In China, including overtime pay within a fixed salary carries the risk of back pay claims for time and a half. While many court cases have enforced this salary structure so long as the hourly rate stays above the local minimum wage, this does not always happen. Courts will also look at the employee’s reasonable expectations, whether working hours are predictable, and how time was kept. There are no statutes or regulations that govern these types of agreements; therefore, the courts will consider the complete circumstances and what was documented. In this article, we will explain when an agreement to include overtime in base pay is enforceable against an employee and provide strategies for documenting the employment relationship and when to consider alternatives.

Contents

• Typical Clauses
• Approaches Used in Judicial Precedents
• Enforceability for Anticipated Overtime
• Reasonableness and Wage Deception
• Legal Exposure and Fairness Concerns

Typical Clauses

Employment contracts often state: “The monthly salary is ¥_____, which includes overtime compensation, and the company will not pay additional overtime compensation.” This means the agreed monthly salary is not the salary under normal working conditions but a figure adjusted for potential overtime pay. This is commonly referred to as including overtime in base pay, meaning that the agreed salary covers all employee compensation during the period and overtime is not included separately.

Leading Case Opinions

Employment Litigation Leading Cases #2, issued by the Ministry of Human Resources and Social Security and the Supreme Court, includes Case 4 on including overtime in base pay, showing the Supreme Court’s position on the matter.[1]

Zhou joined an automobile service company in July 2020, with his employment contract providing a monthly salary of ¥4,000 (including overtime pay). In February 2021, Zhou terminated the employment contract for personal reasons. Zhou also claimed that the company had not paid overtime in full even when the calculation used the applicable minimum wage rate to calculate his wage for statutory working hours, and demanded the difference. The company acknowledged Zhou’s overtime work, but refused to pay on the grounds that the overtime pay was already included in the monthly salary in the employment contract. Zhou then petitioned the Employment Arbitration Commission. Its final decision ordered the company to pay Zhou back overtime pay of ¥17,000.

The issue in dispute was whether the auto service company was obligated to pay Zhou back overtime pay despite having agreed to include overtime in base pay. The China Employment Act §§ 47-48 and Minimum Wage Rules § 3 allow employers to set their compensation structure and salary level, subject to the minimum wage rate and mandatory overtime pay rules.

In this case, the evidence showed that the employer did not pay Zhou overtime pay in full. This finding was based on the time actually worked, including Zhou’s wage for statutory working hours calculated at the applicable minimum wage rate when used as the base for calculating overtime pay. The calculation revealed the total compensation due exceeded the ¥4,000 agreed-upon wage. The Arbitration Commission, therefore, ordered the employer to pay Zhou back overtime pay. Thus, a provision including overtime in base pay can still fail to protect the company if management is not following an effective documentation policy tailored to the compensation plan.

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Approaches Used in Judicial Precedents

The leading case required the employer to pay back overtime pay but did not invalidate a provision including overtime in base pay. Instead, the court calculated the employee’s rate by dividing the agreed-upon wage by the time actually worked, including overtime hours. If the resulting hourly rate is below the applicable minimum wage, the provision is invalid because it effectively allows the employer to pay net wages below the minimum wage, thereby violating the mandatory rule.

While this leading case is unusual, its reasoning implies that provisions including overtime in base pay are enforceable if the total wages divided by actual hours worked exceeds the applicable minimum wage. A review of court rulings from the major jurisdictions shows that this analytical framework is now the mainstream approach.

A common approach in judicial precedent is to quantitatively analyze whether wages are below the local minimum wage. Localized meeting minutes and court guidance also provide other rules. For example, Beijing Employment Disputes Q&As #1 § 58 provides that an employer may enforce an agreement if it proves the wage includes overtime pay, as long as the hourly rate is at least the local minimum wage.[2]

The Jiangsu Upper Appeals Court and Arbitration Commission Advisory Opinions § 23 states that the agreement is void if the converted wage falls below the minimum wage or the piece-rate standard is unreasonable.[3] The Shenzhen Lower Appeals Court Judgment Guidelines § 62 provides a formula for converting the agreed-upon wage into hourly and overtime rates. If the converted hourly rate falls below the local minimum wage, the agreement is void and overtime pay must be recalculated using the minimum wage as the base rate.[4]

Courts also consider the employees’ positions and salaries. Managers and executives are better educated and have greater negotiating leverage than rank-and-file employees. Thus, arbitration tribunals and courts will enforce employment contracts or agreements stating that the base salary includes overtime pay unless there is evidence showing that the agreement is unenforceable or otherwise voidable.

