Preface

In the process of enterprise bankruptcy reorganization, properly handling employee claims is an extremely important step. According to Article 113 of the Enterprise Bankruptcy Law of the People's Republic of China, their priority of repayment is second only to bankruptcy expenses and common benefits debts, and the most common type of employee claims is the issue of economic compensation to original employees.

I. Background of the Application of Economic Compensation in Enterprise Bankruptcy Reorganization

Generally speaking, in the process of enterprise reorganization, the original creditor's rights and debt relationships will be severed, the enthusiasm of employees will be mobilized and activated, and new investors will be introduced. At this time, the enterprise uniformly terminates the labor relations with employees and then resettles them separately. In accordance with Item 4 of Article 46 of the Labor Contract Law, an enterprise shall pay economic compensation to employees when it lays off staff during bankruptcy reorganization.

It can be seen from this that the general circumstance in which economic compensation needs to be paid to employees during bankruptcy reorganization is: the employee has a legally valid labor relationship with the enterprise at the time of bankruptcy reorganization, and the enterprise takes the initiative to terminate the labor relationship.

II. Calculation of Economic Compensation in Enterprise Bankruptcy Reorganization

(I) General Provisions

The payment of economic compensation by enterprises during bankruptcy reorganization is ultimately a form of economic compensation paid by enterprises to employees, and shall comply with the general provisions of labor laws and regulations on economic compensation.

There are two factors affecting the calculation of economic compensation, namely calculation base and calculation period. Next, the author will explain the calculation base and calculation period one by one.

1. Calculation Base of Economic Compensation

【General Provisions】

In accordance with Paragraph 3 of Article 47 of the Labor Contract Law, the calculation base of economic compensation is the employee's average wage in the twelve months prior to the termination or ending of the labor relationship.

It should be noted here that, in accordance with Article 27 of the Implementation Regulations of the Labor Contract Law of the People's Republic of China, the monthly wage for calculating economic compensation shall be calculated based on the employee's gross wage, including time-based wage or piece-rate wage, as well as monetary income such as bonuses, allowances and subsidies.

【Special Provisions】

• If the employee's monthly wage is higher than three times the average monthly wage of employees in the local area announced by the people's government of the municipality directly under the Central Government or the city divided into districts where the enterprise is located, then in accordance with the provisions of Paragraph 2 of Article 47 of the Labor Contract Law, the standard for the enterprise to pay economic compensation to him/her shall be three times the average monthly wage of employees in the previous year.
• If the average wage of the employee in the 12 months prior to the termination or ending of the labor contract is lower than the local minimum wage standard, in accordance with the provisions of Article 27 of the Implementation Regulations of the Labor Contract Law of the People's Republic of China, it shall be calculated in accordance with the local minimum wage standard.
• If the employee has worked for less than 12 months, in accordance with the provisions of Article 27 of the Implementation Regulations of the Labor Contract Law of the People's Republic of China, the average wage shall be calculated based on the actual number of months the employee has worked.

2. Calculation Period of Economic Compensation

【General Provisions】

In accordance with Paragraph 1 of Article 47 of the Labor Contract Law, economic compensation shall be paid at the rate of one month's wage for each full year of service the employee has worked for the enterprise. For more than six months but less than one year, it shall be calculated as one year; for less than six months, half a month's wage shall be paid.

【Special Circumstance: Consolidated Calculation of Working Years】

In practice, there may be cases where employees enter and leave the enterprise multiple times. How to determine the working years in such cases?

3. Restrictions on the Period of Economic Compensation

In accordance with Paragraph 2 of Article 47 of the Labor Contract Law:

• If the employee's monthly wage is higher than three times the average monthly wage of employees in the local area announced by the people's government of the municipality directly under the Central Government or the city divided into districts where the enterprise is located, the period for paying economic compensation to him/her shall not exceed twelve years;

• If it does not exceed the aforementioned standard, there is no maximum limit on the period.

(II) Special Provisions

1. Calculation Standard of Economic Compensation for Directors, Supervisors and Senior Management Personnel

Regarding the wage standards for directors, supervisors and senior management personnel, the Enterprise Bankruptcy Law has special provisions. In accordance with Paragraph 3 of Article 113:

The wages of directors, supervisors and senior management personnel of a bankrupt enterprise shall be calculated in accordance with the average wage of the employees of the enterprise.

At this time, there are certain differences between the Labor Contract Law and the Enterprise Bankruptcy Law regarding the calculation of the monthly wages of directors, supervisors and senior management personnel. Considering that directors, supervisors and senior management personnel are more closely related to the enterprise's operation policies and development direction, their appointment is more stringent, the decisions they make largely determine the enterprise's development status, and they hold special positions, they should bear more responsibilities for the enterprise's bankruptcy compared with ordinary employees.

In bankruptcy proceedings, for the application of laws and regulations to determine the wages of directors, supervisors and senior management personnel, the Enterprise Bankruptcy Law is more in line with the context of enterprise bankruptcy and can more fairly settle employee claims. Therefore, the calculation of the monthly wages of directors, supervisors and senior management personnel shall prioritize the provisions of the Enterprise Bankruptcy Law, and then calculate the economic compensation based on the working years on this basis.

2. Individual Income Tax

In accordance with Item 1 of Article 5 of the Notice of the Ministry of Finance and the State Taxation Administration on Issues Concerning the Connection of Preferential Policies after the Revision of the Individual Income Tax Law (Cai Shui [2018] No. 164):

Individuals who obtain a one-time compensation income (including economic compensation, living subsidies and other subsidies issued by the enterprise) due to the termination of labor relations with the enterprise shall be exempted from individual income tax for the part within three times the amount of the average wage of employees in the local area in the previous year; the part exceeding three times the amount shall not be included in the comprehensive income of the current year, and shall be taxed separately in accordance with the comprehensive income tax rate table.

Therefore, the economic compensation obtained by employees due to the termination or ending of labor contracts caused by enterprise bankruptcy shall be subject to individual income tax directly in accordance with relevant provisions.

III. Conclusion

In bankruptcy proceedings, the calculation of economic compensation is closely related to the Labor Contract Law but also has certain differences. The administrator shall fully consider protecting employee claims and the rights and interests of all creditors to achieve fair repayment and proper handling.