As an important corporate governance device, debt reduces agency problems among owners, managers, and employees, thus improves employee productivity. In the meanwhile, debt may increase bankrupt risk, decrease human capital investment and employee productivity. Using a panel of the listed manufacturing companies in China spanning from 1999-2014, we find that debt reduces employee productivity. The subsample analysis finds that, ceteris paribus, financial distress strengthens the negative effect of debt on employee productivity, and the negative effect is more significant in companies that are more dependent on human capital and in companies located in areas with better outside employment environments. Our paper suggests that the agency cost of debt will induce underinvestment of human capital, which depress employee productivity. Our research provides empirical evidences for the “Deleveraging” policy in China