Analysis of the Liquidated Damages Agreement of the Employment Agreement

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2019-08-07 | 来源:劳动法苑


As a source of regular employment, recent graduates are the main force in the recruitment of "fresh blood". Before the parties formally sign the labor contract, graduate students still face many procedures to be dealt with the school and the employer. Various agreements such as internship agreement, employment agreement and formal labor contract, signed during the period of before and after graduation will cause many employment problems and contradictions. Based on the practical cases, the author discusses the nature of employment agreements, the comparison of relevant provisions for liquidated damages, and precautions in practice.

1. Case Brief

The Employment Agreement is related to each graduate and employer. In order to improve the stability of employment, the employer will use the penalty clause in the agreement to restrict the parties. However, due to the relative uncertainty of the graduates, the agreement itself will cause many problems and contradictions. In order to set a legal and effective breach of contract clause, it is necessary to first clarify the nature of the Employment Agreement and its applicable law. It is important to establish this point to further understand the situation in which liquidated damages can be set in the labor contract with the purpose of achieving the effect of reasonable and legal restrictions on both parties. In the following two cases, the author will analyze the problems in the Employment Agreement from the perspective of judicial practice.

a. Case 1: Mr. Wang sued a real estate company in Shanghai to pursue a liquidated damages case

On March 23, 2011, a real estate company in Shanghai (Company A) issued a "Notice of Appointment" to Wang and signed the "Graduate Employment Agreement" (the Agreement). The employment period is 3 years, and the monthly income is RMB 5,500 before tax. Article 10 of the Agreement clearly stipulates that the situation introduced by Company A is seriously inaccurate, and Wang may unilaterally terminate the exemption from this agreement. The content of the self-recommended materials provided by Wang is seriously inaccurate, and Company A may unilaterally terminate this agreement and be exempt from liability. After the clause, the "default penalty is 5,500 yuan". In May 2011, Wang proposed to cancel the agreement, but Company A refused to return the relevant formalities. The contradictions between the two parties intensified. Wang appealed to the court after his case was refused to accept by the arbitration committee.

The statements from Wang's side:

Wang submitted his resume on campus and got hired. After being hired by another company, he proposed to cancel the agreement. However, Company A asked Wang to pay 5,500 yuan in liquidated damages. Wang believed that there are no specific provisions regarding liquidate damage. Therefore, Wang requested the court to ask the company to return the agreement and process the formalities.

Company A states:

The agreement stipulates the defaulting party shall be liable for compensation, and expressly mentions the liquidated damages shall be 5,500 yuan. After signing the Employment Agreement, Wang found another job and asked to cancel the contract with the company. Wang defaulted on the contract, Company A asked Wang to continue to perform the agreement, otherwise he would have to pay liquidated damages of 5,500 yuan.

The court's verdict:

Since the agreement is a civil contract, the agreement is legal and valid without violating the mandatory provisions. Nevertheless, the penalty clause in this agreement shall be regarded as the liability for breach of contract in Article 10 of the agreement, and Wang's conduct does not violate the agreement of the clause. In other words, Wang does not provide any inaccurate material. Therefore, the Agreement was dissolved, and Wang should not pay liquidated damages to Company A.

b. Case 2: Disputes between Zhang and Funing County Experimental Primary School and Funing County Education Bureau

On March 25, 2017, Zhang and the Funing County Experimental Primary School signed the "Graduate Employment Agreement" (the Agreement), and the Agreement stipulated liquidated damages of 50,000 yuan. On April 17, 2017, Zhang resigned and applied for a penalty of only 47,000 yuan on the grounds of family difficulties. The unit agreed and terminated Agreement. At present, Zhang's amount of the breach of contract is obviously too high. It did not cause actual losses to the unit. Therefore, Zhang appealed and required to return the liquidated damages.

