Chinese labor law is primarily governed by the Labor Law, Labor Contract Law, and other supporting regulations that regulates employment relationships. Unlike the U.S. ‘at-will’ employment model, China mandates written labor contracts, restricts termination to statutory grounds, requires severance pay for many types of dismissals, enforces non-compete clauses, and guarantees paid leave and open-ended contracts (indefinite-term contracts that can only be terminated for lawful reasons). While U.S. employment law emphasizes employer flexibility, China’s framework is more formal and worker-protective.
Historically, Chinese labor law favored employees. However, recent economic and geopolitical challenges have prompted reforms – including the Supreme People’s Court’s (“SPC”) 2025 Judicial Interpretation on Labor Dispute Cases (II) (“Interpretation II”) – to grant employers greater operational flexibility while preserving core worker rights. As SPC officials emphasized during the interpretation’s unveiling, Interpretation II seeks to “balance protections for both workers and employers, safeguarding employee rights while supporting business sustainability and orderly operations.” This reflects China’s effort to adapt labor protections to the evolving economic realities.
Promulgated on July 31, 2025, and effective from September 1, 2025, Interpretation II recalibrates employer-employee dynamics without undermining any fundamental worker protections. For multinationals operating in China, understanding these adjustments is essential for compliance and risk management. Here are some of the interpretation’s key changes:
1. Managing Employment Across Affiliated Entities
Multinational corporations operating multiple entities in China encounter frequent challenges when managing employees who work across affiliated companies, whether through temporary assignments, permanent transfers, or dual roles – such as managers overseeing business units in two subsidiaries. Interpretation II provides critical guidance on these arrangements. Where a written employment contract exists, courts will uphold its terms as definitive. However, when no written contract is in place, employment relationships will be assessed based on actual management practices, including work hours, assigned responsibilities, wage payment structures, and social insurance contributions. Importantly, affiliated companies may be held jointly liable for wage and benefit obligations unless the agreements allocate responsibilities clearly.
To minimize legal risks, companies should formalize cross-entity employment arrangements through written agreements, such as tripartite contracts, secondments or service agreements. For temporary assignments, these documents should state that the original employer remains responsible for wages and benefits, while the host entity covers the relevant expenses and additional allowances. Permanent transfers require the termination of the original employment contract and the establishment of a new one to properly address key legal considerations, including severance pay obligations and the continuity of service years. Proper documentation ensures compliance while reducing potential disputes under China’s evolving labor framework.
2. Foreign Employees’ Right to Confirm Employment
Interpretation II grants foreign employees the right to seek judicial confirmation of employment relationships with their employers in China if they hold permanent residency, possess valid Chinese work permits, or comply with other statutory procedures. This provision reinforces legal protections for foreign talent while ensuring that Chinese employers comply with labor standards and requirements.
3. Extension of Fixed-Term Contracts and Eligibility for Open-Ended Contracts
China’s Labor Contract Law establishes employees’ right to demand “open-ended” contracts (or indefinite-term contracts – which provide permanent employment status terminable only for legally specified reasons) after completing two consecutive fixed-term contracts or meeting other statutory requirements.
In practice, some employers have exploited contractual extensions to avoid creating more secure employment relationships. Interpretation II addresses this evasive tactic by clarifying that multiple extensions accumulating to one year or more will be treated as equivalent to two fixed-term contracts, thereby activating an employee’s right to demand an open-ended contract.
Interpretation II also implicitly ends a Shanghai practice whereby an employee’s right to demand an open-term contract is triggered only when the employer makes an offer to renew a contract after the completion of two fixed-term contracts. Instead, Shanghai employers will need to comply with the rest of China whereby an employee has the right to demand an open-term contract at the end of the second term. Across China, employers effectively now have only one chance to decide whether to renew an expiring employment contract.
4. Exceptions to Double-Wage Penalties for the Failure to Sign Written Contracts
Under Chinese labor law, employers are required to establish written employment contracts with all full-time employees. Failure to comply with this requirement after one month of employment exposed employers to double-wage penalties – they were liable for twice the employee’s wages for the period during which no written contract was in place. Interpretation II introduces limited exceptions to this requirement.
