On July 31, 2025, the Supreme People's Court of China issued the "Interpretation on the Application of Law in the Trial of Labor Dispute Cases (II)" ("the Interpretation"), which will come into effect on September 1, 2025. This newsletter outlines some of the key provisions of the Interpretation for reference purposes only.
When employees work for affiliated entities alternately or concurrently, rights and obligations should be clearly defined
In practice, it is not uncommon for employees to be transferred between affiliated companies or to hold concurrent positions at affiliated companies. For example, due to organizational restructuring or operational needs, an employee may be temporarily assigned or permanently transferred from one company to another affiliated entity; or an employee may hold concurrent positions at two affiliated companies, such as serving as the general manager of two affiliated companies.
According to the Interpretation, when an employee is alternately or simultaneously employed by affiliated entities, and the employee seeks to confirm the employment relationship, the courts shall handle the matter as follows:
- If a written employment contract has been concluded, the employment relationship shall be determined in accordance with the employment contract;
- If no written employment contract has been concluded, the employment relationship shall be determined based on the labor management practices, taking into account factors such as working hours, job responsibilities, payment of wages, and contribution to social insurance. In such cases, if the three parties have no relevant agreement, the employee may request the affiliated companies to jointly bear the responsibility for paying wages, benefits, and other entitlements.
To ensure clear legal relationships, optimize human resources management, and reduce potential costs (such as avoiding double labor protection and social insurance), employers may consider entering into corresponding tripartite agreements with employees and affiliated companies based on the actual needs of individual cases. For short-term secondments or holding concurrent positions, the tripartite agreement may stipulate that during such deployment, the original employment contract and employment relationship between the employee and the employer remain in effect, and the employer continues to be responsible for paying wages and contributing to social insurance and housing provident funds. Meanwhile, the affiliated company will not become the employer of the employee and shall only pay the employee the corresponding allowance. The tripartite agreement should also clearly stipulate work management, job responsibilities, working hours, and the rules and discipline that the employee must comply with during his/her deployment. If an employee is to be permanently transferred from the original employer to an affiliated company, it may be advisable to specify in the tripartite agreement the termination of the original employment relationship with the original employer and the establishment of a new employment relationship with the affiliated company. In addition, the tripartite agreement should also address issues such as whether the original employer is required to pay statutory severance to the employee, and whether the employee's years of service with the original employer will be recognized by the affiliated company as the new employer.
Agreements between employers and employees regarding non-payment of social insurance are null and void
Participating in statutory social insurance scheme in accordance with the law is a legal obligation of both employers and employees in China. However, in practice, it is not uncommon that employers and employees reach agreements not to make social insurance contributions and instead provide employees with subsidies or other forms of compensation. The Interpretation now explicitly stipulates that any agreement between an employer and an employee, or any commitment made by an employee to the employer, stating that social insurance contributions do not have to be paid, is null and void due to violation of the law. If an employer fails to make social insurance contributions in accordance with the law, the employee may immediately terminate the employment contract, and the employer shall pay the statutory severance. After the employer has paid the outstanding social insurance contributions in accordance with the requirements of the competent administrative authority, it may request the employee to return the compensation paid to the employee for the non-payment of social insurance contributions as agreed between the parties.
Given that housing provident funds contributions are also legally mandated, the provisions of the Interpretation should also apply to agreements between employers and employees regarding the non-payment or underpayment of housing provident fund contributions. Such agreements also violate the mandatory provisions of laws and regulations and should be deemed invalid as well.
Excessively extending the term of an employment contract may lead to an indefinite-term employment contract
According to Article 14 of the Labor Contract Law, after two consecutive fixed-term employment contracts have been concluded, and in the absence of any specific statutory circumstances, the employer shall not refuse an employee's request to sign an indefinite-term employment contract.
In practice, some employers have repeatedly extended the term of the first fixed-term employment contract to avoid a second fixed-term employment contract and a subsequent indefinite-term employment contract.
The Interpretation now explicitly stipulates that if accumulated extensions of the term of the employment contract total one year or more, and the extended term expires, this may be deemed as the consecutive conclusion of two fixed-term employment contracts, and the employee has the right to request the employer to conclude an indefinite-term employment contract. In practice, some courts may also deem an extension made shortly before the expiration date of the first fixed term as circumvention of the law and recognize the signing of a second fixed-term employment contract. Therefore, to effectively extend the term of the first fixed-term employment contract, both the length and the timing of such extension are crucial.
In the event of non-fulfillment of the agreed service period, the corresponding special benefits may be reclaimed
In practice, to retain talent, employers often agree with employees on a specific service period and provide corresponding special benefits (e.g. sign-on bonus, retention bonus) in addition to paying regular wages. If an employee breaches the service period agreement, whether the employer may claim compensation accordingly has not been explicitly stipulated by law in the past.
The Interpretation now explicitly stipulates that if an employer provides special benefits to an employee for completing a specific service period in accordance with the agreement, except for certain legally specified grounds allowing immediate termination by employees, and the employee fails to complete the agreed service period and causes losses to the employer, the employer is entitled to damages. The court may determine the amount of compensation to be paid by the employee based on the following factors: the actual losses suffered by the employer, the degree of fault of each party, and the service period agreed and already completed.
Non-compete covenant must be lawful and reasonable
Pursuant to Articles 23 and 24 of the Labor Contract Law, employers may include non-compete clauses in employment contracts or confidentiality agreements with employees who are subject to confidentiality obligations. Such clauses specify that during the non-compete period following the termination or expiration of the employment contract, the employer shall pay the employee monthly economic compensation for a maximum period of two years. If an employee breaches the non-compete agreement, they shall pay the employer liquidated damages in accordance with the agreement. The group of persons subject to non-compete restrictions is limited to senior managers, senior technical personnel, and other personnel of the employer with confidentiality obligations. The scope, geographical area, and duration of the non-compete restrictions shall be agreed upon between the employer and the employee, and such agreements shall not violate the provisions of laws and regulations.
The Interpretation now explicitly stipulates that if an employee has not been made aware of or has no access to the employer's trade secrets or confidential matters related to intellectual property rights, any non-compete covenant agreed upon between the employer and such employee shall be invalid.
Except for post-employment non-compete agreements, employers may also agree with senior managers, senior technical personnel and other employees subject to confidentiality obligations on non-compete clauses during their employment period. For a non-compete covenant during employment, payment of economic compensation is not required.
The scope, geographical area, and duration of the non-compete restrictions stipulated in the agreement must be commensurate with the trade secrets and confidential matters related to intellectual property rights that the employee has access to or is aware of. Any provisions exceeding a reasonable proportion are invalid.
If an employee breaches a valid non-compete agreement, the employer may require the employee to return any economic compensation already paid and pay a reasonable amount of liquidated damages.
