Series
Publications
Series
Publications
On 1 August 2025, the Supreme People’s Court (the “SPC”) issued the Judicial Interpretation (II) on Several Issues Concerning the Application of Law in the Trial of Employment Dispute Cases (the “Interpretation”), which will take effect on 1 September 2025. On the same day, the SPC also released six model cases related to Interpretation (each, a “Model Cases” and collectively the “Model Cases”). The Interpretation and the Model Cases aim to unify judicial practice and adjudication standards, balance the interests of both employees and employers, and promote employment stability. Below, we have selected several key provisions from the Interpretation for introduction and brief analysis, with the aim of providing practical references for enterprises in human resources management.
The Interpretation includes several provisions addressing the application of non-compete clauses. On one hand, these provisions restrict the scope of non-compete obligations; on the other, they affirm employers’ rights, helping enterprises safeguard their legitimate interests.
1. Restricting the subjects and scope of non-compete obligations
According to the Employment Contract Law, non-compete obligations may apply only to senior management personnel, senior technical personnel, and other employees who bear confidentiality obligations. Article 13, Paragraph 1 of the Interpretation reaffirms the categories of employees to whom non-compete clauses may apply and sets strict limits on the abuse of such provisions. This article provides: “Where an employee does not have knowledge of or access to their employer’s trade secrets or confidential information related to intellectual property, and the employee requests a declaration of invalidity of a non-compete clause, the people’s court shall uphold such a request.”
In recent years, we have observed that some employers commonly misuse or even overgeneralise the application of non-compete agreements or clauses. For example, some employers do not distinguish whether employees actually possess the company’s trade secrets, IP, or other confidential matters, but instead uniformly require all employees to sign non-compete agreements (including non-business positions such as cleaning or security staff) and stipulate a significant amount of liquidated damages for breach of non-compete. If employees without confidentiality obligations join competing employers after resignation, the former employer may require them to pay liquidated damages. This practice restricts employees’ freedom to choose their employment, undermines their lawful rights, and negatively affects talent mobility in the market. To address this, before the publication of Interpretation, the SPC and certain local courts had already issued several relevant model cases, highlighting that whether an employee falls within the proper application scope of non-compete clauses must be carefully examined during adjudication.1 Article 13, Paragraph 1 of Interpretation reflects the judiciary’s general position: non-compete restrictions should apply only to staff likely to access trade secrets, and employers must bear the burden of proof regarding employees’ access to such information when disputes arise.
Article 13, Paragraph 2 of the Interpretation further clarifies that both employers and employees should reasonably agree on the scope of non-compete restrictions. It provides: “Where the scope, geographic area, term or other content of a non-compete clause is not reasonably proportionate to the trade secrets or confidential information related to IP that the employee has knowledge of or access to, and the employee requests that the excess portion of the non-compete clause be declared invalid, the people’s court shall uphold such a request.” The SPC’s recently published Model Case No. 4, a dispute over a non-compete clause between Pharmaceutical Company A and Zheng, further explains this new guidance. In this case, the court considered both the legislative intent and judicial practice, clarifying that the employee’s non-compete obligation should be proportionate and aligned with the confidentiality matters he or she have accessed or handled.2
Key takeaway: Based on the new guidance set out in the Interpretation and Model Case specified above, we recommend the following:
2. Confirmation of the validity of non-compete clauses during employment
Although the Employment Contract Law allows employers to agree non-compete obligations with employees, it does not explicitly state whether such obligations apply during the period of employment.3 Article 14 of the Interpretation addresses this issue by confirming that employers and employees may agree on non-compete clauses that apply during employment, and that such clauses are valid while the employee remains employed.4 In particular, under this provision, the validity of a non-compete clause during employment is not affected by the absence of monetary compensation in the agreement, nor by the employer not paying such compensation during employment. This reflects a position of protective preference towards employers.
While Article 14 does not specify whether the parties may stipulate a liquidated damages clause for breach of a non-compete obligation during employment, Model Case No. 5, i.e. Huang v. Textile Company A, released by the SPC confirms that if an employee breaches a non-compete obligation during employment, he or she will bear contractual liability as agreed. In light of this Model Case, we believe that in the future, when labour disputes arise involving an employee’s violation of non-compete obligations during his or her employment, courts at all levels are more likely to support an employer’s claim for liquidated damages as agreed by both parties.
