Is a borrowed salary scheme unlawful?

A borrowed salary scheme is in essence a "lend now, deduct later" pay model. When an employee generates no commission the company pays a fixed "guaranteed salary", for example RMB 5,000 or the minimum wage; when commission is earned the company first deducts the sums already paid, and the employee keeps only the balance. The guaranteed salary paid during a period without commission is treated as a loan. The model is widespread in sales-driven businesses such as estate agencies, design institutes and export sales.

In my view the first question is whether the employee and the company are in an employment relationship, because the Labor Law applies to the scheme only if they are. Where, for example, an estate agency has signed a service agreement with the person, or has not signed an employment contract, and the person does not clock in or out and is not subject to the company's management, no employment relationship exists. The parties may then agree that the company pays a fixed monthly sum as living expenses and later deducts it from commission, with any shortfall to be repaid by the person. Outside an employment relationship such an agreement is analysed under civil law: if it reflects the true intention of both parties, does not breach the law and is not voidable or void, it is lawful and binding, and the arrangement is in substance a loan, that is, an ordinary private lending relationship.

Where the parties are in an employment relationship, the scheme is not necessarily unlawful if the following conditions are met.

1. Voluntary agreement. The arrangement must reflect the employee's true intention, without fraud or coercion by the company, and must not be a personal loan. Money borrowed for personal reasons — a family member's illness, a home or car purchase, renovation — is a private lending dispute.

2. Minimum wage protected. The employee's actual take-home pay for the month, after the advance is deducted, must not fall below the local minimum wage. Where the employer advances the minimum wage to support the employee's living costs and later seeks to set it off, or recover it when the employee leaves, the advance is connected to the parties' employment rights and obligations and is subject to the statutory minimum wage guarantee, so it cannot be recovered as a private loan.

3. The payment must be identified clearly as an advance. Advances are commonly of two kinds: agreed wage advances and advances for official expenses. Agreed wage advances are typical of annual-salary arrangements for senior managers, paid first and settled later. In the labor contract dispute between Mr Zhou and Shanghai Feishi Management Consulting Co., Ltd., the court held, on the basis of the emails exchanged by the parties and the letter of engagement, that the claimant's pre-tax income was RMB 40,000 a month, that a further RMB 10,000 would be deducted from the year-end profit distribution, and that the claimant had confirmed that the RMB 50,000 monthly payment included an advance of RMB 10,000 to be set off when the annual bonus was settled. The court therefore calculated at RMB 40,000 the wages payable to the claimant for the period from 1 August 2018 to 14 September 2018, namely RMB 58,390.80 (see (2019) Hu 0107 Min Chu No. 4783). Advances for official expenses typically arise where an employee travels or makes purchases for the employer. Money advanced for official business rather than personal expenditure is an internal management matter and is dealt with under the company's internal financial rules. See the third of the Qingdao Intermediate People's Court's typical private lending cases for 2018, "Funds advanced to an employer by an employee for official purposes are to be handled under the employer's internal accounting rules and fall outside the scope of civil cases accepted by the courts". The basis is the Reply of the Supreme People's Court on Whether Courts Should Accept Disputes Arising from Long-Outstanding Advances Made by Employees Performing Official Duties: where an employee advances funds at the employer's direction to conduct business, the employee acts in an official capacity, no creditor-debtor relationship between equal parties arises between them, and the court should not accept the matter as a civil case; disputes over unreimbursed advances after completion of the assignment are to be handled under the employer's internal accounting rules.

Minton's suggestions.

For employers: business risk — a slack market, poor sales — must not be shifted onto employees unlawfully, and a statutory base wage must not be dressed up as a "loan" or a "living advance" and then clawed back in full when targets are missed. To do so is in substance an indirect deduction from remuneration, and it breaches Article 50 of the Labor Law (wages must not be deducted or delayed without cause) and Article 30 of the Labor Contract Law (remuneration must be paid in full and on time as agreed in the contract and as required by the State).

For employees: where an unlawful "borrowed salary" scheme is encountered — being required to sign an IOU, being pursued for repayment on leaving, or receiving less than the minimum wage after deductions — evidence should be kept. The employment contract, pay records, the written advance or loan documents, chat records and attendance records should be collected to show that the advance was in substance remuneration or a float for work expenses. The matter should be reported promptly to the local labor inspection authorities, or an application made to the labor and personnel dispute arbitration commission for the shortfall in wages and the return of unlawful deductions.