A contract was signed between Mr. Long and his work unit which stipulated a term of service of 18 years due to the high costs of training paid by the unit. Mr. Long submitted a resignation letter to the unit when less than one-third of his contract had been performed. Afterwards, the unit claimed large damages due to his breach of the labor contract. Should the claim of the company be supported by the Court? A vehement controversy over fault, liability and reasonable damages broke out between the lawyers from each party.

I. Case Playback

After graduation, Mr. Long was allocated to work for a famous automobile company, and his outstanding capacity was quickly recognized. Later, he and his staff members were offered an opportunity to participate in training at the company headquarters in Germany. Before going abroad, it was stipulated in the contract between the company and the staff members that a total of three years of training in Germany would be provided by the company, but the term of the contract between the parties would be extended to 18 years, including the three-year training period. In addition, during the performance of the revised labor contract, the employee should bear the costs of the training if he/she were to leave the company within the term of the contract. However, a definite, fixed amount of the training expense borne by the employee was not stipulated in the contract.
After two years of post-training employment, Mr. Long suddenly put forward his resignation letter despite the fact that there were still 13 years remaining on his 18-year contract Term of Service. 
In response to Mr. Long’s breach of contract, the auto company put forward a claim of 1,090,000 RMB to compensate the company for the loss.
Thinking that the level of compensation was unfair and unilateral, Mr. Long found it difficult to accept the demands of the company for repayment of such high training costs. When Mr. Long returned to China after his training, the company failed to adhere to the verbal promises for salary increases and expert-class treatment made at the time of contract signing to Mr. Long and the other engineers. Furthermore, although the employees had received training from the company, they could not be prevented from transferring to a better position, with the justification that they had received no chance to showcase their talent within the company. It was illogical for the company to claim more than 1,000,000 RMB for the training compensation which it put forward unilaterally. An individual employee could not bear such a substantial cost and, as a result, the right of employees to freely choose a job position was restricted in a disguised form.
Representatives from the company held the point of view that the repayment of the training expenses had been voluntarily signed into the contract by all parties. If any of the parties involved in this dispute had doubts about this stipulation, any party could bring forward ideas or refuse to sign the contract. If Mr. Long had a dispute about the contract at that time, he would not have been sent by the company to engage in trainings abroad. The training expenses of more than 1,000,000 RMB were composed of three years of tuition plus transportation and accommodation expenses, which had been calculated as an average from the lump sum spent on a delegation of engineers who had gone abroad together with Mr. Long. This calculation was released by company headquarters in Germany and could be confirmed with certified invoices signed by the relevant departments and notary departments. If employees who had received such expensive job training by the company are allowed to leave the position without bringing what they had learned into play, no job training would ever be provided by the company willingly. If no relevant compensation was formulated, who would bear the losses taken by the company?
Then, was such high-priced training expense compensation reasonable in this case? Should the employee pay for the expenses of training?

