As an employee in Shanghai, you may have questions about service periods, including:

- What is a service period?

- If an employee violates a service period agreement, must they pay liquidated damages? How is the amount determined?

- Under what circumstances do they not need to pay liquidated damages?

- What happens if the labor contract expires but the service period has not been completed?

- Does an agreed service period affect salary increases?

To help employers and employees better understand their rights and relevant regulations, the Ministry of Human Resources and Social Security has provided answers to these frequently asked questions.

1. What is a service period?

According to Article 22 of the Labor Contract Law, an employer may agree with an employee to stipulate a service period only if both of the following conditions are met:

(1) The employer provides special training funds for the employee; and

(2) The employer provides the employee with professional technical training.

 

2. If employees violate a service period agreement, must they pay liquidated damages? How is the amount determined?

According to relevant laws and regulations, if an employee violates a service period agreement, they shall pay liquidated damages to the employer based on their agreement.

The liquidated damages payable by the employee shall not surpass the employer's training costs. Additionally, these damages should only cover the portion of training expenses corresponding to the remaining unfulfilled service period.

Training expenses include documented training costs paid by the employer for the employee's professional technical training, travel expenses incurred during the training period, and other direct expenses incurred for the employee related to the training.

Note: General pre‑job training, such as safety production education, job skills training, routine business guidance, and corporate culture training, falls within the employer's legal obligations and is distinct from professional technical training. Therefore, they cannot be used as the basis for stipulating a service period.

There are two main situations in which liquidated damages must be paid:

(1) The employee proposes to terminate the labor contract for personal reasons.

(2) The employer lawfully terminates the employee due to misconduct as listed in Article 26 of the Regulation on the Implementation of the Employment Contract Law of the People's Republic of China, such as serious violation of the employer's rules and regulations and gross negligence causing significant damage to the employer.

In addition, the Supreme People's Court clarifies that in the case where the employer and the employee agree on a service period and the employer provides special benefits, if the employee terminates the labor contract early in violation of the agreement without meeting the conditions for unilateral termination under Article 38 of the Labor Contract Law, the employee shall bear liability for compensation.

Note: Special benefits refer to additional benefits provided by the employer to the employee beyond normal labor remuneration, such as housing subsidies, car purchase assistance, and equity incentives. Such special benefits must be explicitly linked to the service period.

3. Under what circumstances does an employee not need to pay liquidated damages?

Even if the service period has not been completed, the employee is not required to pay liquidated damages in the following circumstances:

(1) The employee can terminate the labor contract under Article 38 of the Labor Contract Law if the employer commits faults such as not paying full wages, not paying social insurance premiums legally, or engaging in illegal employment practices. This does not breach the service period agreement, and the employer is not entitled to liquidated damages.

(2) The employer lawfully terminates the labor contract in accordance with Article 40 or 41 of the Labor Contract Law, where the employee is not at fault. Such conditions include inability to perform original work after the medical treatment period expires, major changes in objective circumstances making contract performance impossible, and economic layoffs.

(3) The employer proposes, and both parties mutually agree to terminate the labor contract.

(4) The employer unlawfully terminates or ends the labor contract. According to Article 48 of the Labor Contract Law, the employer shall bear liability for unlawful termination and does not have the right to claim liquidated damages.

(5) The labor contract expires, and the employer does not agree to extend it until the service period ends, which leads to the termination of the employment relationship.

(6) The service period agreement is legally invalid. Under Article 26 of the Labor Contract Law, this may occur if no special training was actually provided, the employer cannot substantiate the claimed training expenses with valid evidence, or the agreement contains provisions that violate mandatory laws or regulations.

(7) The employer fails to perform the obligations stipulated in the service period agreement. Such failures include not providing promised special training or failing to provide working conditions or benefits as agreed. The employee may refuse to pay liquidated damages based on the principle of fairness.

 

4. What happens if the labor contract expires but the service period has not been completed?

According to Article 17 of the Regulation on the Implementation of the Employment Contract Law of the People's Republic of China, if the labor contract expires but the service period agreed between the employer and the employee has not yet ended, the labor contract shall be extended until the service period expires; if the parties have other agreements, those shall prevail.

Note: The law does not prescribe an upper limit for service periods. The term shall be determined through negotiation between both parties based on the principles of fairness and reasonableness, and is generally consistent with the cost of training, the technical content of the training, and industry practices. The parties may also agree on changes or termination before the service period ends.

 

5. Does an agreed service period affect salary increases?

According to Article 22 of the Labor Contract Law, an agreement between the employer and the employee on a service period shall not affect the increase of the employee's labor remuneration during the service period in accordance with normal wage adjustment mechanisms.

The employer cannot deny the employee’s legitimate salary increases, promotions, or benefits for reasons such as providing special training or agreeing to a service period. During that period, the employee's rights to compensation and benefits are equal to those of other employees.

The service period system aims to balance the employer's investment in developing talent with the employee's right to choose employment. A well-defined, legally compliant, and mutually agreed-upon service period, when properly documented and honored, safeguards the employer's motivation to nurture talent. It also helps prevent disputes early on and promotes stable, harmonious labor relations.

 

Disclaimer: This article is for general reference only and does not constitute legal advice. For specific cases, please consult the competent authorities or a qualified legal professional.

 

Source: Official WeChat account of the Ministry of Human Resources and Social Security (ID: "rsbwwx")

 

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