|China: Overtime Work – Mandatory Rules and Internal System|
As in other jurisdictions, overtime work in China is subject to legal restrictions on length of overtime hours and leads to overtime compensation. Reportedly, in 2009 more than 60% of the total labour disputes in Beijing, and almost 34% in Shanghai, were related to overtime claims. To avoid disputes and ensure compliance, it is important for enterprises operating in China to structure a compliant internal overtime system.
Except for overtime during public holidays1, overtime rules do not apply to employees who work under the flexible work time system, such as higher management, sales persons, etc. Implementation of the flexible work time system is subject to prior approval by the local labour authority, and special local procedures may apply based on the work location.
Ordering Overtime Work
According to the Labour Law effective as of 1 January 1995, an employer may ask the employee to work overtime based on production or operation needs, and upon consultation with the trade union and the concerned employee. This means that at least theoretically the employee has the right to say no to overtime work. An employer may not treat the employee’s rejection as e.g. violation of labour discipline.
In practice, it is rare that the employer encounters rejections to reasonably requested and compensated overtime work. There may even be attempts by employees themselves to create unnecessary overtime, resulting in financial burdens on the employer.
To reduce respective risks, the employer should implement an internal overtime approval system. Any overtime work which has not been approved in advance would not be recognized by the employer. Such approval procedure is widely upheld by labour arbitration tribunals and courts2.
As stipulated under the Labour Law, generally overtime work shall not exceed one hour per work day, or due to special reasons and provided that the health of the employee is not affected, not exceed three hours per day and in total thirty-six hours per month. Non-compliance can lead to warnings, rectification orders and fines by the labour authority.
The above restrictions are sometimes overlooked by enterprises. If violations come to the attention of the local labour authority (by e.g. anonymous disclosure by an existing employee), the described risks may materialize.
In general, overtime compensation shall be calculated based on the following formula:
applicable compensation rate x hourly salary x number of overtime hours
Different compensation rates apply depending on the day when the overtime work is rendered:
With regard to overtime work during weekends, the employer may also arrange the employee to take time off in lieu of the monetary compensation.
The hourly salary is determined according to the following formula:
monthly salary (or agreed calculation basis) / 21.75 / 8
Local regulations may have more detailed rules on determination of the calculation basis for overtime compensation. For instance, in Shanghai, the calculation basis may be agreed in the labour contract based on the employee’s monthly salary. In case of no agreement on the calculation basis, either in the labour contract or in a collective labour contract or other applicable internal rules, the calculation basis shall be 70% of the monthly salary the employee receives for his normal work (leading to lower overtime compensation).
In Beijing, the calculation basis shall be the employee’s monthly salary as agreed in the labour contract. If the labour contract additionally provides for a lower amount as the calculation basis for overtime compensation, the employee has the right to claim for overtime compensation based on his actual monthly salary.
Some local regulations direct that overtime compensation shall be paid at least once every month. It is therefore advisable for the enterprise to pay overtime compensation together with the employee’s monthly salary.
When disputes arise, in most cases the employer is obliged to prove the fact relating to the overtime work and the employer’s compliance with overtime rules3. A complete and efficient internal overtime system is recommended so that the strict burden of proof can be met.
The above described prior approval system is often included in an employee handbook.
Payment of overtime compensation should also be well documented. The enterprise can, for example, prepare a salary payment chart for each employee every month with the amount of paid overtime compensation being separately indicated and kept in files. The enterprise needs to keep the above documentation for at least two years. This is also in line with local statutory requirements e.g. in Bejing and Jiangsu Province.
Often, employers may overlook that overtime pay is tax-wise considered like the normal salary of an employee. Correspondingly, the employer needs to ensure that individual income tax is withheld and paid to the tax authority. Otherwise, the employer, as withholding agent, would be held liable for administrative penalties such as fines etc.
By: Ralph Koppitz and Tina Li, http://reaction.taylorwessing.com/reaction/Newsletters/IntlEmployment/2010_09_02.html