China Labor Law – New Judicial Interpretation: Employer’s main Key Liabilities

The “Interpretation on the Application of Law in the Trial of Labor Dispute Cases (II)” (Fa Shi [2025] No. 12) (the “Judicial Interpretation”) was published by the Supreme People’s Court of China on 31 July 2025, and has been effective since 1 September 2025.

This new Judicial Interpretation addresses long-standing uncertainties in the Chinese labor law, particularly in relation to intra group employments, non-compete provisions enforcement, social insurance obligations, fixed-term contract renewals, and service period arrangements.

        I.            New Interpretation Context

China’s labor framework is based primarily on the Labor Law of the People’s Republic of China (1995), the Labor Contract Law (2008 and amended in 2013), and the Social Insurance Law (2011). Judicial interpretations issued by the Supreme People’s Court (the “SPC”) are binding and serve to unify the implementation of the law in practice.

The first interpretation on labor disputes was released in 2021. Rapid changes in employment practices led to this second interpretation after years of consultations.

      II.            Overview of the Key Legal Clarifications

• Non-Compete Covenants Must Be Lawful and Reasonable

Under Articles 23 and 24 of the Labor Contract Law, post-termination non-compete clauses are permitted for senior managers, senior technical staff and employees with confidentiality obligations.

Validity – the Judicial Interpretation confirms that non-compete are invalid if the employee has no access to trade secrets or confidential information.

Scope – restrictions mut be reasonable in terms of role, geographic area, and duration (maximum two years). Overbroad provisions may not be enforceable.

Compensation – during the post-employment non-compete period, employers must pay monthly compensation. No compensation is required for non-compete obligations that apply during employment.

Breach – if an employee breaches a valid non-compete provision, the employer may claim compensation and seek agreed liquidated damages.

Also, a key clarification under the new Judicial Interpretation is that non-compete obligations applicable during employment are enforceable without additional compensation, as they fall within the employee’s basis duty of loyalty.

• Excessive Extension of Fixed-Term Contracts May Lead to Indefinite-Term Employment

Under Article 14 of the Labor Contract Law, once an employee has signed two consecutive fixed-term contracts, he may request an indefinite-term contract.

The new Interpretation addresses attempts by employers to avoid this rule through repeated extensions of the first contract:

Extended duration – if cumulative extensions of the first fixed-term contract exceed one year, courts may treat it as two contracts, giving the employee the right to request an indefinite-term contract.

Last-minute extensions – extensions made just before a contract expires may also be deemed a second contract if viewed as a circumvention.

• Agreements to waive Social Insurance Contributions Are Invalid

Participation in the statutory social insurance system is mandatory for both employers and employees.

Invalid agreements – any arrangement to waive or reduce contributions, even if requested or agreed by the employee, is void.

Employee rights – if an employer fails to make contributions, the employee may terminate the contract immediately and claim statutory severance.

Employer recovery – once overdue contributions are paid, the employer may recover only the cash allowances or substitutes previously given in lieu of contributions, not the severance.

Housing fund – the same rule applies to the housing provident fund: waivers or underpayments are invalid.

In a nutshell, employers must make full social insurance and housing fund contributions – any waiver arrangement will not be upheld in court.

• Employment across affiliated companies requires clear agreements

In practice, employees are often seconded to, or work concurrently at, affiliated companies. The new Interpretation clarifies how courts will determine the employment relationship in such cases:

• • Written contract – if a contract exists, it prevails.
  • No contract – courts will look at actual practices, such as who directs the work, pays wages and makes social insurance contributions.
  • Joint liability – if responsibilities are unclear, both affiliated companies may be held jointly liable for wages, benefits, and other entitlements due to employee.

To avoid disputes and legal ambiguity, the employee, the original employer and the affiliated entity should sign tripartite agreements. These agreements should define the following:

• • Whether the original employment relationship continues;
  • Which entity is responsible for wages and statutory contributions;
  • The employee’s job duties and responsibilities, reporting lines, and workplace during secondment;
  • Conditions for transfer to a new employer;
  • Treatment of severance, years of service and other entitlements.