Is the severance base calculated before or after tax?

Source: Legal House, Labor Law Library

Recently, the editor pushed a detailed explanation: 61 situations and standards of economic compensation N, N+1, 2N, 2N+1, 2 (N+1), and some fans asked "What is the calculation standard of the economic compensation base?Is it pre-tax or after-tax?". In line with this question, I will answer one or two for your reference.

When an employer calculates the severance payment for termination or termination of an employment contract to an employee, is the calculation base of severance compensation determined according to the employee's wages or actual wages?

Many HR and workers are entangled in this problem, so let's make an analysis from the legal provisions to see whether the severance base should be paid or paid.

Article 47 of the Labor Contract Law stipulates that severance shall be paid to the employee at the rate of one month's salary for each full year of service in the employer. If it is more than six months but less than one year, it shall be counted as one year, and if it is less than six months, the worker shall be paid half a month's salary. If the monthly wage of a worker is three times higher than the average monthly wage of the employee in the previous year as announced by the people's government of the municipality directly under the Central Government or the city divided into districts where the employer is located, the standard of severance shall be paid to him at the rate of three times the average monthly wage of the worker, and the maximum period of payment of severance shall not exceed 12 years. The term "monthly wage" mentioned in this article refers to the average salary of an employee in the 12 months prior to the termination or dissolution of the labor contract.

As stipulated above, the severance base shall be calculated on the basis of the average salary of the employee in the 12 months prior to the termination or termination of the labor contract (if the salary is more than 3 times the average wage, it will be calculated as 3 times). Is the salary here payable or paid?

Article 27 of the Regulations for the Implementation of the Labor Contract Law clarifies that the monthly wage of economic compensation as stipulated in Article 47 of the Labor Contract Law shall be calculated according to the wages due to the employee, including hourly wages or piecework wages, as well as monetary income such as bonuses, allowances and subsidies. If the average salary of an employee in the 12 months prior to the termination or termination of the labor contract is lower than the local minimum wage standard, it shall be calculated in accordance with the local minimum wage standard. If a worker has worked for less than 12 months, the average wage shall be calculated according to the number of months actually worked.

It should be noted that the Implementing Regulations of the Labor Contract Law stipulate that the wage for calculating the base of severance compensation is the "due wage". The concepts of "wages due" and "wages due" can be understood to mean the same thing. "Wages due" are expressed from the perspective of wages received by employees, and "wages due" are expressed from the perspective of wages paid by employers. "Should" corresponds to "real", and "deserved" corresponds to "deserved".

The main difference between a worker's monthly payable and take-home pay is the various deductions and fees. Therefore, in practice, "payable (due) wages" are also called pre-tax wages, and "actual (take-off) wages" are also called after-tax wages.

The wages due refer to the sum of all wages payable before deducting social insurance premiums, housing provident fund, individual income tax and other deductions. The take-home salary refers to the actual salary received, that is, after deducting income tax, social security premiums, provident fund and other expenses.

Since the social insurance premiums, taxes and other deductions withheld by the employer are all part of the individual's labor income, the employer only bears the obligation to withhold and pay. The tax authorities are responsible for the payment of taxes by workers, and the social insurance institutions are responsible for the payment of social insurance premiums. The part deducted by the employer's withholding and payment is actually the employee's salary, so the calculation of severance should be based on the pre-tax and undeducted social security and other expenses.

In practice, there are also some cases in which the calculation of severance is based on the actual salary, and this situation generally occurs for the following reasons: 1) the labor and management have not agreed on the labor remuneration, and it is difficult to determine the specific amount of wages to be paid; 2) the employee himself claims only the actual salary; 3) the adjudicator tries to save trouble and it is easier to calculate the actual payment; 4) the difference between "due" and "actual" is not noticed in the misunderstanding of the legal provisions.

Regarding the issue of wages in the calculation base of severance payments, some practical cases are provided for your reference:

Shandong High Court (2022) Lu Min Shen No. 7829: After review, this court held that, firstly, when calculating the severance compensation for Yin Longlong's termination of labor relations, the original judgment was based on Yin Longlong's average monthly salary from January to August 2020 as determined by the (2021) Lu 03 Min Zhong No. 1770 Civil Judgment. The average monthly wage shall be calculated according to the wages due to the worker, including hourly wages or piece-rate wages, as well as monetary income such as bonuses, allowances and subsidies. However, the wages in July and August 2020 were all actual wages in the calculation basis of the original trial, and the average monthly salary of Yin Longlong calculated on this basis was improper, and this case should be retried.

