The highest court in China recently released new interpretations regarding the application of laws in labor dispute cases, which took effect on September 1, 2025. These bring clarity to a range of employment issues in China, address challenges, update previous interpretations, and aim to unify legal practices across regions.
On August 1, 2025, China’s Supreme People's Court issued the Interpretations of the Supreme People's Court on Some Issues Concerning the Application of Laws for the Trial of Labor Dispute Cases II (Interpretation II), effective September 1, 2025. Interpretation II differs significantly from the first draft that was released in December 2023.
For example, the December 2023 version released for public comment included some controversial clauses, such as the scope for accepting labor disputes related to employee stock incentives, a restriction against arbitration of claims involving compensation for accrued but unused annual leave, and protections for workers who have reached the statutory retirement age but have not yet started receiving pension benefits, among others. Interpretation II does not address these issues, thereby leaving these issues to be decided on an ad hoc basis by courts across the country.
Interpretation II marks a significant development in employment law since the first new interpretation which took effect on January 1, 2021 and supersedes the previous four interpretations. Interpretation II responds to recent developments in employment practices, addresses practical challenges in labor dispute cases, and aims to harmonize divergent practices across the country.
Determining the Employer in Affiliate Arrangements
When employees work for multiple affiliated entities, courts will now recognize an employment relationship with the entity that signed a written employment contract with the employee. If no written contract exists, the court will holistically consider factors such as management, payment of wages, and social insurance contributions to identify the employer.
Expatriate (Foreign National) Employees
Interpretation II adopts a new “positive list” approach to recognize an employment relationship between a foreign individual and a Chinese company. A court will recognize such a relationship if the foreigner (1) has permanent residency, (2) holds a work permit and resides legally in China, or (3) has completed required immigration procedures. This means courts need only check immigration documents rather than evaluating the substance of the employment arrangement, potentially expanding risks for companies employing expatriates under local contracts.
Representative Offices and Parent Company Liability
Chinese representative offices can now be named as parties in labor disputes, even though they are not “legal persons” under Chinese law and generally employ staff through third-party agencies. Importantly, foreign parent companies can be included in these disputes, increasing their potential liability and making enforcement against their assets possible.
Double Salary (Penalty for No Written Contract)
If an employer fails to sign a written contract within the applicable legal timeline, employees are entitled to “double wages” as penalties, calculated monthly or by actual working days for partial months. Each month is viewed as a separate claim, giving employees a one-year limitation period for each month’s penalty. There are three exemptions: force majeure, the employee’s intentional or gross negligence, or as otherwise stipulated by law.
Consecutive Fixed-Term Contracts and Open-Ended Contracts
Interpretation II specifies which scenarios are considered to be “two consecutive fixed-term contracts.” These situations include contracts extended for more than one year, automatic contract extensions, or attempts by the employer to subvert the law by rotating the contracting parties within affiliates or otherwise act in bad faith to circumvent the law.
Service Period Agreements
If employers provide special benefits (such as paid training) in exchange for a minimum service period, they may recover such benefits or claim compensation if the employee leaves early, except where the law allows unilateral termination of the employment relationship by the employee. Courts will consider actual losses, party fault, and service completed.
Noncompete Restrictions
Noncompete clauses must be reasonable in scope and proportionate. Employers may impose noncompete obligations during employment without extra compensation and may claim liquidated damages if breached. However, courts may strike noncompete agreements if the employee did not access trade secrets or if restrictions are overly broad.
In addition, Interpretation II allows employers to impose noncompete obligations on the applicable employees during their employment without the need to pay additional noncompete compensation beyond their regular compensation and provides for employers to claim liquidated damages for an employee’s breach of their noncompete obligation during the employment term, even in the absence of the payment of separate noncompete compensation.
When Reinstatement Is ‘Impossible’ After Wrongful Termination
For wrongful terminations, courts may rule reinstatement is “impossible” in specific situations, such as contract expiry during legal proceedings, the employee receiving a pension, employer bankruptcy, company dissolution, or if the employee’s new job genuinely impairs duties or the employee refuses to relinquish new employment. The list, clarified for the first time, creates stricter standards for denying reinstatement.
Interpretation II enhances protection for older workers in wrongful termination cases by allowing denial of reinstatement only if they have started receiving pension benefits. Previously, reaching the statutory retirement age was enough to invalidate a reinstatement claim. However, it is unclear how courts will handle cases where an employee has reached retirement age but has not begun receiving pension benefits for reasons unrelated to the employer.
An employee’s refusal to relinquish new employment introduces a stricter approach compared to previous practices, removing a tool employers could leverage in complex termination cases involving reinstatement threats. In Beijing, for example, if an employer showed that an employee had joined another company, reinstatement was typically deemed impossible.
Article 16(5) changes this by providing employees more leverage. Even if an employee has a new job, it must significantly affect their duties to the current employer, or they must refuse to leave the new job when asked. This gives employees a second chance to choose between employers and limits the employer's ability to claim reinstatement is impossible due to a new employment relationship.
Article 16 includes a catch-all clause, indicating that other circumstances might make a contract unfeasible. However, how courts will interpret this is uncertain. It is unclear if factors like a breakdown of trust between the employer and employee or the employee leaving China will be considered "other circumstances" under this catch-all clause. Ongoing judicial developments in different regions will need to be monitored to understand how this provision is applied.
Salary to Reinstated Employees
If reinstatement is ordered, employees are entitled to their normal salary from the termination date to reinstatement. If both sides contributed to the dispute, courts may apportion liability according to fault.
Article 18 of Interpretation II offers employers a potential defense by allowing them to seek a proportional reduction in salary payments for a reinstated employee based on the employee’s degree of fault. While what constitutes fault by the employee remains subject to future judicial interpretation, the draft version of Interpretation II, which was issued on December 12, 2023, offers some guidance. It suggested that courts could consider factors such as the employee’s delay in initiating arbitration or litigation, and whether the employee worked for another employer during the disputed period.
Social Insurance Enforcement
This provision in Interpretation II represents another means to curtail noncompliance with social insurance enrollment. Any agreement between the employer and employees to waive social insurance is invalid. If an employer fails to pay required social insurance, the employee may lawfully terminate their contract and demand severance. Employers may request reimbursement from employees for the employee’s portion of retroactive social insurance contributions.
This provision underscores the potential liabilities that employers could face—including retroactive social insurance contributions and statutory severance payments—if they do not strictly comply with social insurance enrollment obligations.
Interpretation II clarifies and standardizes the rules on a broad range of employment issues. Employers should carefully review and update their human resources documentation and policies to ensure compliance and strengthen their policies in light of these updated legal standards.
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