In addition, according to Article 15 of the Interpretation, if an employee breaches a valid non-compete agreement, the employer may request the return of any monetary compensation already paid under the agreement, as well as require the employee to pay liquidated damages. This also reflects the SPC’s emphasis on protecting employers’ legitimate rights and interests. However, it is important to note that the prerequisite for requiring employees to return the compensation is that the non-compete agreement is valid and the agreement clearly stipulates the obligation to return the compensation.
Key takeaway: Based on the new guidance set out in the Interpretation and Model Case specified above, we recommend that employers promptly revise or update their non-compete agreement templates. These templates should clearly specify employees’ non-compete obligations and the relevant liquidated damages during their employment, and expressly require that, in the event of a breach, the employee must not only pay liquidated damages but also return any non-compete compensation already received.
1. Wages from contract termination until employment reinstatement
According to Article 46 of the Employment Contract Law,5 where an employee believes that his or her employer’s termination or rescission of their employment contract is wrongful, there are two remedies available: the employee may either request that the employer continue to perform the contract, or claim statutory severance. The choice of remedy depends on the employee’s claim, and the outcome is determined by the specific judgment of the court on a case-by-case basis.
Article 18, Paragraph 1 of the Interpretation states that if an employer wrongfully terminates or ends an employment agreement that is still capable of being performed, the employee may claim wages from the date of the wrongful decision until the day before the contract is reinstated. The wage standard should match the employee’s usual pay when carrying out their regular duties.
Paragraph 2 of this Article 18 introduces a more innovative rule: if both the employer and the employee are at fault during the process of contract termination or expiry, each party must bear responsibility proportionate to their level of fault. This means that even if the court orders reinstatement of the relevant employment agreement, where the employee bears some degree of fault – such as the termination is based on his or her misconduct – and the employer’s failure to comply with the necessary procedural requirements makes the dismissal wrongful, the court may reduce the amount of wages the employer must pay the employee for the relevant period.
It is worth noting that the provisions of Paragraph 1 of this Article 18 differ from certain local regulations or judicial practices. For example, the Shanghai Measures for Enterprise Wage Payment (上海市企业工资支付办法) stipulate: “If a local arbitration tribunal or court revokes the enterprise’s original decision and both parties reinstate the employment relationship, the enterprise shall pay the employee’s wages for the period of mediation, arbitration and litigation.” According to this local Shanghai regulation, even if the company's decision to terminate or end the contract is ultimately found to be wrongful and the employment relationship is reinstated, the employer is not required to pay wages for the entire period before the employee initiates judicial proceedings. This rule encourages employees to assert their labour dispute rights promptly and reduces the likelihood of delay or laches in bringing their claims.
By comparison, the Interpretation undoubtedly places a heavier burden on employers. As the limitation period for labour disputes in China is one year, an employee may initiate labour arbitration within one year of the employer’s wrongful termination of or expiration the employment contract.6 As a result, an employee may wait until near the end of the one-year limitation period before initiating a dispute. In such cases, if the court finds the employer’s termination or expiration wrongful and orders reinstatement of the contract, the employer will be required to pay the full amount of wages for nearly a year – from the date of termination or expiration until the employee files for labour arbitration.
2. Circumstances in which a labour contract cannot continue to be performed
As stated above, under Article 46 of the Employment Contract Law, if an employer wrongfully terminates or ends an employment contract and the employee does not request reinstatement, or if the contract cannot in fact continue to be performed, the employer must pay statutory severance in accordance with the law. The new Article 16 of the Interpretation sets out the following specific circumstances that are recognised as the “employment contract cannot continue to be performed”:
“(1) The labour contract expires during the arbitration or litigation process and there is no requirement to renew or extend the contract in accordance with the law;
(2) The employee has commenced to lawfully receive basic pension insurance benefits;
(3) The employer has been declared bankrupt;
(4) The employer has been dissolved, except where dissolution is due to a merger or division;
(5) The employee has established a labour relationship with another employer that seriously affects completion of tasks at their current employer, or, upon the employer's request, refuses to terminate their contract with the other employer; or
(6) There are other circumstances in which the labour contract cannot objectively be performed.”
It can be seen that, at present, the SPC has adopted a relatively rigorous standard regarding circumstances in which an “employment contract cannot continue to be performed.” The first five situations are clear and objective, leaving little room for dispute or debate between employee and employer. The sixth circumstance serves as a catch-all clause, allowing lower courts some flexibility to handle special cases as appropriate.
