Annual leave plays a very important role in an employer's rules and regulations, which balances the employee's right to rest and the employer's managerial prerogative. However, in many versions of enterprises' rules for annual leave that the author has received, revised or handled as evidences for arbitrations and proceedings, there are cognitive misunderstandings. After analyzing these misconceptions, common problems come to light. The aim of this article is to help enterprises systematically understand the essence of annual leave management, mitigate the legal risks in order to prevent future problems, and protect the reasonable rights of enterprises. The article will address several common misunderstandings and analyze them for enterprises' reference.
II. Pinpointing and analyzing the common misunderstandings of annual leave management
i. Formal employees who have worked in the Company for more than one year are entitled to annual leave.
"Employees are entitled to take annual leave after 12 months of continuous work. Employees undertaking a probationary period shall not take annual leave, according to the company's rules and regulations."
"The accumulated service period shall be reported by the employees themselves to the company and they should provide valid supporting documents. If not, the treatment is based on the service period with the current employer."
The aforementioned provisions reveal two main problems.
First, are the "12 months of continuous work" referring to employee's total period of employment or just in the current company?
The Article 3 of the "Implementation Measures for Ministry of Human Resources Security on Paid Annual Leave for Employees of Enterprise" (hereinafter referred to as the "Annual Leave Measures") stipulates that employees who have worked continuously for 12 months or more are entitled to take annual leave. This provision is a legal basis for employees to be entitled to take annual leave. However, it cannot be concluded from this clause that "continuous work for more than 12 months" must be completed within the current company. Therefore, in a case where employees have worked continuously for 12 months, the service period must be calculated successively even if part of the service period was previously completed at another company.
The example clauses impose stricter legal requirements on which kind of employees should take annual leave. This essentially limits the rights of employees and raises the risk of not being recognized by the law. It is recommended that enterprises design the regulations to be compliant with statutes and to strengthen management when enforcing annual leave policies. For example, it is the employee's obligation to submit the materials to prove how long his/her whole service period is before applying for annual leave. The Company can exercise its veto when the employee is unable to provide the evidence to prove they are entitled to take annual leave (e.g. It is found that there has been gap between service periods).
Second, is it possible to stipulate that employees in their probationary period are not entitled to paid annual leave?
Article 2 of the "Regulations on the Paid Annual Leave for Employees" (hereinafter referred to as the "Regulations on Annual Leave") clearly stipulate that employees of government agencies, bodies, enterprises, institutions, non-corporate civil entities and individually-owned businesses which employ staff who have continuously worked with their employer for more than one year shall be entitled to paid annual leave. According to this clause, as long as the employee continuously works for more than 12 months, even if the employee is within the probation period, he/she is entitled to take paid annual leave. Therefore, if the employer directly denies the employee's right to paid annual leave during the probationary period in the rules and regulations of the enterprise, it would amount to being in direct conflict with the law.
In addition, Article 5 of the "Regulations on Annual Leave" specifies that employers shall plan and arrange for their employees to take annual leave according to their actual circumstances and work status. More importantly, the respective personal preferences of the employees should be taken into account. This provision gives the employer the right to approve the application for employee's annual leave. In order to allow for discretion, it is recommended that the company examines arrangement possibilities instead of vetoing the rights of annual leave in the rules and regulations so that they can administrate the enterprise more efficiently.
ii. Not distinguishing the standard of compensation between the statutory annual leave and welfare annual leave.
"If there are annual leave days that have not been used before the end of the year due to work requirements, they can be extended to March 31 of the next year with the consent of the employee. The annual leave days that have not been used within this time frame will be compensated according to the 100% standard."
In practice, the employer pays great attention to the employee's welfare and the employees are entitled to take welfare annual leave. Hence, their annual leave days are more numerous than statutory ones. However, many enterprises do not realize that there are important differences between the two kinds of annual leave regarding discretion. Therefore, from the perspective of protecting the statutory rights and the interests of enterprises, the rules concerning statutory annual leave and the welfare annual leave should not be the same.
This example clause covers two issues. First, in terms of statutory annual leave, Article 5 of the "Regulations on Annual Leave" stipulates that where there is a genuine need preventing employers to arrange for their employees to take annual leave due to work requirements, after having received the consent of the employees, employers may decide to not grant annual leave to their employees. Instead, they may pay the wage remuneration in lieu of the annual leave entitlement at the rate of 300% of the daily wage of the employees for each of the annual leave days to which he/she is entitled. According to this provision, unless both parties agree to extend it to the next year, the employer needs to pay wage remuneration as a substitute to annual leave according to the statutory standard. When the employee has not used statutory annual leave in the current year, the employer has no right to unilaterally regard it as automatically expired. Moreover, even if the statutory annual leaves are extended to next year with consent of both the employer and the employee, the former still needs to pay wage remuneration when the annual leaves are not used. Therefore, the example clauses shall not apply to statutory annual leaves, which is in conflict with the law.