This position has been stated in recent rulings by the Shanghai No. 2 Lower Appeals Court and Qingpu District Court. The Jiangsu Upper Appeals Court’s Advisory Opinions II § 8 provides that executives whose job duties fit the irregular workweek plan will be deemed to be on an irregular workweek even without government approval, and overtime pay claims will be denied.[5] This approach makes it even harder for executives to claim overtime pay under an irregular workweek plan, and, when combined with an appropriate contractual provision, makes including overtime in base pay a viable option for executives.

Enforceability for Anticipated Overtime

Courts also consider whether contracts including overtime in base pay are void or voidable. Chinese law does not expressly regulate such agreements, so arbitrators and courts will determine their enforceability under the Civil Code.[6] If an employer produces a signed written agreement, an employee asserting the contract is void or voidable must prove lack of capacity, fraud, duress, or exploitation, or risk an adverse outcome.

Courts also consider whether employees reasonably expect overtime hours. In a typical fixed-schedule employment contract, the employer and employee agree that the employee will work 8 hours per day, 6 days per week, and the base pay includes overtime compensation. In this situation, an arbitration tribunal or court will usually find that the employee reasonably expected those overtime hours and that the overtime compensation was included in the base pay. Thus, an employee’s claim for weekend overtime compensation is likely to fail, but a claim for daily overtime pay on workdays may succeed because the employee did not reasonably expect overtime work on workdays.

The Shanghai No. 1 Lower Appeals Court adopted that view in Shanghai Case 01-cv-8608 (2023). The court held that the employee’s monthly salary covered compensation for regularly scheduled overtime on Saturdays because the employee knew of and accepted the schedule and the parties’ subsequent written agreement expressly allocated part of the salary to Saturday overtime.[7]

The employee had acknowledged that the ¥1,600 salary includes regular weekend overtime compensation. The court therefore held that the ¥1,600 salary included weekend overtime compensation. The employer alleged that the salary also included daily overtime pay. The court found the daily overtime hours to be uncertain and the employee to have declined to acknowledge that the salary covered them, so the employer’s factual allegation to that effect was not supported.

In another precedent, Shanghai Case 0113-cv-1498 (2020), the Baoshan District Court reasoned that the China Employment Act‘s 36-hour monthly overtime cap was relevant to the reasonableness of including overtime in base pay. The court held that it is reasonable to infer that the parties understood that the overtime included in the salary would not exceed the statutory limit of 36 hours per month. Therefore, because an employee would not reasonably expect more than 36 hours of overtime per month, overtime hours within the 36-hour cap are included in the base salary, while overtime hours exceeding the cap must be paid separately by the employer.[8]

Reasonableness and Wage Deception

As described, including overtime in base pay is generally accepted in practice and can be feasible if certain requirements are met, but there are other issues. The employer’s reasoning for requesting this is to contract around paying overtime compensation, even though the China Employment Act mandates otherwise.

What often happens when employers negotiate to include overtime in base pay is that they will begin requiring employees to work as many overtime hours as possible to maximize cost efficiency. Minimum wage serves as the baseline after proration, but this offers employees poor protection. Thus, the appropriate conclusion is that including overtime in base pay is generally unreasonable.

In reviewing whether including overtime in base pay is valid, most courts consider whether overtime hours were foreseen. The unforeseen overtime hours are typically paid, but overtime an employee expected is not paid. However, the issue is that employees’ expectations are subjective.

With a fixed schedule (e.g., 8 hours daily, 6 days weekly), employees have clear, accurate expectations of monthly overtime hours, thus making including overtime in base pay reasonable. However, when there is significant, unpredictable monthly overtime, there is no clear way to identify employees’ expectations. Some courts have begun using the China Employment Act‘s 36-hour monthly overtime cap as the upper limit for employee expectations, but this approach is not entirely reasonable and may not be what employees expected.

