Deferred Bonus Plan, which has been commonly used by financial enterprises, is a compensation plan that employees' bonus is deferred and paid in installments. For financial enterprises, to defer payment of bonus is not only an essential way to control business risk and manage employees' performance, but also an important requirement set by industry regulatory authorities to fulfill.
We take the insurance industry as an example. According to the Guidelines on Remuneration Administration for Insurance Companies (for Trial Implementation) (Bao Jian Fa [2012] No.63) promulgated by the original China Insurance Regulatory Commission, insurance companies are required to set a payment deferral plan for performance-based remuneration in their remuneration rules and determine the length of deferral based on the duration of risks, which in principle should be no less than 3 years; the performance-based remuneration of the directors, supervisors, senior management, and key employees of insurance companies should be paid in a deferred manner, with the deferred portion no less than 40%, except that the deferred portion of directors and general manager should be no less than 50%.
Apart from insurance, industries including commercial banking, securities, and trust management are also required to formulate and implement deferred bonus plan according to their industry regulatory regulations1.
Deferred bonus plan postpones the payment of bonus. If, during the period of deferral, employees departed from the employers, are employers allowed to deny deferred bonus to such employees according to relevant internal rules or policies? Relevant practice is controversial.
I. Should employers have the right to deny deferred bonus to departed employees?
If employers' remuneration rules provide that employees who depart before the payment of their deferred bonus are not entitled to the remaining deferred bonus, does the departure of employees grant the employers lawful right to deny payment of such employees' remaining deferred bonus according to such provisions? The law doesn't have clear provisions in this respect. In judicial practice, courts haven't unified their opinions in adjudication of relevant disputes. According to our study of the judgements of courts in Beijing over the years on deferred-bonus-related disputes, court opinions in adjudication of these disputes can be summarized as follows:
1. Since employers have clearly defined the conditions for paying deferred bonus and employees became ineligible for deferred bonus due to departure, the employers don't need to pay the deferred bonus.
In (2018) Jing Min Shen No. 2670 retrial case, the employer's performance-based bonus plan and relevant documents provide that 2 thirds of the 2014 performance-based bonus should be paid in the year, while the remaining 1 third should be retained as "Deferred Bonus Against Risk" and paid in the following 2 years; employees who depart before payment of deferred bonus should not be entitled to such deferred bonus; in respect of employees who resign voluntarily and do not join a competitor of the company thereafter, the remaining deferred bonus of such employees should be paid in installments. The employee in question who resigned in September 2015 and then joined a competitor of the employer claimed the 2016 installment of the 2014 deferred bonus from the employer through arbitration and litigation proceedings.
In this case, Beijing Court of Xicheng District, Beijing Second Intermediate Court and Beijing Higher People's Court held that Article 47 of the Labor Law of the People's Republic of China provides for that an employer may independently determine its form of wage distribution and wage level according to the law based on its business features and economic performance; according to this Article 47, it's the employer's discretion to develop plans for annual bonus distribution and conduct annual performance evaluation on employees according to the employer's remuneration rules; now that the employer's bonus distribution plan and other relevant documents clearly set forth the conditions and eligibility for getting deferred bonus and that the employee quitted his job before payment of deferred bonus and then joined a competitor of the employer, the employee has lost eligibility for the deferred bonus. As a result, the courts rejected the employee's claim of deferred bonus.
2. The court considered the employer's provisions that "departed employees lose the eligibility for deferred bonus" null and void and ruled the employer to pay the deferred bonus.
(1) In (2018) Jing 0102 Min Chu No. 8272 litigation of first instance, Beijing Court of Xicheng District held that a bonus plan must be drafted to the extent of law and in procedures complying with the law and that content of the bonus plan should be fair; the employer's rules that "employees who resign voluntarily should not be entitled to any and all deferred bonus" have restricted employees' entitlement to certain rights and interest and avoided its own obligations or responsibilities under the Labor Contract Law, and therefore should be null and void according to Article 26 of the Labor Contract Law.
