Sick Leave in China: Employers' Obligations

During the past three decades of economic reform in China, as the country has opened itself to the outside world, China's workforce has transitioned from a reliance on state-owned enterprises to handling the forces of today's market economy much more independently. At the same time, obligations to support sick employees have been transferred to the private sector, the government's social insurance fund and insurance companies.

China has taken measures to address this transition, from the gradual creation of a social-welfare insurance system to the central government's codification of employers' obligations in such laws as the Labor Law, the Labor Contract Law and the Regulations on Enterprise Employees' Medical Treatment Period for Non-work Related Injury and Illness. These provisions define and prohibit unfair dismissal of employees during any statutory medical treatment leave (“sick leave”) period.

Provincial-level governments have promulgated local regulations in order to implement the national statutory requirements. This advisory primarily examines Shanghai's sick-leave regulations. In Shanghai, if an individual employment contract, a collective bargaining contract or a company's rules have terms that differ from the legal requirements, the terms most favorable for an employee prevail.

Employers' obligations

An employer's obligations include:

1. Not terminating an employee during his/her statutory sick-leave period. Termination after expiration of a sick-leave period is subject to certain procedures;
   
   
2. If the employee's labor contract expires during his/her sick-leave period, employers must automatically extend the term of the contract until the end of the sick-leave period; and
   
   
3. Paying the employee's sick-leave wage during his/her sick-leave period.

Sick leave

During an employee's sick leave, an employer may not terminate the employee and must pay him/her a sick-leave wage.

Under national law, an employee suffering from illness or non-work-related injuries is entitled to a sick-leave period ranging from 3 to 24 months, depending on the number of years the employee has worked for an employer and his/her total years of work experience.

In Shanghai, the length of a sick-leave period depends on the number of years an employee has worked for an employer; for example, if an employee's contract was signed after May 1, 2002, his/her first year of service entitles him/her to a three-month sick-leave period. Thereafter, every full year of service entitles the employee to an additional month. In other words, if an employee has worked for more than two years, but less than three, his/her sick-leave period can be up to four months.

Sick-leave entitlement does not have to be taken in a single installment. An employee may exhaust his/her leave entitlement at different times.

In Shanghai, an employee's sick-leave period must be extended if the employee has been confirmed by the Labor Capacity Appraisal Center, a government evaluation entity, to have totally lost his/her labor capacity and if he/she is not qualified for retirement benefits (see the discussion regarding early retirement below). An extended sick-leave period must be agreed upon by the employer and the employee. However, in no event may an extended sick-leave period, together with a sick-leave period as demarcated in the preceding paragraph, be shorter than 24 months.

Sick-leave wages

Generally, an employee is compensated during his/her sick-leave period at 60 to 100 percent of his/her regular wage, depending on the employee's seniority. The following chart provides a general overview of the sick-leave wage/subsidy calculation in Shanghai, as an example. Different cities in China may have different local rules and interpretations.

In Shanghai, the sick-leave wage/subsidy of an employee should not be less than 40 percent of the average wage of the enterprise, or 80 percent of the municipal minimum wage for the preceding year, whichever is greater. However, in no event may a sick-leave wage/subsidy be more than an employee's actual salary or the municipal average wage (¥2,892 in Shanghai), whichever is lower.

Employment protection

Upon expiration of an employee's sick-leave period, an employer in Shanghai must allow the employee reasonable time to prove whether he/she is competent to continue in the same position. If the employee is not competent, the employer should reassign his/her position and allow him/her a reasonable period to prove whether he/she is competent for the new position. The law is silent as to what a reasonable period is.

An employer may terminate an employee only when the employee is unable to return to work, or is proved to be incompetent after the employer has offered the employee a new position following his/her return to work. Under such circumstances, the employer should provide one month's prior notice, or pay the employee one month's salary in lieu of the notice, and pay severance compensation in line with his/her service period (for general instruction on calculating severance payment in China, please refer to our recent article on dismissing an underperforming employee).

Shanghai's regulations also prescribe that an employer pay a medical subsidy of no less than six months' salary to an employee when terminating him/her upon expiration of his/her sick-leave period, in addition to a severance payment, except where an employee's contract term expires after automatic extension during his/her sick-leave period.

Early retirement

In Shanghai, if an employee is no longer able to work and has reached 50 years of age (for a male employee) or 45 years of age (for a female employee), he/she may apply for an early-retirement benefit if one of the following conditions is satisfied:

1. The number of years he/she has worked before the end of 1992, plus the number of years he/she has contributed to a pension fund is more than 10, if he/she started working before the end of 1992; or
   
   
2. The number of years he/she has contributed to a pension fund is over 15, if he/she started working after the end of 1992.

If an employee can no longer work, but fails to reach the above statutory age threshold, he/she may apply for another form of early retirement benefit, called “tui zhi” in Chinese, when the following conditions are satisfied:

1. He/she started working before the end of 1992; and
   
   
2. The number of years that he/she has worked before the end of 1992, plus the number of years that he/she has contributed to a pension fund, is more than 10.

The employment contract of an employee who takes early retirement, or tui zhi, expires automatically, and the employee is not eligible for severance or medical-subsidy payment.

Conclusion

Employers in China are obligated to retain an employee while he/she is on sick leave, even if the employee's contract expires during the leave period. An employer is further required to pay an employee sick-leave wages during his/her sick leave. When the employee returns, the employer must try to accommodate him/her. If termination ultimately results, the employer must pay severance compensation and, in Shanghai, for example, the employer may also need to pay an additional medical subsidy to the employee. An employee who meets certain requirements may be eligible for early retirement.