A company in China may be ordered to pay an annual bonus for an employee no longer working there, even when the policy says it’s forfeited on separation. In some cases, courts may treat the bonus as compensation that has already been earned under the terms of the employment contract. Payment is more likely to be ordered if the employee was fired, the separation was unlawful, or otherwise caused by the company. Therefore, legal analysis of the specific facts is needed to determine if management can avoid paying the bonus. The answer depends greatly on how the bonus is structured, and whether documentation shows the bonus was genuinely paid for retention purposes. In this article, we will explain China’s law on bonus forfeiture provisions, and provide legal strategies for structuring a plan and managing terminations to reduce risks.
The enforceability of a no bonus on quitting clause depends on the grounds for the employment contract termination, whether the employee completed the annual performance review cycle, and local judicial precedent under Chinese law. Employers may owe a pro-rated annual bonus when they wrongfully terminate employment.
This is a common risk under terms providing for no bonus if employment ends before payout. If a termination is wrongful, the employer may be required to pay an annual bonus even if the employment agreement or company policies state that the bonus is not payable. The China Civil Code has general rules which for this case can be summarized as follows: it prohibits parties from improperly taking action to prevent the other party from earning a bonus for their own benefit.[1] Thus, courts may deem bonus eligibility criteria satisfied if the employer wrongfully terminates employment in a way that prevents the employee from satisfying those criteria. The employee may be entitled to a pro-rated annual bonus based on time actually worked and the bonus rate.
Chinese courts have applied this approach in numerous cases. In Shanghai Case 01-cv-app-9708 (2017), the employer argued against paying an annual bonus because the employee handbook provided that the bonus only applies if the employee is still employed at the end of the year.[2] The court held that the provision was applicable only if the termination was lawful, and therefore the employer’s wrongful termination did not exempt it from paying the bonus. The court ordered the employer to pay a pro-rated bonus for time actually worked.
There are at least two other situations that create a material risk that an employer is required to pay an annual bonus upon premature separation.
Contents
Active Employment Requirements
If the employer initiates the termination for reasons not attributable to the employee, active employment requirements may not be enforced under Chinese law. In Supreme Court Leading Case No. 183, the court held that an employee was entitled to an annual bonus even though the employee was terminated before the bonus payment date because they had completed the work assigned to them for the year and there was no misconduct or voluntary resignation.[3] The court reasoned that the employer could not prove the employee’s performance did not meet the standard for the bonus. The court also held that active employment requirements cannot be applied in isolation from the grounds for termination or from the employee’s completed work.
These risks are amplified if the employer has done anything unlawful. Employees may terminate their employment contract when the employer fails to provide the agreed-upon working conditions, fails to make timely payment of wages and social security contributions, or adopts company policies that violate employee rights. (See China Employment Contracts Act § 38). In such cases, courts typically regard the resignation as caused by employer wrongdoing rather than as a voluntary resignation, and thus the “no bonus on quitting” clause will not exempt the employer from the obligation to pay.
See Beijing Case 03-cv-app-14534 (2021) for one example.[4] There, the employee terminated the employment contract under § 38 because of employer wage theft. The court held that even if the company policy denied the annual bonus upon resignation, that policy violated employee rights, and therefore the employee’s claim for an annual bonus was upheld.
Even when the risk factors above are absent, the enforceability of a clause denying bonuses to former employees can be uncertain. There are two different views on the law:
- Under the China Employment Contracts Act, an employment contract provision is unenforceable if it exempts the employer from its statutory obligation to pay, deprives an employee of a legal right, or otherwise violates mandatory provisions of applicable law and administrative regulations. The clause denying bonuses to former employees deprives an employee of their right to earned compensation and is therefore void.
- Employers have the right to determine their compensation structure and salary levels based on their own business characteristics and financial performance. An annual bonus is an internal incentive plan which an employer can freely establish. Thus, the employer has the management prerogative to decide whether a former employee is eligible for a bonus payment. Moreover, annual bonuses are not mandatory compensation or benefits under Chinese law. Therefore, a clause denying bonuses to former employees is enforceable.
The judicial precedents in Beijing, Shanghai, Guangzhou, and Shenzhen in China indicate that the risk of an employer being liable for an annual bonus is low when an employee resigns before the performance period ends. However, when an employee resigns after the end of the performance period but before the bonus payout date, courts in Shanghai are more likely to enforce the bonus forfeiture provision, while courts in other jurisdictions typically hold such provisions unenforceable. A key factor in determining the enforceability of a no bonus on quitting clause is whether the performance period has ended.