Including overtime in base pay may be deceptive. Some employers with onerous overtime requirements may attract talent by offering salaries well above the market average, while the effective hourly rate after conversion may be uncompetitive or lower than that of peers. If employees do not know the expected overtime hours, these offers can create an illusion of a high salary and even disrupt market integrity.

Courts generally allow employers to set wages subject to the minimum wage policy, but because the overtime expectation is uncertain, employees cannot accurately calculate their hourly rate when signing the contract. Moreover, courts perform post-hoc conversion only after actual overtime is known, and determining validity solely on the basis that the converted rate exceeds the minimum wage is highly disputed.

Legal Exposure and Fairness Concerns

Employers have legal exposure if they include overtime in base pay not grounded in an overtime policy. Courts will need to know the specific overtime hours worked by employees each month and will need to distinguish between overtime on workdays, weekend overtime, and statutory holiday overtime. This requires employers to have a method of counting all overtime hours. However, many employers believe that including overtime in base pay means they do not need to track overtime hours or need only keep rough records. This makes it difficult for a court to accurately calculate employees’ hourly rates.

In overtime disputes, the burden of proof on overtime facts lies with the employee. However, employers will be subject to an adverse inference when they cannot rebut the employee’s initial showing.

This approach of including overtime in base pay may be challenged as unfair. The China Employment Act establishes an overtime pay structure based on a principle that pay should be commensurate with work performed, compensating employees for extra work and loss of nonworking time; this requirement is fair under the law. An approach that includes overtime in base pay is inconsistent with that principle, as employers are not required to pay overtime compensation separately, regardless of whether or how much overtime is worked.

Fixed schedules are becoming less common and overtime hours are less predictable, so including overtime in base pay could cut both ways: employers may lose if employees work less overtime than expected, while employees may lose if they work extensive overtime without clear expectations about the overtime burden at the time of hiring.

While courts have held that including overtime in base pay may be valid if certain standards are met, there is no statutory rule and the law is unsettled. Employers seeking to reduce labor costs should consider applying for alternative arrangements, such as an irregular workweek plan or an averaged work hours plan for certain positions; developing policies that separate voluntary overtime from mandatory overtime; and exercising caution when including overtime in base pay to minimize the chance of a lawsuit and legal exposure. Before including overtime in a fixed salary, make sure to get expert advice about whether there is a risk you may be ordered to pay back pay.

If you need help with this, consider asking CBL to connect you with a lawyer who can handle these employment issues.

Further Reading

Get more insights about Chinese employment law:

China Work Hour Schedule Types and Overtime

For a general overview of this topic, see also CBL’s China Employment Law FAQ.

Footnotes

[1] Employment Litigation Leading Cases #2, (劳动人事争议典型案例(第二批)), (Supreme Court, Aug. 26, 2021), (in Mandarin)

[2] Employment Disputes Q&As #1, (关于审理劳动争议案件解答(一)), (Beijing Upper Appeals Court and Beijing Employment Dispute Arbitration Commission, Apr. 30, 2024), (in Mandarin)

[3] Jiangsu Upper Appeals Court and Arbitration Commission Advisory Opinions, (关于审理劳动争议案件的指导意见), (Jiangsu Upper Appeals Court and Arbitration Commission, Dec. 14, 2009), (in Mandarin)

[4] Shenzhen Lower Appeals Court Judgment Guidelines, (深圳市中级人民法院关于审理劳动争议案件的裁判指引), (Shenzhen Lower Appeals Court, Oct. 22, 2015), (in Mandarin)

[5] Jiangsu Upper Appeals Court’s Advisory Opinions II, (关于审理劳动人事争议案件的指导意见(二)), (Jiangsu Upper Appeals Court and Arbitration Commission, Nov. 8, 2011), (in Mandarin)

[6] China Civil Code, (中华人民共和国民法典), (National People’s Congress, May 28, 2020), (in Mandarin)

[7] Shanghai Case 01-cv-8608 (2023), ((2023) 沪01民终8608号), (Shanghai No.1 Lower Appeals Court, Jun. 30, 2023), (in Mandarin)

[8] Shanghai Case 0113-cv-1498 (2020), ((2020)沪0113民初1498号), (Shanghai Baoshan District Court, Jul. 22, 2020), (in Mandarin)