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Analysis on Bonus Disputes for Senior Executives

2018-02-23

I. Senior executives shall present complete evidence if they assert that the employer owes and fails to pay bonuses of a high amount. A sole evidence of the commitment letter issued by the employer  does not necessarily obtain the acceptance of the court.

  

Case 1: Mr. Zhang  was a deputy general manager of a Company A based in Shanghai, and Company A failed to timely pay employee salaries due to its capital chain rupture. Zhang claimed that Company A owed and failed to pay him a bonus amounting to RMB 3.5 million and presented to the court a commitment letter with the Company’s seal, providing that, “the Company owes Zhang after-tax bonuses for the year 2013 in an amount of RMB 3.5 million. Given the Company is required to pay project costs and other expenditures of large amounts at the end of the year, the Company is temporarily having a difficulty in its cash flow, the bonuses will be paid after the Company restored its normal cash flow”. After the examination, the court identified certain problems below: firstly, there is no seal on the place of year and month on the commitment letter, which is inconsistent with the common practice; secondly, the labor contract between the two parties does not provide annual bonus, and Zhang has not provided any internal policies of the Company regarding bonus payment; thirdly, Zhang did not present evidences in proving that the Company paid him annual bonus during his employment with the Company; fourthly, generally the annual bonus is paid to employees at the end of year provided the Company has a profit available. It would be contrary to the common sense that the Company would offer to pay a bonus of an amount as high as RMB 3.5 million where the operation is unsatisfactory and it is unable to pay salaries. As such, and considering that such letter of undertaking is the only evidence presented and is not corroborated by other valid evidence, the court did not uphold the claim by Zhang.

 

Case 2: Qu was a general manager of Company B based in Beijing. In a bonus payment dispute between Qu and Company B, Qu presented a Letter of Confirmation which confirms the covenant granted by the Company B to pay a bonus of RMB 5.5 million, on which there are affixed the common seal of the Company B and the signatures and dates of the legal representative of Company B at that time. The signatures and seals on such Letter of Confirmation are consistent with common practice, and the contents and forms thereof have no manifest errors, and Qu has given a complete representation on the process and basis upon which such Letter was formed, and such Letter was approved by the Board of Directors. In addition, Qu has presented the approvals and payment records in connection with the bonuses paid in the previous years. Though the Company claimed that the Letter of Confirmation was falsified, it neither applied for a judicial authentication , nor presented any evidence to support its assertion, hence the Court upheld the claim of Qu for the bonus.

 

[Case analysis]

The cases of the type mentioned above are rather common among disputes concerning a senior executive, and deserve special attention of employers. Seen from the above two cases, it can be concluded that the judiciary is rather prudent in the determination of the admissibility as evidence of commitment letters and/or agreements presented by any senior executive in a senior executive bonus dispute, and it will strictly examine the truthfulness and legality of such letters. Generally, the weight given to the above letters of undertaking/agreements is less than that given in a bonus payment dispute concerning normal employees, which is attributable to the following factors: firstly, due to the unique feature of the powers and duties of senior executives, they have certain power of decision-making and management on the use of the common seal of the company, therefore the above evidence is not appropriate to be admitted independently as the basis for determining the fact in the instant case; secondly, the process of determining the remuneration/bonus of a senior executive is unique in that such determination is generally subject to the approval of the Board of Directors; thirdly, whether a senior executive bonus will be available is closely related to the operation conditions of the company; fourthly, the body will be specially prudent given the sum related is relatively great and the impact of decisions is extensive; fifthly, the position and advantage of a senior executive will render the protection afforded to a senior executive as an employee in practice weaker than that afforded to a normal employee.

 

The above analysis is in the favor of employers, however employers shall not be off guard. Many senior executives will be fully prepared for the upcoming resignation under the guidance of professionals in that regard. Once their assertions are established and upheld, employers will be in a vulnerable position. Further strict regulation, management and oversight effectuated on the use of common seal in daily management will not be able to completely prevent such dispute from taking place. In the case any senior executive privately prepared such letters of undertaking by taking advantage of their positions, the employer may conduct the defense by taking the following actions, to influence the court in the direction of the litigation, and conduct a full cross-examination, and present contrary evidence, if necessary, for the purpose of giving rise to the court’s doubts on the claims:

 

1.Strictly review the documents for legality, validity and truthfulness: this can be done by defending against the form, content, source, elements thereof (such as common seals, signatures, dates ). For that purpose, the employer may provide evidence to prove that the senior executive’s working scope includes management and approval of the use of common seal, based on the actual circumstance, to lower the admissibility and acceptance on such documents as evidences from the court.

2.From the perspectives of the agreements or any other basis regarding payment of senior executive bonuses, state whether there is such agreement and the payment conditions as agreed, and whether any facts validating the non-payment of the bonus.

