Changing Jobs? Getting Fired for Misconduct Could Bring an Extra 200% in Unused Annual Leave Pay | A Case from My Practice

I recently concluded a labor dispute in which I represented the company, from arbitration all the way through the appeal.

The findings were consistent at every stage: the employee had seriously violated the company’s rules, and the dismissal was lawful.

The employee’s claims for unlawful dismissal compensation, overtime pay, and various other payments, totaling hundreds of thousands of yuan, were rejected.

But there was one item on which the company kept “losing,” from arbitration through appeal: unused annual leave pay.

What puzzled me was that the company had already arranged time off against the employee’s remaining leave balance and paid the corresponding amounts. It even continued paying social insurance and housing provident fund contributions during that time. Yet it was still ordered to pay a shortfall in unused annual leave pay.

The time off was arranged and the money paid. Why was the leave still “unused”?

* This article expresses the author’s personal views only and does not constitute legal advice.

1. The Company Had Done What It Could

The misconduct was straightforward: the familiar situation of consecutive absences without approval, meeting the employee handbook’s threshold for serious misconduct. The company issued a termination notice on that basis. Its procedures, evidence, and internal rules withstood scrutiny at all three stages.

It was almost Chinese New Year. The employee still had annual leave carried over from the previous year and compensatory time off, totaling nearly 200 hours.

When handling the dismissal, the company also made arrangements for this balance. The employee could take time off until early March, receive the corresponding pay, and then return to complete the formalities; alternatively, the employee could choose an immediate cash settlement.

The employee did not reply, so the first option applied by default.

The company subsequently paid the amounts corresponding to the annual leave and compensatory time off. It even included wages for the Chinese New Year holiday and continued social insurance and housing provident fund contributions through March.

From the company’s perspective, the employee had committed serious misconduct, the dismissal was lawful, and the remaining leave and benefits had all been dealt with, without delay or underpayment. The company did not even pursue losses caused by the unauthorized absences. It had done what it could.

The employee saw things differently.

The employee continued to claim unused annual leave pay, demanding the additional 200% component.

The arbitration tribunal upheld the claim, the trial court upheld it, and the appellate court affirmed.

2. Laws and Regulations: Leave the Rest to Fate

Article 10 of the Measures for the Implementation of Paid Annual Leave for Enterprise Employees provides that, where an employer does not arrange annual leave with the employee’s consent, or arranges fewer days than the employee is entitled to, it must pay 300% of the employee’s daily wage for the unused portion, including the wages for normal working time.

In other words, where normal wages have already been paid, an additional 200% is generally payable.

In this case, the decisions acknowledged and deducted the 100% component the company had already paid.

The arbitration tribunal calculated the amount using the monthly wage base and ordered the company to pay the remainder.

At trial, the court also included the year-end bonus in average wages, adjusting the calculation base. The appellate court ultimately affirmed.

The amount was modest, far below the employee’s other rejected claims.

But as counsel for the company, this particular item has stayed with me.

If the company had simply dismissed the employee without arranging any time off or settling the annual leave balance, an order to pay would have been unremarkable.

Here, however, the company specifically arranged time off and bore the costs for that period, including additional social insurance and housing provident fund contributions. The purpose was to protect the employee’s interests as far as possible within the legal framework.

Throughout the proceedings, I repeatedly raised this question: Why could this period of paid time off not count as fulfillment of the company’s annual leave obligations?

Yet from arbitration through appeal, the decisions continued to treat this time as unused annual leave.

None of the three stages analyzed how the time off arranged by the company should be assessed in relation to unused annual leave pay.

The practical result was that everything the company had already done was still insufficient to discharge its obligation to pay the shortfall.

3. The Employee Commits Misconduct, and the Company Pays for the Leave Left Over

Annual leave is an employee entitlement. That is undisputed, and I firmly believe every employee should enjoy their paid annual leave.

But a labor dispute cannot focus solely on the employee’s remaining entitlements while brushing aside why the employment relationship ended abruptly and what arrangements the company actually made.

When an employee commits serious misconduct, a company that chooses to continue the employment relationship can still arrange annual leave. If it chooses lawful dismissal, however, the leave that could otherwise have been scheduled must be dealt with on departure.

The current annual leave rules provide that companies may coordinate and schedule annual leave according to production and operational needs, while considering employees’ wishes.

They must consider those wishes, but the key remains coordinating and scheduling.

Numerous cases and articles published by courts support employers’ authority to schedule annual leave.

The difficulty is that the current rules do not list serious misconduct as a reason for losing annual leave entitlements—which generally should not be affected anyway—and say nothing specifically about how unused annual leave should be handled when an employee is dismissed for serious misconduct.

Drawing on the legislation, court decisions, and court articles, I advised the company to arrange the leave lawfully while protecting the employee’s interests as far as possible.

The outcome, of course, is set out above.

I suppose that, since all three stages found arranging annual leave after the employee’s misconduct to be unlawful, the arrangement must indeed have been unlawful.

But there should at least be room for further discussion: the employee’s own conduct brought the employment relationship to an abrupt end, and the company still arranged time off and paid for the remaining leave. How much weight should those facts carry?

If doing all of this produces much the same result as simply paying out unused annual leave, why should an employer go to the trouble?

Continuing social insurance and housing provident fund contributions costs real money. Managing a transition period also takes resources. The company does more than its statutory obligations require, but once litigation begins, those expenses do not automatically offset other items: the extra contributions need not be refunded, the employee keeps the Chinese New Year holiday wages, and time off was actually provided—yet the company is still treated as having “unlawfully arranged annual leave.”

4. Could This Become an “Exit Strategy”?

Of course, this article is not intended as a complaint. Given the circumstances at this point in time, I can more or less understand why the decisions went this way.

Still, the case made me think about another question.

Suppose a long-serving employee is planning to leave for another job and has 10 days of unused annual leave.

If the employee gives the usual month’s notice, the company can arrange for those days to be taken during the remaining employment period. The employee takes paid time off, then leaves on good terms.

But if the employee instead seriously violates the handbook—without going so far as to incur liability for damages—and the company dismisses them immediately, the company may have to pay for unused annual leave.

An additional 200% on top of normal wages means that 10 days of leave produces 20 days’ wages. Using the monthly calculation standard of 21.75 paid days, that is close to a month’s salary.

Resigning would bring no statutory severance, yet unused annual leave could deliver something close to an extra month’s pay—the “+1.”

This puts employers in an uncomfortable position. An employee openly commits serious, deliberate misconduct, calling for immediate action, but that may trigger an additional 200% in unused annual leave pay. Arranging the leave before completing the departure means continuing the employment relationship and paying social insurance, housing provident fund contributions, and so on—with no certainty that a court will accept the arrangement in the end. In this case, at least, it did not.

For the company, the most “cost-effective” approach might actually be to “coordinate and schedule” all of an employee’s leave as soon as the balance renews.

“Better that both lose than only one wins.”

I personally recommend neither approach. People, however, often place greater weight on their own interests.

If someone already planning to leave works out that an orderly resignation will mean taking their remaining leave, while getting themselves dismissed immediately could bring an extra payment, which will they choose?

When some long-serving employees check their leave balances and then open the employee handbook, will their question become:

Which rule can I break to get fired immediately?