Employers can avoid double-wage penalties if they can demonstrate that the failure to execute a written contract was due to force majeure events, the employee’s own misconduct or refusal to sign, or specific statutory exemptions – such as automatic contract renewals pending labor disputes or arbitration proceedings. This adjustment reflects a more balanced approach, aligning penalties with fault-based principles rather than imposing strict liability regardless of circumstances.
5. Non-Compete Clauses: Stricter Validity Tests
Chinese law allows post-employment non-compete agreements for a maximum of two years, contingent upon payment of legally mandated compensation – a notable contrast to certain U.S. jurisdictions where such agreements may be unenforceable. The SPC has further refined non-compete regulations, which serve as critical tools for protecting trade secrets. Some of the key developments are that non-compete clauses will be deemed void if the employee never had access to confidential information, and restrictions must be proportionate to the sensitivity of the protected information. Overly broad geographic scope, excessive coverage, or unnecessarily prolonged durations that exceed what is reasonably necessary to safeguard legitimate business interests risk partial or complete invalidation.
A significant clarification is that non-compete obligations during employment are enforceable without separate compensation, as they form part of the employee’s inherent duty of loyalty. However, for post-employment restrictions, compensation remains mandatory. Employers may pursue compensation and liquidated damages for breaches occurring in either phase. This dual-phase framework strengthens intellectual property protections while requiring careful drafting to prevent abusive or unenforceable terms.
6. Defining When Contracts ‘Cannot Be Performed’
In wrongful termination disputes, employees may pursue one of two remedies: (1) compensation equal to twice the statutory severance amount (calculated as one month’s salary per year of service, subject to legal caps), or (2) reinstatement of the employment contract (specific performance). Prior to the new Interpretation, courts often applied inconsistent standards when evaluating reinstatement claims.
The SPC has now established clear exceptions where reinstatement will not be granted, including cases where the employment contract expired during litigation proceedings; the employee reached retirement age; the employer entered bankruptcy or liquidation; or the employee obtained new employment that would materially conflict with their ability to resume duties at the original workplace. These criteria provide predictability for employers confronting reinstatement demands while maintaining employee protections under the law.
7. Nullification of Social Insurance Waivers
Interpretation II invalidates private agreements to waive social insurance contributions, eliminating what was previously a common but legally questionable practice. Employees retain the right to resign and claim statutory severance pay if employers fail to meet their social insurance obligations. This underscores the mandatory nature of China’s social security system and removes any ambiguity regarding employer compliance requirements.
8. Mandatory Health Examinations for Workers Exposed to Occupational Disease and Exceptions
Interpretation II strengthens the safeguards for employees working in occupational disease hazard environments by making pre-termination health examinations a mandatory requirement for lawful dismissal. Courts will support reinstatement claims when employers fail to conduct these examinations, underscoring China’s commitment to protecting workers’ health and safety rights. However, the Interpretation balances these protections with two key employer safeguards: (1) if the employer completes the required health examination before the conclusion of first-instance court proceedings and no occupational disease is found, or (2) if the employee refuses the examination without valid justification. These exceptions maintain the integrity of worker protections while providing reasonable compliance flexibility for employers and prevent any potential misuse of the reinstatement remedy.
Key Considerations for Multinational Corporations Operating in China
The recent judicial Interpretation underscores China’s ongoing efforts to balance robust worker protections with necessary operational flexibility for enterprises. Multinational corporations should consider implementing the following measures to ensure compliance and minimize legal exposure:
- Conduct comprehensive audits of cross-entity employment arrangements to verify clear contractual terms and eliminate potential ambiguities.
- Establish standardized contract renewal procedures to avoid the unintended creation of indefinite employment relationships.
- Review and customize non-compete provisions to ensure they correspond to genuine confidentiality needs and competitive risks.
- Implement rigorous termination protocols that comply with statutory grounds and account for circumstances where contract reinstatement is precluded under the Interpretation.
- Immediately discontinue any non-compliant social insurance arrangements to prevent disputes.
- Enforce mandatory health examinations for workers in occupational hazard environments to fulfill regulatory obligations.
As these legal reforms take effect, proactive legal assessments and timely policy adjustments will be essential for maintaining alignment with China’s developing labor regulations. By prioritizing these actions, multinational corporations can manage their regulatory requirements while preserving their business flexibility.
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Jeffrey Wilson, JunHe
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