Hunan High Court (2016) Xiang Min Zai No. 109: Article 27 of the Regulations for the Implementation of the Labor Contract Law of the People's Republic of China stipulates that "the monthly wages of economic compensation specified in Article 1 shall be calculated according to the wages due to the employee, including hourly wages or piece-rate wages, as well as monetary income ...... such as bonuses, allowances and subsidies." According to the above provisions, the calculation of severance shall be based on the "wages payable" of the employee before tax and before deducting social security and other expenses. The social insurance premiums, taxes and other deductions withheld by the employer are all part of the individual's labor income, and the employer only bears the obligation to withhold and pay on behalf of the employee, and the part deducted is actually still the employee's salary, so this part of the payment should be included in the wage income. The original second-instance judgment was erroneous in this determination and should be corrected.

Heilongjiang High Court (2021) Hei Min Zai No. 465: On the issue of Liu Zhenquan's claim for the calculation standard of economic compensation. According to Article 27 of the Regulations for the Implementation of the Labor Contract Law of the People's Republic of China, "the monthly wage of economic compensation as stipulated in Article 47 of the Labor Contract Law shall be calculated according to the wages due to the employee, including hourly wages or piece-rate wages, as well as monetary income such as bonuses, allowances and subsidies. Accordingly, the monthly wage for calculating severance shall be calculated according to the wages due to the employee, and all wages payable to the employee before tax and before deducting social security and other expenses shall be used as the calculation base. Liu Zhenquan advocated that bonuses and car subsidies should also be included as the basis for calculating wage standards. The court of first instance improperly calculated the severance based solely on the amount of Liu Zhenquan's actual salary. During the retrial, the amount of severance should be determined after ascertaining the amount of wages to which Liu Zhenquan should be paid.

(2022) Liao 03 Min Zhong No. 4589: This court held that according to Article 27 of the Regulations for the Implementation of the Labor Contract Law of the People's Republic of China, the severance should be calculated according to the wages due to the employee, and the court of first instance should pay 2,500 yuan according to the labor contract between the appellant Ningyuan Town Health Center in Anshan Economic Development Zone and the appellee Chen Baoyong. The calculation of the amount of severance based on the monthly standard was improper, and the appellant's claim that the Ningyuan Town Health Center of Anshan Economic Development Zone should be based on the actual salary as the standard for calculating the severance payment had no legal basis, and this court did not support the appellant's appeal claim of the Ningyuan Town Health Center of the Anshan Economic Development Zone.

(2021) Yue 15 Min Zhong No. 306: On the issue of how to determine Yan Zheng's average monthly salary. According to Article 27 of the Regulations for the Implementation of the Labor Contract Law of the People's Republic of China, "the monthly wages for economic compensation as stipulated in Article 47 of the Labor Contract Law shall be calculated according to the wages due to the employee, including hourly wages or piece-rate wages, as well as monetary income such as bonuses, allowances and subsidies." ......", the severance payment shall be calculated on the basis of the employee's payable wages. The court of first instance calculated the average monthly salary based on Yan Zheng's actual salary after deducting social security, taxes, provident funds, and other expenses, which was contrary to the law, and this court corrected it.

(2017) Chuan 07 Min Zhong No. 186: The calculation base of economic compensation and double wages stipulated in the Labor Contract Law of the People's Republic of China shall be calculated according to the wages due to the employee for 12 months under normal working conditions, that is, the total salary of the month before deducting social insurance premiums and taxes. Therefore, the original trial court's determination that the calculation base of severance was not improper, and the appellant's argument that severance should be calculated on the basis of actual wages did not provide sufficient evidence to prove it, and this court did not accept his opinion.

(2014) Ning Min Zhong Zi No. 5356: On the calculation base of economic compensation. ...... The social insurance premiums, provident fund, and individual income tax paid by individual workers are part of the wages of workers. Zhongtai Hi-Tech Company's claim that the actual wages paid after deducting the social insurance premiums, provident fund and individual income tax paid by the employees should be used as the calculation standard for economic compensation has no basis in law, and the appeal request is not sustained.

Attachment: The Measures for Economic Compensation for Breach and Termination of Labor Contracts stipulate several circumstances under which an employer may be required to pay severance for unilateral termination of a labor contract:

Payments made before 08	Pay years before 08 years
The employer terminates the labor contract by consensus	Not more than twelve months
The worker is not competent for the job	Not more than twelve months
Illness or non-work-related injury	There is no limit to the number of years of payment
The objective situation has changed significantly	There is no limit to the number of years of payment
Economic layoffs	There is no limit to the number of years of payment

Interpretation I of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases stipulates that an employee may be required to pay severance for unilateral termination of a labor contract:

Interpretation I of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (promulgated on April 16, 2001)

Article 15 Where an employer compels a worker to terminate the labor contract under any of the following circumstances, the employer shall pay the worker's labor remuneration and economic compensation, and may also pay compensation:

(1) Forced labor by means of violence, threats, or unlawful restrictions on personal freedom;

(2) Failing to pay labor remuneration or provide labor conditions in accordance with the provisions of the labor contract;

(3) Deducting or delaying the wages of workers without reason;

(4) Refusal to pay wages and remuneration for extended working hours;

(5) Paying wages to workers below the local minimum wage standard.

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