(2) In (2019) Jing 02 Min Zhong No. 5120 litigation of second instance, the employer's rules provide that: bonus of the month should be paid in the following month; for all employees, bonus should be paid in 50% of the approved amount, and the other 50% should be retained against potential risk and paid after and according to the year-end settlement; deferred bonus should not be paid to those who have left the company before payment of such deferred bonus. Beijing Court of Xicheng District and Beijing Second Intermediate Court held that firstly, although the 50% is retained and paid in a deferred manner, it doesn't change the fact that it is bonus payable to the employee and a part of the employee's monthly remuneration; secondly, the above rules fail to clarify of which time range the deferred bonus shouldn't be paid (i.e. of a certain year or of all service years); thirdly, the employer's argument that the employee shouldn't be entitled to the 2017 annual bonus since he departed in June 2018 when the annual settlement for 2017 didn't yet start is not fair to the employee. The employee worked for the employer throughout 2017 and then resigned for personal reason in June 2018 which was close to the expiry date of his employment contract. Considering the employee worked normally for the employer during the whole term of his employment contract, the court held that the employer's denial of the employee's entitlement to the 2017 annual bonus (which includes the retained bonus of the employee over previous years) just because the employer's 2017 annual settlement came later than the date of the employee's departure goes against the principle of fairness under the Labor Contract Law.
II. Should employees have the right to request employers to pay up all deferred bonus upon departure?
Article 9 of the Interim Provisions on the Payment of Wage promulgated by the original Ministry of Labor and Social Security provides that "When the employment relationship is terminated or ended in accordance with the law, the employer shall pay up the employee's wage upon the termination or ending of the employment contract." Article 12 of the Regulations of Beijing Municipality on Wage Payment also provides that "Where an employment contract is terminated or ended by an employee and an employer in accordance with the law, the employer shall pay off all of the wages to the employee."
In some labor disputes, employees requested employers to pay up all the undue deferred bonus when they departed from the employers according to the above-mentioned provisions. In respect of Beijing's judicial practice, courts tend to agree that the deferred bonus plan specified in employers' rules and policies and under industry regulatory regulations should apply to the departed employees and reject employees' claim of deferred bonus if such deferred bonus is not due before the courts adjudicate the cases. (See [2017] Jing 02 Min Zhong No. 4976 civil judgement)
III. Are employers allowed to cease payment of departed employees' deferred bonus in case of "risk"?
In case of occurrence of any risk, loss or other circumstances specified in industrial regulatory regulations or employers' rules and policies after employees' departure, the employers are allowed to cease payment of the employees' unpaid deferred bonus.
In Beijing's judicial practice, for labor disputes regarding cessation of deferred bonus payment, usually courts would review whether employers have submitted sufficient evidence to prove the occurrence of the circumstance(s) where payment of deferred bonus should be ceased as required by industrial regulatory regulations or the employers' rules and policies. In case required by the employers' rules and policies, courts would further review whether such rules and policies have been adopted through the required democratic procedures and announced or informed to the employees. If the employers' evidence could prove the above, courts tend to reject the employees' claim of deferred bonus. (See [2019] Jing 02 Min Zhong No. 12080 civil judgement and [2017] Jing 0102 Min Chu No. 14201 civil judgement)
It should be specially noted that in case any of the circumstances specified in industry regulatory regulations occurs, it's not that the employers have the right to, but more preciously, they "shall" cease payment of the deferred bonus of those responsible, otherwise, they will violate the industrial regulatory regulations. Examples are given as follows:
Article 65 Paragraph 2 of the Code of Corporate Governance for Securities Companies (2020 Revision) promulgated by China Securities Regulatory Commission provides that "If the senior management fail to perform duties diligently which causes the securities company to commit severely illegal or irregular acts or encounter significant risk, the securities company shall stop paying all or part of the unpaid performance-based annual pay."
