On August 1, 2025, the Supreme People’s Court issued the “Interpretation on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (II)” (hereinafter referred to as “Interpretation II”), which came into force on September 1 of the same year. This significant judicial interpretation directly affects several aspects of employment management and thus deserves high attention from employers.
This article aims to interpret the key provisions of the Interpretation II and the new adjudication rules established thereby, assisting employers in optimizing their employment management systems and achieving timely compliance with the requirements of the new regulations.
1. Affiliated Enterprises Shall Jointly Bear Liability for Payment of Labor Remuneration in Cases of Mixed Employment Without Written Labor Contracts
Prevalent Shared Employment and Disputes
In practice, the shared employment of employees among affiliated companies is prevalent. This has long given rise to disputes regarding the identification of labor relations and the determination of which entity bears the obligation to pay remuneration.
Interpretation II on Shared Employment
Article 3 of the Interpretation II clarifies that if an employee works for multiple affiliated entities either alternately or concurrently, the determination of labor relationship shall first be based on whether there is a written labor contract:
- If a written labor contract has been signed, the labor relationship shall be confirmed in accordance with the labor contract;
- If there is no written labor contract, the court shall determine the labor relationship by comprehensively examining factors such as the entity exercising management over the employee, working hours, job content, the payer of remuneration, and the contributor of social insurance.
The court shall also uphold the employee’s claim that all affiliated entities shall jointly assume liability for the payment of wages and other benefits. However, if the affiliated entities have entered into a valid agreement on the employee’s remuneration and benefits with the employee’s consent, such agreement shall prevail.
2. Foreign Enterprises Legally Included as Participants in Labor Dispute Litigation
Current Status of Representative Offices
Under existing laws permanent representative offices of foreign entities are not recognized as eligible employers. They may only hire staff through foreign affairs service providers via labor dispatch arrangements.
In legal practice, while representative offices are often accepted as valid parties in lawsuits and share liability with dispatch agencies, some lack sufficient assets to settle debts. This leads parties to frequently seek to involve the parent foreign enterprise in the liability. However, inconsistent rulings across different courts have created uncertainty in the application of the law.
Interpretation II on Representative Offices
Article 5 of the Interpretation II clarifies that representative offices have the status to participate in lawsuits. It also grants parties the right to apply to include the foreign enterprise as a litigation participant. Specifically, if a representative office has no independent property or has been dissolved, the parties may apply for the foreign enterprise represented by such representative office to bear legal liability. This provision resolves the ambiguity in judicial practice and provides clearer legal guidance for labor dispute cases involving foreign enterprise representative offices.
3. No Double Wages Paid During the Period Deemed as Having Concluded an Open-ended Labor Contract
Current Legal Provisions
The Labor Contract Law stipulates that if an employer fails to conclude a written labor contract with the employee for more than one month but less than one year from the date of employment, it shall pay the worker double wages on a monthly basis.
Furthermore, if an employer fails to conclude a written labor contract with the employee for one year from the date of employment, it shall be deemed that the employer has concluded an open-ended labor contract with the employee from the day after the expiration of one year from the date of employment.
Clear Views in Interpretation II
Interpretation II explicitly states that double wages for failure to sign a labor contract are generally supported for a maximum of 11 months, andno double wages need to be paid during the “deemed open-ended” period after one year.
Double wages are punitive compensation rather than labor remuneration, and their application shall be based on the principle of fault liability. Interpretation II clearly points out that if an employer can prove that the failure to conclude a written labor contract is due to the employee’s intentional act or gross negligence, and the employer has indeed fulfilled its obligation of good-faith negotiation, the employer may be exempted from liability.
4. Clarifying the Special Circumstances of “Consecutively Concluding Two Fixed-Term Labor Contracts”
Employee’s Right to Open-Ended Contracts
Under the Labor Contract Law, if statutory requirements are satisfied, an employee shall be entitled to request the employer to enter into an open-ended labor contract once two consecutive fixed-term labor contracts have been concluded.
In judicial practice, however, due to different interpretations of what constitutes “consecutively concluding two fixed-term labor contracts,” employers have adopted various tactics to evade their statutory obligation to enter into open-ended labor contracts.
