The Legal Effect of the Termination Penalty Clause in the Labor Contract of Foreign Employees
I. The core prerequisite for legally employing foreign workers
Foreigners establishing employment relationships with employers within China must meet one of the following conditions:
(1) Those who have obtained permanent residency status;
(2) Those who have obtained a work permit and are legally staying and residing in China;
(3) Proceed with the relevant procedures in accordance with the relevant national regulations. (Article 4 of the "Interpretation of the Supreme People's Court on the Application of Law in Labor Dispute Cases")
If any of the above conditions are not met, it may lead to illegal employment. Foreign employees' rights granted by the labor contract or the "Labor Contract Law" may not be protected.
For the vast majority of foreign employees, the most important thing is to obtain a work permit and ensure that the work permit is consistent with the party involved in the labor contract.
In practice, if the employer that handles the work permit is different from the employer that signs the labor contract, it will also lead to illegal employment.
II. The Validity of Liquidated Damages in the Contracts of Foreign Employees
Legal provisions
"Regulations on the Employment Management of Foreigners in China"
Article 22: The working hours, rest and vacation, labor safety and health, as well as social insurance for foreigners employed in China shall be governed by the relevant provisions of the state.
"Answers of the Shanghai Higher People's Court on Certain Issues Concerning Labor Dispute Cases"
II. Issues Concerning the Application of Chinese Labor Standards to Foreigners Employed in China
(1) The labor standards regarding minimum wage, working hours, rest and vacation, labor safety and hygiene, social insurance, etc., as stipulated in Article 22 and Article 23 of the regulations on the management of foreigners' employment in China (issued by the former Ministry of Labor, the Ministry of Public Security, the Ministry of Foreign Affairs, and the former Ministry of Foreign Trade and Economic Cooperation) shall be supported by the labor dispute handling institutions if the parties request their application.
(2) Any other labor rights and obligations agreed upon or fulfilled by the parties beyond the provisions mentioned above can be determined by the labor dispute handling institution based on the written labor contract, individual agreements, other agreements, or the actual performance of the parties.
(3) If the parties, apart from the items listed in (1) and (2) above, propose to apply relevant labor standards and labor remuneration requirements, the labor dispute handling institution will not support such requests.
Relevant cases
Case 1
Case Number: (2024) Shanghai 01 Civil Appeal Case No. 16138 (Shanghai First Intermediate People's Court)
Basic Facts
Both parties signed the "Employment Contract for Foreign Experts", stipulating that the employment period would end on September 30, 2023. Article 12 of the contract states that if the employee "unilaterally terminates the contract without cause", they must pay a penalty to the employer (which includes visa processing fees and three months' salary).
2. The employee tendered his resignation on November 24, 2022 due to personal reasons, and the labor relationship between the two parties was terminated on December 24, 2022.
3. The company believes that the hired party has "unjustly terminated the contract" and demands that they pay a penalty of 71,000 yuan (visa fee of 5,000 yuan + three months' salary of 66,000 yuan).
4. The employee contends that the true reason for his resignation was that the company had long been in arrears with his salary, and that the penalty clause violated Article 25 of the Labor Contract Law and was therefore invalid.
Court judgment opinion
According to the "Regulations on the Management of Foreigners' Employment in China", between the employer and the foreigner who has been approved for employment, apart from the mandatory labor standards such as minimum wage, working hours, rest and vacation, labor safety and health, and social insurance, other labor rights and obligations (including the conditions for termination and liability for breach of contract) can be mutually agreed upon by both parties. Therefore, the agreement on the penalty clause in the involved contract is valid and does not become invalid due to Article 25 of the "Labor Contract Law".
2. The employee clearly stated the reason for resignation as personal circumstances when leaving the company. This was inconsistent with the "company's failure to pay wages" claim made in the lawsuit, and the employee failed to provide sufficient evidence to prove that the company had illegally withheld wages. Therefore, the employee's resignation behavior met the "unjustified termination of contract" stipulated in the contract and constituted a breach of contract.
3. The appeal is rejected and the original judgment is upheld. The hired party shall pay a breach of contract penalty of RMB 71,000 to the company.
Case 2
Case Number: (2023) Shanghai Pudong District Court Civil No. 8145
Basic Facts
Both parties signed the "Special Treatment Agreement Contract", stipulating that the company would provide housing subsidies (reimbursement of 15,000 yuan per month) and children's education expense subsidies as special treatments for the foreign employee. However, this foreign employee must complete a three-year service period; otherwise, the aforementioned subsidies paid must be returned double the amount.
2. Before the end of his service period, this foreign employee resigned on his own initiative due to personal reasons.
3. The company demands that this foreign employee return double the subsidy amount of 410,000 yuan, which was received from April 2021 to February 2022.
4. This foreign employee believes that this agreement is actually a penalty clause, which violates Article 25 of the Labor Contract Law and is therefore invalid. Moreover, the subsidy should be regarded as a component of the salary.
5. Labor arbitration decision: The labor arbitration court ruled in favor of the company, and ordered the foreign employee to return 410,000 yuan.
Court judgment opinion
The court cited the provisions of the "Regulations on the Management of Foreigners' Employment in China" and the "Several Opinions on Implementing the 'Regulations on the Management of Foreigners' Employment in China'" of Shanghai Municipality. It held that the rights and obligations of foreign employees regarding the terms of employment, positions, remuneration, conditions for termination, and liability for breach of contract could be stipulated through labor contracts. Therefore, the provisions in the "Special Treatment Agreement Contract" regarding the service period and the double return of special treatment if the contract is not fully performed by the employee, fall within the scope of what the parties can mutually agree upon and are binding on both parties. The claim by the foreign employee that this clause is invalid due to violation of the "Labor Contract Law" is not supported.
2. The court did not explicitly determine that this subsidy was considered as wages. Instead, it classified it as a special benefit stipulated in the contract, with conditions related to the service period. The foreign employee's early resignation violated the conditions attached to the entitlement to this benefit.
3. If foreign employees leave their positions prematurely without any valid reason, it constitutes a breach of contract and they shall bear corresponding responsibilities as per the agreement.
4. The court upheld the validity of the penalty clause. However, considering the actual salary of the foreign employee, the actual expenses incurred, and the performance of the contract, the court deemed the double return of 410,000 yuan to be excessively high. Therefore, it appropriately reduced the amount to be returned to 260,000 yuan.
III. Conclusion
Courts in Shanghai have recognized the validity of the termination penalty clause in the labor contracts of foreign employees. For foreign employees who legally work in China and establish a labor relationship with Chinese enterprises, in addition to the basic labor standards such as minimum wage, working hours, rest and vacation, labor safety and health, and social insurance that are subject to relevant Chinese labor laws, other labor matters are usually handled in accordance with the terms of the labor contract. Therefore, if the labor contract clearly stipulates that foreign employees need to pay a penalty for early termination of the contract, then the foreign employees should fulfill their payment obligations in accordance with the contract.
Meanwhile, we have observed that if the agreed amount of liquidated damages is excessively high, the court may make an appropriate adjustment.