Second, welfare annual leave is the days which is more than statutory annual leave. Article 13 of the "Measures for Annual Leaves" stipulates that where the number of days of annual leave and the sums paid in lieu of any untaken annual leave under the labor contract, the collective contract or the articles of association of an employer are more favorable than the those provided under the law, the employer shall execute according to the agreement or the articles. According to this provision, the employer can set the rules of using welfare annual leave independently. In other words, the employer has discretion to stipulate in the rules and regulations that the untaken welfare annual leave will be automatically expired and not compensated or that it can be extended to a certain time in the following year. However, in the example clauses, the employer levels up the protection of welfare annual leaves because they will pay the wage remuneration in lieu of annual leave entitlement at the rate of 100% of the daily wage income of the employees for such annual leave period to which he/she is entitled.
In summary, the main problem with the example clause is that it is too "rough". It will result in the rules of statutory annual leave being in conflict with the law while the rules of welfare annual leave are higher than the statutory requirements, which rising risks and costs.
iii. If the employee does not apply for annual leave in time, it would be regarded as a written forfeiture of leave and the company would not be eligible to pay extra compensation.
"If the employee does not apply for annual leave before December 31 in current year, it would be regarded as a written forfeiture of the current annual leave."
This provision seems to make the business management more flexible but, in fact, there is a compliance risk. According to Article 10 of the "Measures for Annual Leaves", the employer shall give annual leave to its employees. Where any employee gives a notice in writing to the effect that he/she choose not to take the annual leave because of personal reasons, the employer may only pay the employee a sum that is equal to what he/she would make on regular working days. According to this provision, it is only when the employee explicitly expresses not wanting to apply for his/her annual leave that it can be judged that the employee is renouncing annual leave. In the example clause, the fact that the employee not applying for annual leave is regarded as a written forfeiture, conflicts with the law. It has wrongly taken the employee's negative/implied behavior as an explicit communication. Moreover, Article 5 of the "Regulations on Annual Leave" stipulate that the employers shall plan and arrange for their employees to take annual leave according to their actual circumstances and work status. In addition, the personal preference of the respective employees should also be taken into account. To a certain extent, this provision creates an obligation for the employer to arrange for workers to take leave, which confirms the flaws of the "default written giving up" clause.
In previous judicial trials, many cases have also reached this conclusion. Regarding the author's personal experience of handling different cases and various study results, most tribunals and courts do not support such clauses. For instance, in the case dealt by Shanghai No. 1 Intermediate People's Court, it clearly clarified that the contents of the company's rules and regulations were in conflict with Article 10 of the above-mentioned "Measures of Annual Leave". Therefore, they had no legal effect. Meanwhile, Beijing and Guangdong have similar jurisprudence supporting that such contents are conflicting with the law and, therefore, do not apply to employees.
In summary, based on the invalidity of this kind of clause, it is recommended that the employer still focuses on the overall arrangement of the employee's annual leave when controlling costs. Some enterprises may face certain scenarios where employers have already made specific arrangements for annual leaves, but the employee refuses to take leaves. At this time, in order to implement the regulations and reduce the follow-up legal risk, the enterprise can make more efforts to preserve the evidence. For example, the enterprise can arrange the annual leave in a certain plan which includes the specific dates and clearly informs the employee about the consequences of not using the vacation and not managing their work tasks appropriately. What's more, the enterprise should guarantee the employee's right for annual leave and preserve all relevant communication materials such as emails.
iv. The employee used annual leave before resignation so the employer is entitled to deduct the annual leave pay from his/her salary.
"The employee shall use the remaining statutory annual leave before the last working day, but if the employee uses a number of days of the annual leave exceeding the number of days calculated, the company is entitled to deduct the annual leave pay from the salary."
Article 12 of the "Measures for Annual Leave" stipulates that no future salary deductions shall be made where the number of annual leave days that the employer has arranged for the current year exceeds the number of annual leave days calculated. As such, it is not recommended to use the example-clause because it definitely conflicts with the above statutory provision.
Based on the difficulties associated with deducing taken annual leave payments, the employer can control costs through the approval process. For example, the employer can calculate the employee's annual leave days according to the proportion of the service period in the current year, thereby further determining the number of days to be approved and avoiding the embarrassing situation of "thinking but not realizing" in the future.
v. During the internal transfer of employees among group enterprises, the remaining annual leave approved by the former employer does not need to be liquidated.