Zhang states:

Although Agreement is valid, the amount of the breach of contract is obviously too high. According to the relevant provisions of the Contract Law for liquidated damages, the liquidated damages should not exceed 30% of the losses. Zhang did not start working in the unit, so she did not cause any actual loss. Now, Zhang required to return the excess liquidated damages.

Experimental primary school states :

 The Agreement was legal and effective. Zhang's behavior undermined the education management of the primary school personnel, and Zhang actually benefited from the record of being employed by the primary school. She was admitted to another school, which actually caused great harm to the school. The 50,000 yuan liquidated damages are not high.

The court's verdict:

The court held that Agreement was a valid civil contract. Consequently, the breach of contract clause was valid. Zhang should pay liquidated damages. The request for refund of liquidated damages was not supported.

2. Case Analysis

The author will focus on the controversy of the two cases, from the nature of the Employment Agreement and the related issues of liquidated damages.

a. Nature of the employment agreement

The Employment Agreement is the abbreviation of "General Higher Education Graduate Employment Agreement", also known as the "Tripartite Agreement". It is a written expression of the rights and obligations of graduates, employers, and schools in the employment of graduates. It can solve a series of related issues such as household registration, insurance, and provident fund for recent graduates. The distinction between the Employment Agreement and the Labor Contract is reflected in the fact that the effectiveness of the Employment Agreement is terminated after the graduates report to the employer and formally establish a labor relationship with the employer, and the Labor Contract is that employees establish labor relations between employers and clarify agreements on the rights and obligations of both parties. As far as the nature of the Employment Agreement is concerned:

First, according to the relevant provisions of the Labor Contract Law, the labor relationship between the employer and the employee is established from the date of employment. Therefore, signing the "labor contract" does not mean that the labor relationship is formally established.

Secondly, under normal circumstances, before the graduates obtain the diploma, they do not have the qualifications of the labor relationship when they sign the Tripartite Agreement.

Moreover, according to the specific provisions and requirements of the "Labor Contract" in Labor Contract Law of PRC. A majority of the "employment agreement" itself does not have the terms of the "labor contract" required by the law.

In case 1, according to the court's point of view, since Zhang did not actually enter the school, there was no labor relationship between the two parties. The agreement itself did not meet the content requirements of the Labor Contract, but only to establish a written form of the rights and obligations of both parties. The agreement, which is used to stipulate the employment intention of the graduate, is an appointment contract.

In Case 2, the court held that Wang was an Employment Agreement signed with Company A before graduation, and the Employment Agreement itself was essentially a letter of intent for establishing labor relations between the two parties, which was an ordinary civil contract. Therefore, if the agreement is expressed by both parties and does not violate any mandatory provisions, it shall be legal and valid, and both parties shall be bound by the agreement.

In summary, the nature of the Employment Agreement is a civil contract, which reflects the intention of the two parties to establish a labor relationship, stipulates the rights and obligations of both parties, and is bound and adjusted by the General Principles of Civil Law of PRC and the Contract Law of PRC.

b. Whether the Employment Agreement can stipulate the liquidated damages

The principle of freedom of contract in the Contract Law of PRC is mainly manifested in the expansion of the scope of application of the arbitrariness norm while limiting the mandatory norms of the contract law. Article 52 of the Contract Law of PRC stipulates five situations in which the contract is invalid. Besides, the penalty clause abovementioned which was through free negotiation does not belong to any of them.

Therefore, under normal circumstances, the parties shall follow the agreement if there is any.  The parties shall also follow the law if there is no agreement. The principle of freedom of contract is manifested in the breach of contract liability to fully respect the freedom of the parties to choose the remedy. Hence, the respect showed in the terms of liquidated damages by letting the parties freely negotiate.

In case 1, one of the focus of the dispute is whether it is possible to set a penalty. First, the court recognizes that both parties can negotiate to determine the liquidated damages clause. Secondly, the court divided the meaning of liquidated damages further as follows: 

"The liquidated damages are divided into general liquidated damages and specific liquidated damages. The general liquidated damages refer to the parties' no specific agreement on the breach of contract, and the contractual payment of liquidated damages specific liquidated damages refer to the liquidated damages agreed by the parties for different breaches of contract." 