Nowadays, in judicial practice, courts in different regions hold varying views on whether a employment contract can continue to be performed. In some areas, such as Beijing, adjudicating bodies adopt a relatively strict approach towards employers, recognising only objective factors that make performance impossible as grounds for preventing reinstatement of the contract.7 By contrast, tribunals or courts in other regions, such as Shanghai, take a more flexible approach and recognise a broader range of circumstances under which an employment contract is deemed to be “unable to continue to be performed.” For example, certain courts in Shanghai, in cases of wrongful termination involving senior executives, have found that the employment contract cannot continue if the employment relationship between the employer and the executive no longer exists or if the executive’s position has already been occupied by someone else.8 Similarly, according to local judicial approaches in Shandong and Jiangxi Provinces9, if “the employee’s original position is highly irreplaceable and unique to the employer’s normal operations, such as general manager or chief financial officer, and the position has already been taken by another person, while the parties cannot reach agreement on a new position,” this is regarded as one of the situations in which an employment contract “cannot continue to be performed.” However, following the promulgation of the Interpretation, it is clear that the SPC has adopted a more conservative approach to determining when an employment contract cannot continue to be performed. In this context, it is likely that future judicial practice and local judicial standards across regions will also become more conservative. We will continue to closely monitor and assess these developments as they arise in specific cases.
Key takeaway: Given the risk that an employer may be required to continue performing an employment contract after a wrongful termination, we recommend that employers carefully assess the relevant legal risks before deciding to terminate or end an employment contract. Employers should also promptly collect and properly retain supporting evidence and safeguard all relevant documents. In particular, employers should evaluate both the likelihood that a termination may be deemed wrongful and the possibility that an arbitration commission, arbitration tribunal, or court may decide that the employment contract should continue to be performed. If there is a chance that an employer may be required to continue performing the contract, they should make appropriate preparations for potential litigation or arbitration before making any termination decision. At the same time, employers may wish to consider resolving the termination in a more amicable manner, such as through encouraging a resignation or reaching a mutual agreement to terminate the contract.
An agreement to waive social insurance contributions is invalid, and the employee may terminate the employment contract and receive severance. Although Chinese law clearly requires employers to pay social insurance contributions for their employees, in practice, some employees request not to participate in social insurance or both parties mutually agree not to pay contributions. Typically, the aim is for the employer to reduce costs while the employee receives a higher post-tax income.
To address this phenomenon, Article 19 of the Interpretation stipulates that if the employer and employee agree, or the employee promises the employer, that no social insurance contributions will be paid, such agreements or undertakings are invalid. Through this judicial interpretation, the SPC has corrected the practice of employers and employees circumventing their obligation to pay social insurance contributions. This decision supports the integrity of the national social insurance system and further protects employees’ rights to social security.
More importantly, the Interpretation further provides that if an employer fails to pay social insurance contributions as required by law, the employee may invoke Article 38(3) of the Employment Contract Law10 to terminate the employment contract and require the employer to pay statutory severance. The court will uphold such claims in accordance with the law. This will undoubtedly increase the risks for employers who fail to pay social insurance for their employees.
We note that in current judicial practice, when an employee voluntarily requests or agrees with the employer not to participate in social insurance, some courts apply the principle of good faith. If an employer’s failure to pay social insurance is primarily due to the employee’s own voluntary request or undertaking, courts may find that the employee’s subsequent termination of the contract and demand for severance is contrary to the principle of good faith, and therefore deny the employee’s claim for compensation. However, with the introduction of the Interpretation, companies can no longer rely on the employee’s consent or undertaking as a defence for not contributing social insurance in similar disputes. This change will significantly increase corporate risk and further compel employers to pay social insurance in compliance with laws and regulations.
Key takeaway: We recommend that businesses pay social insurance contributions for employees promptly and in full, in accordance with PRC law, and avoid using non-compliant methods to evade legal responsibilities. If an employee requests to opt out of social insurance, the company should clearly refuse the request. To address any concerns employees may raise, companies can explain that paying social insurance is not only a legal obligation for employers, but also provides employees with various essential protections. Employees are entitled to social insurance benefits in situations such as illness, work-related injury, maternity, and retirement.
Through the Interpretation, the SPC reiterates the circumstances in which the term of an employment contract will be automatically extended by law. Specifically, these include:
“(1) Where employers are prohibited from terminating the employment contract as set out in Article 42 of the Employment Contract Law11;
(2) Where the service period has not yet expired, as provided in Article 17 of the Regulations on the Implementation of the Employment Contract Law; or
(3) Where the term of office has not yet expired for a labour union representative, as provided in Article 1912 of the Labour Union Law.”