II. Legal Background

In this era of intense competition, competition between enterprises is often a competition for human capital and human talent. Enterprises usually do not hesitate to spend huge sums of money to introduce, train and develop talent. But this is also an era of increased labor mobility. Management-level executives go to great lengths to persuade expensive top-level talent to stay in the enterprise rather than watch their tremendous investment benefit the competition. It is this complicated situation that causes enterprises to use ‘Terms of Service’ in order to persuade top talent to stay in the company.
A ‘Term of Service’ is a period of time during which laborers promise to serve the employing unit in return for special treatment provided by the unit. Currently, the unit asks employees to serve the unit for a fixed number of years in exchange for certain special treatment and includes the Term of Service in the labor contract or the other relevant contracts. The special treatment includes, but is not limited to, housing subsidy, training for the employee’s development, employment and recruitment costs, reimbursement of large individual expenses, commercial insurance and vacation expense subsidies. These actions made by the unit are intended to persuade the employees to stay. However, if the employees do not fully meet the obligations of their Term of Service, these bonuses will be considered losses. Since stipulations of special treatment and Terms of Service will often exert great influence on an employee’s professional development, employees should carefully decide whether or not to accept the special treatment and tolerate the restrictions of the Term of Service. Once the employee prematurely violates a contract and shirks his obligations regarding the Term of Service while he has accepted special treatment provided by the unit, the unit can legally exercise the rights to require the employee to bear the liability of either the liquidated damages or the indemnification.
Employee liability for compensation to the employer is displayed in the Article 102 of the Labor Law; “if laborers dissolve labor contracts in violation of the conditions specified in this Law or violate the confidentiality stipulations in the labor contract and if such actions have caused economic losses to the unit, laborers shall be liable for damage compensation in accordance with the law.” This article has become a foundational regulation upon which an indemnification system based on the employee’s breach or termination of the labor contract has been built. Practically speaking however, it is not fully actionable, as it is relatively ambiguous and based on principles.
Term of Service was further regulated in Article 4 of the Method of Damage Compensation about the Violation of Provisions Concerned about Labor Contract in the Labor Law issued by the Ministry of Labor in 1995. The article says that liabilities and damage compensation such as expenses disbursed by the unit during recruitment and employment of the laborer, training expenses paid by the unit, the direct economic losses related to production and operation, and other indemnifications stipulated in the labor contract shall be born by the laborer if the laborer dissolves the labor contract in violation of regulations or stipulations in labor contract and such acts have caused losses to the unit.
It is clearly illustrated in the regulations that the laborer shall pay the unit damage compensation for recruitment expenses and training expenses after the laborer dissolves the labor contract illegally. Compensations levels should be calculated based upon the company’s actual losses.
Liquidated damages can be divided into general liquidated damages and special liquidated damages. The former is the legal rule under which liquidated damages can be applied to all the laborers and the units that breach the contract. The latter one is the legal rule under which liquidated damages can only be applied to laborers who violate the Term of Service agreement or illegally disclose trade secrets.
Liability for the breach of a Term of Service agreement by an employee can be found in some local regulations. Take the local legislation in Shanghai for example; it is regulated in Article 14 of the Shanghai Labor Contract Regulations that a Term of Service could be stipulated between the contractual parties if the unit contributes for the expenses of recruitment, training or other special treatment given to the laborer. It is further regulated in Article 17 that liquidated damages can be set to ensure the fulfillment of the Term of Service. Hence, the liquidated damages prescribed by this Shanghai legislation are typical of special liquidated damages. The damages penalty is sometimes higher than the amount of the actual losses incurred and the unit has the option to claim for liquidated damages reflecting the actual damages.
In this case, the special treatment was job training abroad for the individual employee. A Term of Service contract was decided between the employee and the unit. Afterwards, due to Mr. Long’s violation of Term of Service stipulation, the unit made a claim for liquidated damages penalty instead of repayment of the costs incurred.
On one hand, the Labor Contract Law follows from the indemnification principles in the Labor Law. Article 90 of the Labor Law states that “if a laborer dissolves his labor contract in violation of this Law or breaches the confidentiality obligations or non-competition stipulated in his labor contract, and if such violation or breach causes his Unit to suffer loss, the laborer will be liable for damages.”
On the other hand, the Labor Contract Law has also referenced the local legislation in Shanghai. Article 22 specifies the damages mechanism for breach of a Term of Service; “If the unit pays for specific vocational training expenses and provides the laborer with professional vocational training, it may sign an agreement with the laborer agreeing upon a term of service. If the laborer breaches the agreement on the term of service, he shall pay damages to the Unit as agreed. The amount of the damages stipulated for breach of the agreement on the term of service may not exceed the training expenses paid by the Unit. In the event of a breach, the damages paid by the laborer may not exceed the portion of the training expenses allocable to the unperformed portion of the term of service.”
But through careful observations, it is not difficult for us to find that readjustments have also been made on the basis of the Shanghai Labor Contract Regulations. First, the amount of the liquidated damage stipulated for a breach of the agreement on the Term of Service may not exceed the training expenses paid by the Unit in the Labor Contract Law. This has actually made the concepts of liquidated damages (which can theoretically exceed the cost of the breach) and damage re-compensation (which is a direct repayment for costs to the unit) equivalent. Secondly, a narrow understanding of special treatment has been clarified in the Labor Contract Law; the scope has been narrowed down only to vocational training. As a result, the scope of employees who are covered by the Term of Service regulation has dwindled.

