16 February 2017

Taking Annual Leave to Explore the World More Often!

By Lucy Lu(partner),  Lexina Li(senior associate) and Enya Yang(legal assistant)

Annual leave is an important reflection of the right to rest granted by law to employees.  The introduction of the annual leave system has made the taking of holidays a hot topic amongst both employees and employers.

Mr. Zhang, a resident of Zhangjiang, Shanghai, quit his job on 10 March 2012. Four days later, on 14 March 2012, he commenced employment with a new company. For the following five years he worked relentlessly without taking annual leave. At the end of 2016, Zhang’s employers decided not to renew his contract. They refused to compensate him for the five years of annual leave he had accrued whilst working for them. Compensation that we say he is entitled to. 

In this article, we answer questions around the implementation of paid annual leave using the case of Mr Zhang as an example.

When was Zhang eligible for annual leave after the commencement of his employment on 14 March 2012?

Article 3 of the Implementation Measures on Paid Annual Leave for Employees of Enterprises (“Measures”) in force 18 September 2008, states that employees who have worked continuously for 12 months or more are entitled to paid annual leave. This article contains two requirements – (1) working “continuously” for (2) “12 months”. Both these requirements must be satisfied to qualify for annual leave. Article 3 does not explicitly require this period to be served with one employer. The definition of “continuously” has become the centre of debate on this issue. Employers argue the use of the word “continuously” implies the 12 months must be served with one employer, whereas employees argue that as long as they worked continuously for 12 months it is irrelevant whether or not their employer changed during this time.

In practice, employers usually require that an employee is only entitled to annual leave if they have worked for the company for twelve months continuously. This is not a reflection of the law. Article 3 does not require this period to be served at one company. Such an interpretation requires adding words to the Article that are simply not there. To clear up this misunderstanding, the General Office of the Ministry of Human Resources and Social Security issued an Official Reply to Issues Relating to the ‘Implementation Measures on Paid Annual Leave for Employees of Enterprises’ (effective 15 April 2009), stating that both employees who have worked for twelve months continuously for one employer and those who have worked for twelve months continuously for different employers are entitled to paid annual leave in accordance with the Article 3 of the Measures.

But, in practice, the Shanghai courts generally hold that if there is an “interruption” during the 12 months, annual leave entitlement will be lost.  The threshold is high in Shanghai to meet the criteria for annual leave and does not allow an interruption of working time between two employers. This interpretation means that Zhang’s twelve months would re-start on 14 March 2012, because of the four day rest period between jobs.

Is it possible for Mr. Zhang to recover compensation for unused annual leave for the last four years?

According to Article 27 of Law of the People's Republic of China on Mediation and Arbitration of Labor Disputes (in force 1 May 2008), the limitation period for making an application for arbitration of an employment dispute is one year. This is calculated from the date the applicant comes to know (or is expected to know) that there has been an infringement of his rights. Article 5 of the Regulations on Paid Annual Leave of Employees (in force 1 January 2008), states that annual leave must be taken within a year and usually may not be carried forward to the following year.  Therefore, the deadline for an employer to pay annual leave compensation is the last day of the current year. Exceptions to this are when an employee agrees to postpone the annual leave to the following year or decides not to take annual leave. The employee must be aware that his right has been violated and that the limitation period to make an application for arbitration regarding the payment of annual leave will be calculated from January 1 of the next year.

According to the above articles, the limitation period for Mr Zhang to apply for compensation for annual leave from 2013 to 2015 has expired. Consequently, Mr. Zhang now has no right to ask his employer to pay any unpaid annual leave owing except for the leave accrued in 2016.

The company refused to pay on the grounds that Zhang waived his right to annual leave voluntarily by not previously applying for it. Is there a legal basis for these grounds?

Pursuant to Article 9 of the Measures, the employer must take the employees’ own preference into consideration when making arrangements for annual leave. This suggests that employers are responsible for the organization of annual leave. Failure of an employee to apply for annual leave cannot be taken as a voluntary waiver of his right to it. Annual leave is the statutory responsibility of the employer, not the employee.  As a result, there is no legal basis for these grounds of refusal.

How should Zhang’s annual leave compensation be calculated? 

According to Article 10 of the Measures, the employer must pay the employee 300% of his daily income for each day of unused annual leave, with the income paid per day in normal working days included. Therefore, the company must pay Zhang an extra 200% of his daily income for each day of unused annual leave in the year of 2016.

Editor’s note: this article was simultaneously published on Chinalawinsight.com

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