For instance, some enterprises, seeking to avoid concluding open-ended labor contracts with employees, arrange for affiliated entities to alternately enter into labor contracts with employees. This practice is intended to prevent a single employer from meeting the condition of having concluded two consecutive fixed-term labor contracts with the same employee. While existing laws stipulate that in such cases, the employee’s working years with the original employer should be calculated into their tenure with the new employer, there remains no clear rule on whether the “number of labor contracts concluded should be calculated cumulatively.”
Additionally, some companies, aiming to streamline management, often agree with employees on terms like “automatic renewal of the labor contract upon expiration” or “extension of the contract term.” In practice, there is frequent debate over whether such arrangements qualify as “consecutively entering into two fixed-term labor contracts.”
Interpretation II on “Consecutive Fixed-Term Contracts”
Article 10 of the Interpretation II clarifies the above controversial situations by explicitly stipulating that the provision of “consecutively concluding two fixed-term labor contracts” shall apply in the following scenarios:
i. The agreed extension of the labor contract term accumulates to one year or more, and the extended term has expired.
Prior to the issuance of Interpretation II, some regions treated any extension of the labor contract term as the employer having consecutively concluded two labor contracts with the employee. Other regions, however, formulated provisions on whether such extensions would be deemed as concluding two fixed-term labor contracts based on the extended period after the modification of the labor contract. For example, in regions such as Jiangsu, it was stipulated that if the accumulated extension of the labor contract term between the employer and the employee exceeds six months, it shall be deemed that both parties have consecutively concluded two fixed-term labor contracts. Article 10 of Interpretation II adopts the perspective of regions like Jiangsu but extends the period for “being deemed as consecutively concluding labor contracts” to “one year,” which is more lenient to employers compared to the provisions in Jiangsu and other regions.
ii. The employer and the employee have agreed that the labor contract will automatically renew upon expiration, and the renewal term has expired.
In practice, some enterprises stipulate that the labor contract will automatically renew upon expiration to reduce the risk of “double wages” arising from forgetting to renew the written contract after its expiration. However, this approach may infringe upon the employee’s right to request the conclusion of an open-ended labor contract. Article 10 of Interpretation II clearly stipulates that if the labor contract term is automatically renewed upon expiration, after the expiration of the renewal term, it shall be deemed that both parties have consecutively concluded two fixed-term labor contracts.
iii. Employees continue to work at the original workplace and position for reasons not attributable to the employee, the employer changes the subject concluding the labor contract but continues to exercise labor management over the employee, and the contract term has expired.
For some enterprises operating in a group manner that may establish and operate multiple entities simultaneously, they may utilize different entities to renew labor contracts with employees alternately, thereby evading the obligation to conclude open-ended labor contracts with employees. In such cases, Interpretation II clearly stipulates that if “the employer changes the subject concluding the labor contract,” the number of concluded labor contracts shall be calculated cumulatively, which further protects the legitimate rights and interests of employees.
iv. Re-signing a labor contract in violation of the principle of good faith, and the term has expired.
5. Validity of Non-Compete Agreements During Employment
Abuse of Non-Compete Clauses and Related Disputes
The purpose of establishing non-compete clauses is to protect employers’ trade secrets. However, in practice, some employers abuse non-compete restrictions by imposing unreasonable non-compete obligations, through signed non-compete clauses, on employees who have no obligation to maintain confidentiality. For example, concluding non-compete agreements with grassroots employees such as security guards and cleaners. This restricts employees’ freedom of employment to a certain extent, which is largely inconsistent with the intended purpose of the non-compete system.
In addition, among the current laws and regulations related to non-compete restrictions, most provisions focus on employees after the termination or dissolution of labor contracts, with no detailed regulations on non-compete obligations during employment. This has led to disputes over in-service non-compete clauses, such as whether signed in-service non-compete clauses are valid, and whether employers are required to pay economic compensation to employees for such in-service clauses.
