PRC Labour Law in a Nutshell: Can I Require an Employee to Pay Liquidated Damages should the Employee Breach the Labour Contract?

Can I require an employee to pay liquidated damages should the employee breach the labour contract?

Yes you can, but you must include the relevant clauses in the labour contract beforehand and the agreed liquidated damages will only apply in the following two scenarios:

• When you provide training to your employee and have incurred special training costs, but the employee breaches his or her obligations to work for you for an agreed period of time or
• When you have entered into a non-compete covenant with the employee and have paid the agreed amount of compensation to the employee on a monthly basis after the termination or expiry of the employment but the employee breaches his or her non-compete obligations

No other liquidated damages clause is permitted in a labour contract.

In terms of the amount of the liquidated damages, how much would be appropriate?

With respect to the liquidated damages due to an employee's breach of the service period obligations after training, the amount must not be more than the proportionate training costs for the remaining period the employee fails to serve.

While you can insert any amount for a breach of the non-compete obligations, in practice when a dispute occurs the arbitrator or the judge will adjust the amount upon the employee's request if the agreed amount appears to the arbitrator or judge to be unreasonable. As such, we would recommend that the amount of the liquidated damages is kept within reasonable bounds.