Article 14 of the Guidelines on Remuneration Administration for Insurance Companies (for Trial Implementation) requires that "In case of any risk or loss specified in deferred payment plans for performance-based pay, the insurance company shall cease payment of the unpaid performance-based pay of relevant responsible persons."
Article 4 through 7 of the Guiding Opinions on Developing and Improving the Mechanism for the Recovery and Deduction of Performance Pay for Banking and Insurance Institutions promulgated by the General Office of China Banking and Insurance Regulatory Commission set forth respectively the circumstances where banking and insurance institutions may, and where they shall, recover and deduct the performance-based pay of senior management, key employees and other responsible persons. The recovery and deduction includes recovery of the paid performance pay and cessation of outstanding performance pay. Article 13 Paragraph 2 of these Guiding Opinions requires that the recovery and deduction mechanism for performance pay shall apply to the employees who have departed and who have retired; Article 14 encourages banking and insurance institutions to study and explore more means for recovery and deduction of performance pay, and to adopt alternative means to achieve effectively the recovery and deduction of performance pay.
IV. Our Suggestion
Based on the above analysis, we have the following suggestions for employers to take when making and implementing deferred bonus plan:
1. It is advisable that employers set forth clearly in their rules and policies the eligibility for deferred bonus and conditions for cessation of deferred bonus payment.
2. The conditions for cessation of deferred bonus payment need to be rational, for avoidance of being held null and void by arbitration tribunals and courts on the ground that such conditions deprive employees of certain rights and exempt the employer from its responsibilities. In our opinions, the bonus deferral required by the above-mentioned industry regulatory regulations is mainly for the purpose of risk prevention and control. If employers deny deferred bonus solely due to employee separation when no risk event occurs during the term of deferral, such denial may likely be considered by arbitration tribunals and courts as irrational.
Other than the purpose for risk prevention and control, if employers' rules and policies explicitly provide that bonus is deferred also for purposes including rewarding employees' long-term loyalty and guiding departed employees' re-employment, the employers' rules and policies denying departed employees' eligibility for deferred bonus may be more likely accepted by arbitration tribunals and courts. In the above-mentioned (2018) Jing Min Shen No. 2670 retrial case, the court accepted the rationality of the employer's provisions that employees who join a competitor after leaving the company will not be entitled to deferred bonus.
3. Deferred bonus plan is generally considered one of the internal rules directly involving employees' immediate interests, therefore, employers should fulfill the democratic procedures and announcement or notice procedures as required by Article 4 of the Labor Contract Law, to protect the plan from being considered invalid and not binding upon the employees due to defect in procedures. Employers may also consider settling down their terms and conditions regarding deferred bonus in employment contracts or other agreements with the employees, so as to strength the legal effect of such terms and conditions.
Footnote
1 Article 16 of the Regulatory Guidelines for Stability of Remunerations in Commercial Banks (2010): No less than 40% performance-related remunerations of a commercial bank's senior management and staff on positions having important impacts on risk shall be paid in a delayed manner, and the delayed term shall be no less than 3 years in general, among which, the delayed payment percentage of performance-related remunerations of primary senior managers shall be more than 50%, and better up to 60% if possible. The deferred bonus distributed in each installment shall be equal, and distribution of larger portion in early installments and smaller in the latter ones shall be avoided.
Article 65 of the Code of Corporate Governance for Securities Companies (2020 Revision): Annual performance pay of the senior management personnel of a securities company shall be decided on by the board of directors based on the result of annual performance assessment of the senior management personnel, and 40% shall be paid in deferred manner for a deferred period at least 3 years. Payment of the deferred pay shall follow the principle of equal division.
The Guiding Opinions of the General Office of China Banking Regulatory Commission on Risk Control of Trust Management Companies (2014): (iii) To develop long-acting mechanisms for risk prevention and control. 2. To develop recovery and handling mechanisms. Trust management companies shall make recovery and handling plans based on their business features. Such plans shall at least contain mechanisms for incentive remuneration deferral (developing a rational deferred incentive remuneration plan corresponding to responsibilities for risk and economic performance)......
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