Sunday, January 25, 2009, 10:53 AM

Can Companies in China Reduce Employee Salaries?

The new Chinese Labor Contract Law ("LCL") has been in effect for a year. Companies, legal professionals and enforcement agencies in China are still trying to understand how to implement the specific provisions of the law. One of the issues that Chinese companies face in the current economic down-turn is whether employers can reduce employees' salaries in order to avoid laying off employees.

This may seem to be a puzzling question to those who are not familiar with doing business in Chna. After all, salary freezes and salary reduction seem to be the topic of the day in the U.S. Almost all companies seem to be doing it in an effort to reduce cost to better position themselves to weather the current economic crisis. Nobody is asking (or has any reason to ask) whether they can legally do that. As long as wages meet the applicable federal and state minimum wage requirements, how companies pay their employees is entirely a private matter between the employer and the employee.

In China, however, this is a legitimate and even prudent question to ask. One of the purposes of the LCL is to protect employees from abusive labor practices, including withholding wages and terminating employees at will. Among other things, the LCL requires employers to enter into employment contracts with each employee, setting forth the employee's pay, working conditions and other rights and obligations. Employers that violate the LCL will face fines and other penalties. The LCL has specific provisions governing how and under what circumstances an employee may be terminated. The LCL, however, does not provide whether an employee's salary, once set, can be reduced, or if so, how.

This article ( argues that since the main purpose of the LCL is to stablize the labor market, if an employer has to choose between lowering wages and laying off employees, the employer can reduce wages. It suggests that the employer should obtain the approval of the labor union and the local labor administrative agency.


Blogger Padmanaban said...

I hope it will happen if the situation still becomes worse, but if the recruitment process is done in a proper way it can be avoided, that is selecting right candidates.

September 28, 2009 at 2:04 AM  

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