Abuse of Non-Compete Clauses and Related Disputes
The purpose of establishing non-compete clauses is to protect employers’ trade secrets. However, in practice, some employers abuse non-compete restrictions by imposing unreasonable non-compete obligations, through signed non-compete clauses, on employees who have no obligation to maintain confidentiality. For example, concluding non-compete agreements with grassroots employees such as security guards and cleaners. This restricts employees’ freedom of employment to a certain extent, which is largely inconsistent with the intended purpose of the non-compete system.
In addition, among the current laws and regulations related to non-compete restrictions, most provisions focus on employees after the termination or dissolution of labor contracts, with no detailed regulations on non-compete obligations during employment. This has led to disputes over in-service non-compete clauses, such as whether signed in-service non-compete clauses are valid, and whether employers are required to pay economic compensation to employees for such in-service clauses.
Interpretation II imposes restrictions on the application of non-compete restrictions
Drawing on the summary of trial experiences in recent years, Interpretation II has explicitly regulated the application of non-compete clauses:
Article 13 of Interpretation II
If an employee requests the people’s court to confirm that a non-compete clause is not effective on the grounds that the employee is not aware of or has no access to the employer’s trade secrets and confidentiality matters related to intellectual property, the people’s court shall support such request in accordance with the law.
If the scope, territory, duration, and other contents stipulated in a non-compete clause are incompatible with the trade secrets and confidentiality matters related to intellectual property that the employee is aware of or has access to, and the employee requests the people’s court to confirm that the excessively unreasonable part of the non-compete clause is invalid, the people’s court shall support such request in accordance with the law.
Notably, Article 13 of Interpretation II stipulates that for employees who are not aware of or have no access to the employer’s trade secrets and confidentiality matters related to intellectual property, the non-compete clauses they signed shall be deemed “not effective” rather than “invalid.” This means that if the employee does not claim the invalidity of the non-compete clause to the court, the clause may remain effective, and the employee may request the employer to pay economic compensation in accordance with the non-compete agreement. However, specific circumstances shall be subject to subsequent judicial practice results.
Article 14 of Interpretation II
If an employer concludes an in-service non-compete clause with senior managers, senior technical personnel, or other personnel obligated to maintain confidentiality, and the employee requests the people’s court to confirm the non-compete clause is invalid on the grounds that in-service non-compete clauses cannot be agreed upon or that no economic compensation has been paid, the people’s court shall not support such request.
Article 14 of Interpretation II addresses the aforementioned controversial issues by affirming the validity of in-service non-compete clauses. It also indicates that since employees already enjoy employment opportunities and salary benefits from the employer during their tenure, it is inappropriate to require the employer to pay non-compete economic compensation.
6. Illegally dismissed employees may demand reinstatement, with wages paid during arbitration and litigation.
Previous Judicial Disputes
In previous judicial practice, there was no uniform standard for adjudicating employees’ claims for resuming labor relations after employers illegally terminated labor contracts.
For example, judicial cases in Jiangsu Province show that if an employer can provide evidence proving that the trust foundation with the employee has broken down and the employer explicitly refuses to resume the labor relationship, the court will generally not order the employer to continue performing the labor contract.
However, arbitration institutions and courts in Beijing hold different views. The judicial standards in Beijing for determining “impossibility of continued performance” are relatively strict. It is rather difficult for employers to obtain support when they cite only the breakdown of trust or the replacement of the original position as grounds for being unable to continue performing the contract.
Meanwhile, there were differences in provisions across regions regarding the wage payment standards and liability bearing during the labor recovery period. Specifically, there was a certain controversy over whether employees’ wages during the period of resuming labor relations should be paid according to the basic wage or the minimum wage.
Some regions hold that wages should be paid in full according to the amount when the employee was normally working, while others argue that it should be determined comprehensively by considering factors such as whether the employee actually provided labor and whether the employer was at fault. As a result, similar cases may lead to completely different adjudication results in different regions.
Clarifications in Interpretation II
Interpretation II clearly lists six circumstances under which a labor contract “cannot continue to be performed,” including but not limited to the employer declaring bankruptcy, the employer dissolving, and the employee retiring. Paragraph 6 of the interpretation clearly states that the “inability to continue performing” a labor contract must be based on other “objective” circumstances rather than subjective judgments.