If an employee resigns before the end of the performance period, there is little risk of a court rejecting the no bonus on quitting clause. Judgments in Beijing, Shanghai, and Guangzhou have upheld such clauses when the employment contract or the company policy clearly sets bonus eligibility criteria and the employee voluntarily resigns or the relationship ends for a reason attributable to the employee before the end of the performance period. The courts have held that, when the employee did not complete the full performance period, the employer lacked a complete basis to evaluate annual performance, making courts more likely to uphold the no bonus on quitting clause (Beijing Case 02-cv-app-6043 (2019), Shanghai Case 01-cv-app-11565 (2020), Guangdong Case 01-cv-app-11320 (2022)).[5][6][7]
Chinese courts are split about the enforceability of a no bonus on quitting provision when an employee resigns after the performance period ends but before bonuses are paid. Courts in Beijing and Guangzhou have held the provision unenforceable.
In Beijing Appeal 02-cv-484 (2017) and Beijing Appeal 02-cv-11594 (2020), the employee resigned after the annual bonus was calculated but before the bonus was paid.[8][9] The courts held that the employee was entitled to earned compensation and that the annual bonus is compensation for regular work. Thus, that company policy provision is unenforceable because it deprives the employee of compensation. The courts therefore held that the employer must pay the employee the bonus.
In a leading Guangzhou case, an employee who was lawfully terminated for misconduct was denied a retention bonus paid to other employees the next day.[10] The court recharacterized the bonus as an annual bonus and held that an employer could not withhold payment solely because the employee was no longer employed on the payment date if the employee had earned the bonus through regular work during the performance period. The bonus was pro-rated for the time actually worked. Although China is not a common law country, the appeals cases exhibit the courts’ precedential reasoning.
As the cases show, whether a bonus will be owed depends on how local judges rule and whether management took action consistent with how the law is applied.
If you need help with employment law issues in China like these, ask CBL to connect you with a qualified lawyer.
Shanghai and Shenzhen Courts’ Different Approaches in China
Shanghai courts have enforced clauses that deny bonuses to employees who leave after the performance period ends but before bonuses are paid. Shanghai courts have favored employers in bonus disputes. In Shanghai Case 01-cv-app-2045 (2019), company policy provided that an employee must be employed on the annual bonus payment date to receive a bonus.[11] The employee resigned after the evaluation period but before payment and sued for their bonus. The court held that the employer has the prerogative over bonuses, which are distinct from wages, and that an employer may award bonuses to reward past performance or incentivize future service. The court enforced the bonus arrangement because it manifested the parties’ genuine mutual intent. The court dismissed the employee’s claim because there was no evidence that the employer acted in bad faith to prevent the satisfaction of bonus eligibility criteria.
Shenzhen local law in China uses an order of preference for this issue: first, the employment contract, then the collective bargaining agreement, and lastly company rules adopted in accordance with applicable requirements.[12] If none of the above have applicable terms, then the employee’s time actually worked is used for proration. Observe that Shenzhen courts give particular weight to whether a written bonus arrangement is clear and valid.
In termination lawsuits where the separation from employment occurs after the performance period ends, the court will consider whether the bonus is a discretionary and additional reward or a fixed part of compensation, the extent to which the employee completed the work, and the reasons for termination.
When designing an annual bonus policy in China, begin by defining the termination requirements and the bonus’s retention purpose. There is no uniform nationwide judicial precedent on whether bonuses are forfeited on termination, so employers cannot safely rely on a single approach to deny bonuses to separated employees. The following three recommendations can minimize the risk of bonus claims:
First, add a clause to the employment contract or company policy that explicitly states that annual bonuses will not be paid if employment ends before the bonus is paid. The enforceability of such a provision depends on its express inclusion in the employment contract or company policy; absent such a term, the employer is at risk of having to pay the bonus unless it can show the employee’s performance was not sufficient to qualify for the bonus. Moreover, “separation” is not a legal term of art, and it could be interpreted to include either voluntary resignation or employment contract termination. Employers should therefore define “separation” in the employment contract or company policy to make clear that no annual bonus is payable if the employment is terminated for any reason.
Second, make clear that the bonus is for employees who remain. Where possible, characterize the annual bonus as a loyalty bonus. Most Chinese courts and arbitrators will enforce a no-bonus-on-separation provision for a loyalty bonus, unless it is a disguised annual bonus. If you cannot characterize the bonus, state in the contract or company policy that the purpose of the annual bonus is to incentivize employees to remain employed, and only employees who are still employed on the payment date are eligible.
