This article was written by Yin Juquan(partner), Zhang Yuanhao(assistant associate).
For a new employee who has served less than a month, or an employee with leave of absence, his/her pay may need to be calculated based on an incomplete month. The law does not specify a calculation method in these circumstances. This article analyzes two typical monthly salary calculation methods for employees who have taken leave of absence.
“Deduction Calculation Method” and “Cumulative Calculation Method”
In accordance with the Circular of the Ministry of Labor and Social Security on the Issues Concerning the Average Monthly Working-time in a Year and Converting the Payment of an Employee (Lao She Bu Fa  No. 3), “daily salary: monthly salary income÷monthly payable days” and “monthly payable days=(365 days- 104 days) ÷12 months = 21.75 days”. This calculation of a daily salary uses a monthly payable term of 21.75 days rather than the actual working days of that calendar month.
Based on the above, there are two main calculation methods: one is deduction for absence, which means the portion of days absent is to be deducted from the monthly basic salary, i.e. salary of a given month = salary of the whole month – (daily salary × absent days); The other method is cumulative-based calculation, where the salary is calculated by cumulative days an employee actually worked, namely salary of a given month = daily salary × number of days an employee actually worked.
Normally the courts adopt the latter method, partly because in disputes for overtime pay the calculation used is a cumulative one and the judges’ are accustomed to this way of thinking. Moreover a cumulative calculation conforms to employees’ common belief that they get one day’s pay for one day’s work. Thus, this calculation method contributes to the settlement of dispute.
However, since most enterprises adopt a monthly salary, a deduction for absence should be more aligned with a calculation based on a monthly term rather than a day’s work. Besides, it is unusual for employees to take personal leave for a long period so it seems to be more reasonable for an enterprise to adopt the deduction for absence method.
There will be discrepancy with both methods
As both methods are calculated based on the abovementioned average 21.75 payable days, there is discrepancy between theoretical “daily salary” calculated accordingly and the employee’s actual daily salary in a given month. In certain circumstances, there will be deficiencies regardless of which methods is used.
For example where an employee’s monthly basic salary is RMB 2,175 and there are 23 statutory working days in August, using the cumulative method, for 1 day’s absence, the employee should be paid RMB 2,200 (2175÷21.75×22=2200), higher than that in the case of a full attendance RMB 2,175, which is apparently unreasonable.
The deduction method will also lead to a discrepancy. In the same circumstances, if the employee worked for only one day, using the deduction for absence method, the employee would be paid RMB -25 (2175-2175÷21.75×22=-25) in that month. In this case, the employee must pay the company RMB 25 though he/she has worked, which is also unreasonable.
Bearing in mind these discrepancies caused by both methods, employers may use calculations flexibly so as to pay reasonable salaries. For example, where an enterprise adopts the cumulative calculation method when an employee works for more than 21 days in a month, the enterprise may instead adopt the deduction method to calculate the salary for that month; while for those using the deduction calculation method, if the employee works for less than 21 days, they could use the cumulative calculation method to calculate the salary of that month. With this flexible approach, an employer may avoid the dilemmas resulting from the discrepancies.
The employer needs to institutionalize the calculation method
No matter which salary calculation method an employer adopts, what really matters is to avoid legal disputes. In the case of leave of absence, the calculation of salary involves deduction, and a firm may refer to Article 3 of Supplementary Provisions of the Ministry of Labor on Relevant Issues of the Interim Provisions on the Payment of Remuneration, which stipulates that “For the purpose of Article 15 of the Provisions, ‘embezzlement’ shall mean the deduction of an employee's salary (all the labor remunerations that the employer shall pay to the employee according to the standard set forth in the labor contract at the premises where the employee provides normal labor) by the employer without justified reasons, with exceptions that the salary: (1)is deducted as explicitly stipulated in applicable laws and regulations of the State; (2)is deducted as explicitly stipulated in the labor contract signed in accordance with applicable laws; (3)is deducted as explicitly stipulated in the factory regulations and disciplines formulated by the employer in accordance with applicable laws and approved by the employee congress; (4)must be reduced when the total salary of the enterprise is related to economic benefits and the latter floats downward (but the salary paid to the employees may not be lower than the local minimum salary standard); and (5) the salary is deducted accordingly when the laborer takes sick leave.” It is of vital importance for an employer to set out the salary calculation method in relevant rules or in a contract.
To reduce the risk of dispute employers should explicitly set out the salary calculation method for employees leave in their rules, or simply include the method in the labor contract. An employer which has spotted such a discrepancy should communicate with employees promptly and request signing of a supplementary contract or they should revise their rules so as to formulate a reasonable method of salary calculation.
Editor’s note: this article was simultaneously published on Chinalawinsight.com