered consideration and remuneration. Therefore, although an employee resigns in the middle of the year, he or she is entitled to a year-end bonus in proportion to his or her service time. Additionally, employees of the same post pay out equivalent work value, so employees of the same post should enjoy the same bonus treatment in accordance with the principle of 'Equal Pay for Equal work'.
Another view holds that the year-end bonus is an incentive treatment paid by employers in addition to the basic remuneration. When considering this payment, employers naturally favor loyal, long-term service employees or recognize the personal or future value of the employee. Hence, regulations such as "resigned employees before the payment of the year-end bonus do not have the right to the year-end bonus" or "different year-end bonus treatment of the employees of the same post" reflect the freedom of the employer's discretion or autonomy, which should be protected. Therefore, the judiciary should not have excessive interference with this process.
As a result of the conflicting judicial opinion, enterprises should ensure that there is a clear policy regarding the year-end bonus. Specifically, the policy should be written out in a reasonable and effective manner. This ensures the continuance to the year-end bonus as an incentive to employees while maintaining the enterprise's autonomy.
- Forms of Year-end Bonus
In practice, it is common for employers to use shopping cards or gifts as the agreed year-end bonus. Is this practice legal? By law, the year-end bonus is proportional to the total amount of the salary 3 . As such, employers can only use lawful currency to pay the bonus and cannot use shopping cards or gifts. 4
3. How to treat the year-end bonus when calculating different kinds of base figures?
- Base Figure of Monetary Compensation.
The base figure of monetary compensation is the worker's average monthly wage for the 12 months prior to the termination of his or her employment contract. This average monthly wage includes the hourly wages, piecework wages and other sources such as bonuses, allowances and subsidies. As the year-end bonus is a type of bonus, it should be included into the base figure of monetary compensation.
- Base Figure of Unused Annual Leave
The base figure of unused annual leave is the worker's average monthly wage for the last 12 months' excluding overtime payment. 5 However, the year-end bonus should be included into the base figure.
- Base Figure of Notice Payment
Generally, the base figure of notice payment is the previous month's salary 6 , so the year-end bonus can be ignored. However, in Shanghai's local practice, if the last month's salary does not reflect the normal salary level, the base figure could instead be calculated using the worker's average monthly wage for the 12 months prior to the termination of his employment contract. 7 If this is the case, then the year-end bonus should be taken into account.
4. How to tax the year-end bonus?
Pursuant to Notice of the State Administration of Taxation on Issues Concerning the Adjustment of Methods for Calculating and Imposing Personal Income Tax on Lump-sum Annual Bonuses and Other Bonuses Obtained by Individuals: lump-sum annual bonuses obtained by taxpayers are deemed as monthly salaries and wages for calculating and imposing taxes. First divide the lump-sum annual bonuses obtained by employees in the current month by 12 months, and determine the applicable tax rate and quick calculation deduction according to the quotient.
- Where the salaries and wages of employees in the same month are higher than (or equal to) the deduction amount set forth in taxation laws, the applicable formula shall be: tax payable = lump-sum annual bonuses obtained by employees in the same month ×applicable tax rate - quick calculation deduction.
- Where the salaries and wages of employees in the same month are lower than the deduction amount set forth in taxation laws, the applicable formula shall be: tax payable = (lump-sum annual bonuses obtained by employees in the same month - balance of income from salaries and wages of employees in the same month and deduction amount) × applicable tax rate - quick calculation deduction.
If employers pay double salaries at the year-end, the extra one month salary shall be combined into the current month salary to calculate tax and will not be taxed independently.
Case Study: Year-end Bonus Dispute after Resignation
When Mr. Li entered into a foreign company working as a salesman, the company agreed with him that the annual year-end bonus would be RMB 100,000 to RMB 400,000 according to his annual sales performance. The specific amount was to be determined in March next year after the annual performance evaluation was completed. Mr. Li resigned in January the next year, and the company refused to pay out the year-end bonus. Mr. Li was unsatisfied and applied for arbitration at the Labor Dispute Arbitration Commission. The Commission held that Mr. Li's annual sales performance was better than others. Additionally, the company had mentioned that the sales performance was only one factor in determining the year-end bonus agreement. The other factors were not mentioned. . Hence, it was unreasonable for the company not to pay any year-end bonus. The award of the Commission was to pay year-end bonus of RMB 160,000 to Mr. Li by the company.
Our team is of the opinion that enterprises should place great importance on policy making and agreements relevant to the year-end bonus. This may be through comprehensively considering factors such as profit margins, personal contribution and future predictions, in addition to generating lawful, reasonable and relevant policies. As a result of sound year-end bonus policies, enterprises may avoid potential labor dispute risks.
1 See Article 1 of Notice of the State
Administration of Taxation on Issues Concerning the Adjustment of
Methods for Calculating and Imposing Personal Income Tax on
Lump-sum Annual Bonuses and Other Bonuses Obtained by
Individuals, promulgated by State Administration of Taxation
on January 21 st , 2005.
2 See Article 2 of Interpretation of the National Bureau of Statistics on the Specific Scope of the Provisions on the Composition of Total Wages, promulgated by National Bureau of Statistics on January 1 st , 1990.
3 See Article 4 of Interpretation of the National Bureau of Statistics on the Specific Scope of the Provisions on the Composition of Total Wages, promulgated by National Bureau of Statistics on January 1 st , 1990.
4 See Article 5 of Interim Provisions on Wage Payment, promulgated by Ministry of Labor on December 6 th , 1994.
5 See Article 11 of Measures for the Implementation of Paid Annual Leave for Enterprise Employees promulgated by Ministry of Human Resources and Social Security on July 17 th , 2008.
6 See Article 20 of Regulation on the Implementation of the Employment Contract Law promulgated by the State Council on September 3 rd , 2008.
7 See Article 5 of Opinions of Shanghai's High Court on Certain Issues Concerning the Application of the Employment Contract Law issued on March 3 rd , 2009.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.