III. Lawyer Debate

Lawyer Zhang Bing from Hui Ye Law Firm in Shanghai in support of the Company considers that the training agreement is effective.

First, the labor contract and the training agreement shall be legal and effective because both parties signed the agreement under true declaration of will before the training began. The 18-year Term of Service stipulation, which includes the training period, was agreed between the parties before the employee went to get trained in Germany. If the employee left the job position in advance, training expenses should be returned to the unit proportionately. These agreements have been fixed in writing, and the employee’s rights and obligations have been clearly regulated. If the employee considered it unreasonable, he had a right to refuse to sign this agreement in the first place and forego the training abroad provided by the company.
Second, the facts of the defendant’s violations are obvious. The employee left his job position only two years after his return from Germany while there were still thirteen years remaining on the contract. It is an obvious breach of the contract.
Third, although the cost of this training is relatively high, the employee should have had some notion about the costs of such kind of training, as the auto industry is technology-intensive. The training expenses are composed of tuition, transportation and accommodation expenses, which have been calculated as an average based on the lump sum spent on the entire delegation of engineers. More importantly, this calculation released by the headquarters in Germany could be confirmed with certified invoices bearing signatures from the relevant departments and notary departments.
Fourth, whether the cost is high or low does not affect the nature of this case. The debate lies in whether or not these training expenses should be repaid. As for this point, there is no doubt. The enterprise paid more than RMB 1,900,000 for the employee’s training, but the employee wanted to change jobs for a better position after only two years of work back in China. It is impossible for the training costs to be recovered and, consequently, the employee should bear liability for damages and compensate the unit accordingly.

The enterprise formerly breached the contract and the amount of indemnification is too high.
Lawyer Zhou Yi Xiang from Shanghai Li Lu Law Firm in support of Mr. Long

First, the reason why the employee quit his job after returning from training abroad is that the company failed to live up to its promise at the beginning. But unfortunately, this petition was not supported by the Court due to the employee’s failure to provide adequate evidence.
 Second, the amount of damages sought by the plaintiff is so high that is out of line with the national conditions in China. An obligation to notify prior to the training was not fully performed by the unit, depriving the employee of his right to full information. Though the training expenses should be re-paid by the employee due to his breach of contract, no specific amount of training expenses were agreed upon by the parties. If a definite amount of repayment was stipulated in the contract, the defendant would be able to consider whether to receive this training or not based on full information.
The amount of damages sought by the plaintiff is conspicuously high, and according to the Contract Law, litigants have the right to request the Court or the arbitration committee to appropriately reduce or increase the definite amount when it is excessively high or excessively low.
Considering the actual ability of the defendant to pay, the high liquidated damages sought by the plaintiff are unreasonable. Since the training has been provided by the unit, it should support its investment buy keeping its verbal promises to the engineers. Nevertheless, the unit failed to provide so.
According to general rules of labor law, if an employee transfers to another company in violation of the contract, at least 70% of the damages should be born by the labor-receiving company. However, requiring the employee to independently repay the training expenses of more than 1,000,000 RMB is clearly too high and does not conform to the national conditions in China.
Last but not the least, should the employee bear total liability for the 1,090,000 RMB claimed by the plaintiff in this case? It depends on the determination of fault. By the time a labor contract was signed between two parties, the employee’s right to choose to go to training or not was taken away by the unit because no clear notification as to the cost of the trainings abroad was made available. Considering that the employee did not have full knowledge when the contract was signed, the unit should bear full liability. According to Contract Law, litigants have the right to request in Court or the arbitration committee an appropriate reduction or increase if the amount of damages is excessively high or excessively low. The defendant, who had graduated and worked for only a few years, felt it was impossible to bear such high-level damage compensation and requested that it be reduced appropriately.