In the case of the liquidated damages clause in the case, since the agreement is after the 10th article of the Agreement, it should be a specific liquidated damage. As a result, in the case of Wang's behavior, there was no violation of the article 10 of the Agreement. The company's request for payment of liquidated damages lacked the corresponding contractual basis, and the court did not support it.

In summary, the Employment Agreement can set a penalty clause, which can be determined by free negotiation between the two parties. It can be aimed at the risk of not being able to conclude the Labor Contract as scheduled. This risk includes the cost of the employer's recruitment process and expected benefits in personnel management and also the violations or changes to other rights and obligations.

c. Employees required to return the liquidated damages after paying it.

In case two, the dispute focuses on whether the liquidated damages should be returned. The court held that the "employment agreement" signed by the two parties was true and was an effective agreement. As a natural person with full civil capacity, Zhang did not object to the breach of contract clause when signing the agreement and recognized the clause. According to the spirit of the Contract Law of PRC, a contract established according to law is legally binding on the parties. The parties shall perform their obligations in accordance with the contract and may not change or terminate the contract without authorization. The clause also forces the parties to fulfill the agreement and fulfill the purpose of the agreement. On that account, it is legally binding on both parties. Zhang's request to return the liquidated damages on the grounds that the two sides constitute labor relations had no foundation in the law which is why the court did not support it.

In view of the issue of liquidated damages, the contractual spirit is adhered to the freedom of negotiation by the parties and shall be liable for the payment of liquidated damages in case of breach of contractual obligations. At the same time, the court will determine the behavior of each party and the risks they bear, thus determining a fair amount.

3. The difference between the "labor contract" and the "employment agreement" on liquidated damages



As shown in the above table, due to the different legal nature of the Employment Agreement and the Labor Contract, there are obvious differences and respective restrictions on the applicable conditions and laws of the breach of contract.

On one hand , in the labor relationship, since the employer has a strong position. The liquidated damages in the Labor Contract are stricter, and only the liquidated damages can be agreed under two circumstances. On the other hand, depending on the specific conditions of each province and city, it will vary from place to place in practice.

Secondly, in civil relations, the parties conclude contracts in accordance with the principle of autonomy of will and are free to agree on the corresponding breach of contract and penalties in the contract. However, its spirit must still conform to the principle of fairness and justice in the contract law. It is characterized by "compensation-based and punishment-assisted". In this regard, the court's measurement of liquidated damages is: "According to the principle of fairness and good faith, the default losses against the parties should be based on their actual losses, taking into account the performance of the contract, the degree of fault of the parties and the expected benefits."

In short, although they are all contracts, because of their different nature, the laws they apply are different, and the legal interests are different. The agreed penalty clause can supervise the contract counterparty to fulfill its obligations. Accordingly,, understanding the different liquidated damages provisions and using the clause reasonably will improve the efficiency of contract performance.

4. Legal Advice

In summary, the reason why the Employment Agreement refers to liquidated damages is that both the employer and the graduates spend a lot of money in the process of recruiting or seeking employment. If one party freely defaults without penalty, this will reduce the effectiveness of the Employment Agreement. When the liquidated damages are stipulated in the Employment Agreement, the court will make a comprehensive consideration based on the actual situation of the employer, the graduates and the degree of fault of the parties. On this basis, the author suggests:

Employers can use this clause to improve the efficiency of company's human resource management and employment by understanding the characteristics of the penalty clause. But at the same time, the amount of the clause should follow the principle of fairness, avoid the abnormality or abnormality of the agreed liquidated damages according to the actual situation of the graduates and the nature of the work.

During the setting of liquidated damages, company should be cautious and act accordingly to the specific needs of company in order to avoid the situation illustrated in case 1.


Editor: Normand Gauthier

Fangyu Gong



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