Finally, don’t set a target bonus; instead, award a small discretionary annual bonus, especially for separated employees. The employer and employee may have clearly agreed on a target bonus—e.g., in the offer letter, as 20% of the employee’s annual salary, subject to the employer’s performance review policies. In this case, the employer will bear the burden of proof if the actual bonus is less than the target bonus amount. Here, the employer must establish the target bonus amount and prove why the employee didn’t qualify for the full bonus.
However, if the employment contract or company policy doesn’t specify the bonus amount, the employer can determine the amount paid out at its discretion. A lower-risk approach is to avoid setting a target bonus amount but still award a reduced annual bonus to separated employees. This avoids litigation about whether the policy of paying no bonus to separated employees is valid. If an employee claims entitlement to a larger bonus, the burden of proof lies with the employee, who cannot prove entitlement absent an agreement setting a target bonus. This strategy controls the risk at minimal cost.
Conclusion
Employers in China should consider their own circumstances and statutory rules when drafting company policy, and communicate clearly with employees to minimize employment litigation risks over annual bonuses. Courts do not look only at whether the employee was still employed on the payment date, but also at the reason for separation, at whether the evaluation period was completed, and at whether the employer can show the employee did not qualify for the bonus. Employers should therefore collect evidence before litigation arises, and require a bonus impact analysis in internal approval processes for termination, layoff, negotiated separation, and year-end resignation so that management understands the full cost before making personnel decisions that cannot be undone.
HR and legal counsel should review the offer letter, employment contract, bonus policy, and past practices to ensure consistency. Check whether these policies are being executed and are adequately communicated to employees. Complete the current performance review; document goal setting, results evaluation, and written acknowledgment. Assess whether the employee resigned voluntarily, was terminated for cause, or separation can be attributed to the employer. Calculate potential payments: full bonus, pro-rata bonus based on time worked, or no bonus at all. If the employee has nearly completed the evaluation period or the separation is attributable to the employer, management should weigh the potential bonus against termination costs and the transition plan before deciding on the termination date and payment plan.
Document decisions in written approval records and apply the bonus policy consistently; avoid case-by-case treatment that undermines policy credibility. (See 2018 Representative Cases of the Guangzhou Lower Appeals Court)[10]
If you need help with employment issues in China, ask CBL to connect you with a qualified lawyer.
FURTHER READING
Get more insights about Chinese employment law:
For a general overview of this topic, see also CBL’s China Employment Law FAQ.
Footnotes
[1] China Civil Code, (中华人民共和国民法典), (National People’s Congress, May 28, 2020), (in Mandarin)
[2] Shanghai Case 01-cv-app-9708 (2017), ((2017)沪01民终9708号民事判决书), (Shanghai Lower Appeals Court, 2017), (in Mandarin)
[3] Supreme Court Leading Case No. 183, (指导案例183号：房玥诉中美联泰大都会人寿保险有限公司劳动合同纠纷案), (China Supreme Court, July 4, 2022), (in Mandarin)
[4] Beijing Case 03-cv-app-14534 (2021), ((2021)京03民终14534号民事判决书), (Beijing No. 3 Lower Appeals Court, Sep. 18, 2021), (in Mandarin)
[5] Beijing Case 02-cv-app-6043 (2019), ((2019)京02民终6043号民事判决书), (Beijing No. 2 Lower Appeals Court, May 24, 2019), (in Mandarin)
[6] Shanghai Case 01-cv-app-11565 (2020), ((2020)沪01民终11565号民事判决书), (Shanghai No. 1 Lower Appeals Court, Nov. 30, 2020), (in Mandarin)
[7] Guangdong Case 01-cv-app-11320 (2022), ((2022)粤01民终11320号民事判决书), (Guangzhou Lower Appeals Court, Jun. 28, 2022), (in Mandarin)
[8] Beijing Appeal 02-cv-484 (2017), ((2017)京02民终484号民事判决书), (Beijing No. 2 Lower Appeals Court, Feb. 28, 2017), (in Mandarin)
[9] Beijing Appeal 02-cv-11594 (2020), ((2020)京02民终11594号民事判决书), (Beijing No. 2 Lower Appeals Court, Dec. 10, 2020), (in Mandarin)
[10] 2018 Guangzhou Lower Appeals Court Representative Cases, (广州市劳动争议十大典型案例), (Guangzhou Lower Appeals Court, Nov. 29, 2018), (in Mandarin)
[11] Shanghai Case 01-cv-app-2045 (2019), ((2019)沪01民终2045号民事判决书), (Shanghai No. 1 Lower Appeals Court, Apr. 22, 2019), (in Mandarin)
[12] Shenzhen Wage Payment Regulations, (深圳市员工工资支付条例), (Shenzhen Municipal People’s Congress Standing Committee, Aug. 4, 2022), (in Mandarin)