IV. Final Judgment

It was judged in the verdict of Jia Ding People’s Court that the contract signed between Mr. Long and the company was effective and true. Mr. Long should bear the liability of training expense damages and other relevant expenses because he resigned before the expiration of the Term of Service, violated the stipulation and breached the contract. And most importantly, Mr. Long was ordered to pay the full training expenses of RMB 1,090,000 to the company according to their requirements.

V. Expert Evaluation

The unit has the right to claim damages.
Professor Dong Baohua from East China University of Political Science and Law

The question is whether the employee should bear the training expenses of RMB 1,090,000. Two problems have to be resolved. One is whether or not the unit has a right to claim the damages; the other is whether the amount of RMB 1,090,000 is too high.
First, the problem is whether or not the unit has a right to claim damages. Realistically, there are two sorts of training provided by the unit. One is what is originally required for the job position, such as pre-work training for newly employed personnel, which is the obligation of the unit and therefore the unit does not own the right to claim damages from the employee. Such an obligation is regulated in the Labor Law so that the employer shall establish a system for vocational training, raise and use funds for vocational training in accordance with the provisions of the State, and provide laborers with vocational training in a planned way in light of the actual situation of the employer. Laborers engaged in technical work must receive pre-job training before taking their posts. The second type is called rights-related training where an employee’s professional techniques are expected to be developed. Special agreements can be signed between the laborer and the unit. It is typically characterized by a stipulation in the Terms of Service and clearly lays out the related damages.
What is the difference between rights-related training and obligation-related training? It depends on two points. One element is whether an extra sum of money has been paid for the training of an individual employee by the unit. The other element is whether a stipulation in the contract exists before training. If it is stipulated in the contract that a definite amount of money will be paid by the unit and if the employee is asked to accept the relevant Term of Service, it belongs to the rights-related training category. In this case, the employee has been sent to engage in further training abroad, which should be regarded as rights-related training. Here, the unit had the right to claim an indemnity.
Second, the problem lies in whether the requested damages of RMB 1,090,000 are excessively high. I consider it to be accurate and not too high. In this case, as adequate evidence on the actual loss of RMB 1,090,000 has been certified by the unit, the unit’s claim has legislative authority. Moreover, in case of the employee’s default, a specific damages stipulation had already been put forward with the employee at the time when the training was provided. If the employee felt that the amount of the indemnity was too high, he could have chosen not to sign this contract with the unit. In all sincerity and good faith, the employee should bear the liability for damages on the basis of the effective contract. On the other hand, the employee may not have to pay all the damages of RMB 1,090,000 by himself. Generally speaking, the unit to which he transferred and for whom he is working will help the employee to bear a part of the cost of damages.
In this case, the fact that the actions of the unit were supported by the Court is generally correct. In the current market environment, the enterprise should be encouraged to invest substantial sums with a goal of developing high quality employees. Meanwhile, legal protections should be created regarding the inputs by the company. Only if the rights-related training has been provided by unit can a contract with a Term of Service be signed. If such a contract is violated, two remedies, namely claims of compensation for damages and claims of damages for actual losses, can be invoked by the unit under the current regulations. The unit has a right to choose the higher standard criteria. In this case, together with the adequate evidence, the unit preferred to claim damages for the actual losses. Hence, the verdict was made reasonably and legitimately. Even if this case was reviewed under the new law, according to Article 22 of the Labor Contract Law, the unit’s claims would also be supported by the Court.

From LexisNexis