Are Breach Penalties Illegal For Employment Contracts?

Our topic for today is another problem that expats regularly face in China on resigning from a job. When employees try to resign, they face difficulties like clauses in their contracts stipulating that they have to give a 3-5 month notice, and that there will be a 5-digit breach penalty if the employees initiates termination of contract.

I will tell you up front, right now that it is illegal to impose breach penalties on employees just because they want to resign. The reason is very simple. The only scenario where companies can penalize their employees for leaving early is if the company has provided training for the employee and both parties agree to a fixed term contract. Let me elaborate further with 2 examples.

Let’s say that you are currently an engineer and would like to be a pilot. We all know that pilot schools are extremely expensive because to-be pilots have to do a certain amount of hours and undergo vigorous training in order to become a commercial airline pilot. In this case, an airline company would offer some students a deal, which is to pay for their education and training. Of course, this comes under a condition that the pilot has to work for the airline company for a certain amount of years. This makes sense because pilot training costs a 7-digit figure, and if everybody just finishes their pilot class and disappears right afterwards, airline companies would lose a lot of money.

Another good example is that companies are willing to pay for their employee’s MBAs or higher education in return for a fixed term of service afterwards. This is very common in the US, where law clerks and paralegals cannot afford to go to law school, which is a postgraduate degree called the Juris Doctor that takes 3 years to complete. The law firm offers to pay for their tuition in return for say, 10 years of service as a lawyer in the firm after they graduate. Companies are also willing to pay for their senior manager’s MBA course as preparation for a higher role in the company if they believe that the employee will be a future asset to the company.

Therefore, in these two scenarios, it is certainly understandable that employees should finish their contracts until the end of their term to prove their loyalty to the company. There is no free lunch on earth. If the employee leaves early, they would be required to pay back their training or tuition fees. For example, if the tuition fees are 500000 RMB, and the contract is a 10-year contract, if the employee leaves after 3 years of service, 70% of the tuition fees, which would be 350000 would have to be paid back to the company.

However, companies will use reasons like foreign employee contracts are special contracts that go under contract law, and that they have gone through a lot of trouble in providing the employee with a work permit and residence permit, and that it is extremely difficult to replace teachers during mid-semester for the education industry. These are not legally enforceable reasons, and invalid clauses even if put in contract. Just that something is written in contract doesn’t mean it is legal, so remember that the law is always above contract and breach penalties are illegal.