"Due to work arrangements among group enterprises, the employee is transferred from Company A to its affiliated Company B. The service period and related benefits from Company A will be inherited by Company B without any economic compensation. However, the employee's untaken annual leave which the employee is still entitled to use will be voided."
Article 10 of the "Regulations for the Implementation of the Labor Contract Law" (hereinafter referred to as the "Implementation Regulations") states that if the employee is not transferred for reasons of its own to the new employer, the new employer shall inherit the service period from the previous one. According to this regulation, if the employee changes employer by being transferred among a group of enterprises, the new employer should inherit the employee's previous service period if the evidence shows that the transfer is not due to personal reasons.
On the basis of the above-mentioned provisions of statutes, it is common practice for two companies to sign an agreement regarding the transfer and clarify the rights and obligations of the employee, as illustrated in the above example. However, the problem in this clause is that Company A and Company B apparently agreed that the employee is not entitled to take annual leave and get corresponding compensation. If the employee claims untaken annual leave in the future, there is a legal risk in the agreement because it conflicts with the law.
However, if the employee is transferred from Company A to Company B and receives a certain amount of economic compensation provided by the company, the agreement can also deal with the standard of compensation for the annual leave.
III. Advice from Lawyers
i. Improve regulations regarding annual leave and get a better grasp of key strategies
(i) Clarify the legal basis
The most serious risk faced by employers in disputes is their lack of familiarity with the statutes. Many clauses in rules and regulations seem reasonable but, in reality, they conflict with the law, which leads to the invalidation of the relevant rules and regulations in litigation and may inflict sustained negative consequences to the company. Therefore, it is recommended that enterprises clarify relevant legal terms when making amendments to the rules and regulations, such as the scope of taking annual leave and the compensation for statutory annual leave. The enterprise can thoroughly review the regulations and check whether or not there are violations in order to make the enterprise more compliant.
(ii) Take charge of the discretion as much as possible
When the enterprise provides welfare annual leave for their employees, it is important to clearly define how to use welfare annual leave. Judicial trials fully respect the various rules concerning welfare annual leave because that is up to the enterprise's discretion. However, if the enterprise provides employees with more annual leave than statutory standard while not clearly specifying the qualification, use and compensation of extra days, the enterprise will be regarded as having forfeited discretion in terms of designing the related rules and regulations. The judiciary will have no standards on which to apply these additional days and will be forced to refer to the statutory standards. As a result, the enterprise may need to pay compensation for welfare annual leave in line with the statutory standard if a dispute with the employee arises.
ii. Make the process compliant to regulations
In order to manage the annual leave of employees and control costs more effectively, it is recommended that enterprises not only stipulate a strict annual leave policy in the rules and regulations, but also design specific procedures and principles for taking annual leave. For example, the enterprise can coordinate and regularly arrange annual leave including but not limited to the following factors:
(i) The actual time period and frequency;
(ii) Clear requirements for the employee's application;
(iii) Department and authority who is responsible for approval;
(iv) Whether to allow cross-year arrangements.
By routinely reviewing the employees' annual leave, stipulating systematic regulations and ensuring efficient management, employees are encouraged or arranged to use up their annual leave as much as possible. On the one hand, these methods protect the employees' rights for rest and vacation and help to construct the enterprise culture. On the other hand, they also take charge of problems regarding employees not taking annual leave days in a timely fashion, which reduces the enterprise's cost of compensation in terms of annual leave.
iii. Train the employees to be more professional
After designing a comprehensive set of rules and regulations, the final effective implementation also requires the enterprise's efficient management and a professional team. The author previously dealt with a lawsuit involving employees asking for compensation for annual leave. Although the rules and regulations stipulate that untaken welfare annual leave will expire without compensation at the end of the year, HR confirmed the untaken annual leave and the amount of compensation to the employee through email, which brings the case extra unnecessary difficulties. As a result, it highlights, once again, the importance of an internal professional team. It is recommended that enterprises continue to enhance the professionalization of the HR department through various means such as training, which further makes the HR department more qualified.
In terms of the management of annual leave, many enterprises have cognitive misunderstandings pertaining to the stipulation of rules and regulations and their actual operation. They may conflict with the law or reduce their own possible discretion, which puts the enterprise in a disadvantageous position, should a subsequent dispute arise. The aim of this article is to help enterprises pinpoint the existing misunderstandings, improve the annual leave regulations and standardize the operational processes in order to successfully achieve the effective coordination of enterprise management compliance and cost control.