3.Inquiry the decisions and the payment procedure of senior executive bonuses, for instance, whether it was approved by the procedures provided in the articles of association of the Company and whether the bonus payment is consistent with the past practice regarding the bonus payment approval.

4.From the perspectives of the overall operation and payment of bonuses to all employees, for instance, whether the company’s operation is unsatisfactory, whether the profit in the current year is negative, whether bonus is paid to other employees, etc.

 

The above considerations are some approaches to the problem proposed for the reference. In reality, the above considerations shall be selected after weighing strength against weakness thereof, and the employer shall conduct effective measures based on the case-specific facts.

 

II. Employers may refuse to pay bonuses if the senior executive fails to abide by the due diligence or loyalty obligations.

 

Case 1: Mr. Song was a deputy general manager of a Company C based in Jiangsu. During his tenure in the company, he participated in the plan for setting up a new company (in a substantially same business scope with Company C) and Song set up a chat group to discuss the items of the new company proposed to be incorporated, for instance, the title, registration and capital verification, etc. Company C terminated the employment of Song and determined not to pay him the annual bonus for that year on the grounds that Song was contemplating to form a new company competing with the Company and violated the basic professional ethics and labor disciplines. Thereafter, Song filed a claim for the annual bonus in the amount of RMB 500,000, and asserted that the Company had paid annual bonus in the previous years. Upon the hearing by the court, Song is held to have conducted the actions alleged by the Company C, as such the court held that Song failed to comply with his due diligence and loyalty obligations, and the Company did not act inappropriately by refusing to pay Song the bonus, and hence dismissed the bonus claim by Song.

 

Case 2: Huang was a board secretary of Company D based in Beijing. Due to Huang’s negligence during his tenure, the investment in a project suffered a loss of RMB tens of millions. Company D deducted a bonus for two years in an amount of RMB 1.06 million on the grounds that he failed to timely report the major event during the project investment, which caused a time delay and an expansion of losses. Thereafter, Huang filed an arbitration and a lawsuit requesting the payment of such bonus. The court holds that Huang’s conduct fails to be completely compliant with the due diligence obligations owed by him, and hence he shall be liable, and dismissed the claim for bonus.

 

[Case Analysis]

A senior executive shall comply with obligations of due diligence and loyalty, which are statutory obligations imposed on senior executives. In the two cases mentioned above, Company C provided sufficient evidence proving Song’s participation in the proposed establishment of the new company, which is sufficient to establish that Song failed to abide by his due diligence obligations and breached his loyalty obligations; Company D has, based on the corporate policies and the facts in connection with the investment ascertained, proved that the negligence of Huang and damages as a result thereof have occurred, and Huang was found liable for the damages, thus it can be established that Huang failed to abide by his due diligence obligations. On the above grounds, the Company has the discretion to determine not to pay the annual bonus.

 

The author proposes the following suggestions regarding such type of disputes:

1.Though due diligence obligations and loyalty obligations are statutory obligations of senior executives and as such are not specifically required to be provided, bonuses pertains the core interests of companies, as such, in order to lower the risks of the company being subject to any litigation or arbitration in the future, it is suggested that, in the agreement between the company and senior executives on the bonus payment, the failure to abide by due diligence and loyalty obligations shall be provided as one of conditions to refusal to pay bonus.

2.In the case of any breach of due diligence or loyalty obligations by any senior executive, the employer shall timely collect and fix facts and evidences in that regard, including the facts of such breaches and consequences thereof, and collect complete evidence regarding the fact handling procedures, as the power factual evidence for the non-payment of bonuses.

3.Though in the above cases the observance of due diligence and loyalty obligations of a senior executive is related to bonus payment, but not all bonuses may be handled in that manner. The bonuses referred to in the above cases are all bonuses of incentive nature, and are different from bonuses in a nature of fixed remuneration. Therefore, it is key to determining the nature of the bonus, and it is advised that in the agreement with senior executives, it is expressly provided that such bonus is incentive in nature and is additional bonus, and the employer has the discretion to determine whether to pay and the amount of such bonus. Such provision may serve as the basis of nonpayment in the future.

 

III. Conclusions

Employers are advised not to confuse any senior executive bonus disputes with other types of employee disputes, and shall fully consider the unique features of such disputes in terms of subject, nature of bonus, bonus payment procedures, burden of proof, identification of evidence and the yardstick of trial, and shall also consider case-specific facts. In addition, given the apparent territorial variances regarding labor disputes, employers are advised to be informed of the local adjudication practices to facilitate the effective handling thereof. All the factors shall combine to facilitate a formulation of targeted defense plans, lower legal risks of the employer and avoid large-sum economic losses.

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