Therefore, in previous judicial practice, reasons such as the loss of a foundation of trust between the employer and the employee can no longer be used alone as a basis for determining that the labor contract cannot continue to be performed.
We can further understand that, in practice, if the employer has already hired a new employee for the position during the arbitration process, the arbitral tribunal may not support the reinstatement of the labor relationship and may instead encourage negotiation on compensation. This is particularly applicable when the termination was based on organizational restructuring and the responsibilities of the new employee differ significantly from those of the original position. However, if the new employee’s duties remain substantially the same, the employer may be deemed to have acted in bad faith, and the ruling is likely to favor the employee’s claim for reinstatement.
In addition, Interpretation II has stipulated the wage payment standards and liability bearing during the period of disputes over the termination or dissolution of labor contracts:
- Wages during the dispute period shall be calculated according to the wage standard when the employee provides normal labor.
If both the employer and the employee are at fault for the termination or dissolution of the labor contract, each party shall bear corresponding responsibilities.
7. Agreements and Undertakings on Exempting Employers from Social Insurance Contributions are Invalid
Article 19 of Interpretation II invalidates any agreement or undertaking between employers and employees to forgo social insurance. When an employer fails to pay such insurance lawfully, employees may terminate the labor contract under the Labor Contract Law and claim economic compensation. The court shall uphold the employees’ claims.
This provision first explicitly invalidates all agreements or undertakings to refrain from paying social insurance premiums. If an employee claims that the employer should make supplementary social insurance contributions, the employer shall do so accordingly. It further stipulates that after making such supplementary contributions, the employer may request the employee to return any social insurance compensation that may have been paid.
Notably, this provision supports employees’ claims for economic compensation arising from forced resignation on the grounds of the employer’s failure to pay social insurance, even if the employee had previously executed a waiver regarding such contributions. Prior to this, there were discrepancies in judicial practice across regions: some regions held that if an employee, after executing a waiver of the employer’s obligation to pay social insurance premiums, subsequently claimed forced termination of the labor contract on the grounds of non-payment, such conduct would violate the principle of good faith, and the court would not support the claim for economic compensation.
Other regions, however, held the opposite view, maintaining that the waiver of social insurance contributions violates mandatory legal provisions and is thus invalid, and that employees are still entitled to claim economic compensation for forced termination of the labor contract on the grounds of non-payment of social insurance.
Now, Article 19 of Interpretation II clearly states that if an employer, with the employee’s consent via a waiver, fails to pay social insurance, the employee is entitled to claim forced termination of the labor contract and request economic compensation on this ground, regardless of factors such as the subjective intent or fault of both parties.
8. Abolition of Provisions Treating Employments of Pension Recipients as Service Relations
Interpretation II has abolished the provision in Interpretation I that “if an employer and a recruited retired person have a labor dispute and file a lawsuit, the people’s court shall handle it as a service relationship.” Specifically, the possibility of establishing a labor relationship (as opposed to a pure service relationship)concerning certain areas between an employer and a person who has already enjoyed retirement benefits is not excluded.
The relevant provisions on employers recruiting retired employees shall be subject to the Interim Provisions on the Protection of Basic Rights and Interests of Over-aged Workers which are to be promulgated soon. These provisions stipulate that employers recruiting people who have enjoyed retirement benefits shall enter into a written employment agreement with them. To a certain extent, such a written employment agreement is a document that falls between a labor contract and a service contract, creating a mixture of positions as an employee and as a service provider.
Employers shall ensure that such employees are entitled to basic rights and interests including labor remuneration, rest and leave, labor safety and health, and work-related injury protection. It is our understanding that these aspects should be handled by reference to the requirements of the Labor Contract Law. However, with regard to matters such as the term, modification, and termination of the service agreement, the provisions are relatively similar to the handling methods applicable to service contracts governing a pure service relationship.
For employers that re-employ or recruit people who have already enjoyed retirement benefits, it is necessary to continue paying attention to the subsequent issuance of relevant regulations. We will also provide a timely update on the topic for your information.
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Dr. Gerald Neumann
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