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China: Supreme Court Issues New Guidance – Key Takeaways for Multinational Employers

By - - Disputes and Grievances, Employment Law

China’s Supreme People’s Court has issued Interpretation II, a major update to labour dispute law, replacing the previous Interpretations. It became effective on September 1st 2025.

It aims to resolve inconsistencies across regions and address modern employment challenges.

Key Updates

  • Employer Identification in Affiliates: If no written contract exists, courts will assess who manages the employee, pays wages, and handles social insurance to determine the employer.
  • Foreign Nationals: Employment relationships are recognised if the individual has permanent residency, a valid work permit, or has completed immigration formalities, shifting the focus to documentation rather than employment substance.
  • Representative Offices & Parent Companies: These entities can now be named in disputes, increasing liability exposure for foreign parent companies.
  • Double Salary Penalty: Employees may claim monthly penalties if no written contract is signed on time, with exceptions for force majeure, employee fault, or legal exemptions.
  • Fixed-Term Contracts: Two consecutive contracts include extended or automatically renewed agreements. Attempts to bypass this rule via affiliate rotation may be deemed bad faith.
  • Service Period Agreements: Employers may recover costs (e.g. training) if employees leave early, unless legally permitted to resign. Courts will assess fault and actual losses.
  • Non-compete Clauses: Restrictions must be reasonable. Employers can enforce non-compete terms during employment without extra pay and claim damages for breaches. Courts may invalidate overly broad clauses or those lacking access to trade secrets.
  • Reinstatement After Wrongful Termination: Reinstatement may be denied if the employee receives a pension, the company dissolves, or the employee refuses to leave a new job. Courts now require stronger justification to deny reinstatement.
  • Salary During Dispute: Employees reinstated after wrongful termination are entitled to back pay. Courts may reduce this based on the employee’s fault (e.g. delay in filing claims or working elsewhere).
  • Social Insurance Compliance: Agreements to waive social insurance will be invalid. Employees may resign and claim severance if employers fail to enrol them. Employers can recover the employee’s share of retroactive contributions.

Implications for Employers

  • Employers should review and revise HR policies, contracts, and dispute procedures to align with Interpretation II. The changes increase clarity but also raise compliance risks, especially for foreign entities and representative offices.

This is a high-level general update only. Legal advice should be obtained on specific circumstances.
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