The Interpretation clarifies that these circumstances do not constitute a failure to conclude a written employment contract by the employer. In other words, if an employee’s employment contract expires and one of the above circumstances arises, the original contract term is deemed to have been automatically extended in accordance with the law, and the employer does not need to sign a new written contract with the employee for the duration of the extension.
Key takeaway: To avoid disputes, if an employee’s contract term expires and is automatically extended under any of the above circumstances, we recommend that companies provide written notification to the employee confirming the automatic extension of the original term.
Under Article 14, Paragraph 2, Item (3) of the Employment Contract Law, if an employee has signed two consecutive fixed-term contracts and does not fall under the exceptions in Article 39 or Items (1) or (2) of Article 40, the employer must offer an open-ended contract on renewal, unless the employee prefers another fixed term. The prevailing judicial opinion nationwide13 currently holds that, when the second fixed-term employment contract between the company and the employee expires, if the employee requests to renew the contract on an open-ended basis, the employer is obliged to do so and has no right to refuse renewal. Article 10 of the Interpretation further clarifies that the following situations constitute “the consecutive conclusion of two fixed-term employment contracts”:
(1) Where the employer and the employee have, by agreement, extended the term of the employment contract on a cumulative basis for one year or more, and the extension has expired;
(2) Where the employer and the employee have agreed that, upon expiry, the employment contract will be automatically extended, and the extension has expired;
(3) Where, for reasons not attributable to the employee, the employee continues to work at his or her original workplace and position, but the employer changes the contractual employer entity, continues to exercise employment management over the employee, and the contract term expires; or
(4) Where the employer adopts other evasive conduct, in violation of the principle of good faith, to re-enter into an employment contract, and the contract term expires.
The main purpose of this article is to prevent employers from circumventing or delaying the commencement or expiry of the second fixed-term employment contract by various means, so as to avoid, or postpone as long as possible, the requirement to sign an open-ended employment contract.
Key takeaway: We recommend that employers pay particular attention to situation (1) above. In practice, some employers, in order to avoid or delay signing an open-ended employment contract with an employee, may agree to extend the term of the original contract as the first contract approaches expiry, rather than entering into a second fixed-term contract. The extension is used to postpone the commencement of a second fixed-term contract as long as possible. After the implementation of the Interpretation, however, if both parties agree to extend the term of the employment contract for one year or more, the extension will be deemed the second fixed-term employment contract.
On the other hand, if the agreed extension is less than twelve months (for example, eleven months), the courts will generally recognise this as an extension of the original contract rather than a new contract renewal. Accordingly, employers may use this rule such that, if they have concerns about entering into a second fixed-term contract with an employee at the expiry of the first – especially regarding the requirement to sign an open-ended employment contract – they may, by mutual agreement, extend the contract term for a further period (for example, three or six months, but no more than one year). This allows for further observation and assessment of the employee’s performance before deciding whether to proceed with a second fixed-term employment contract.
In daily business operations, it is not uncommon for an employer to fail to promptly renew a fixed-term employment contract when it expires, resulting in the employee continuing to work after the contract’s expiry without a written employment contract. Regarding how to handle the employment contract and employment relationship in such circumstances, Article 34, Paragraph 1 of the 2021 Judicial Interpretation (I) on Several Issues Concerning the Application of Law in the Trial of Employment Dispute Cases provides: “If, after the expiry of the employment contract, the employee continues to work for the original employer and the original employer raises no objection, both parties shall be deemed to have agreed to continue performing the employment contract under the original terms. If either party requests to terminate the employment relationship, the court shall uphold such request.”
The latest Interpretation clarifies the timeframe for employers to raise objections. Article 11, Paragraph 1 states: “If, after the expiry of the employment contract, the employee continues to work for the employer, and the employer raises no objection for more than one month, the court shall uphold a claim by the employee requesting renewal of the employment contract under the original terms.” Through this Interpretation, the SPC has granted employers a one-month objection period: if the employer does not raise any objection to the employee’s continued employment within one month after the expiration of the employment contract, the employee may request that the contract be renewed under the original terms.14 By the same logic, if the employer promptly objects within one month after the contract expires and indicates that the contract will not be renewed, the original employment contract may be terminated.
Additionally, Article 11, Paragraph 2 of the Interpretation provides: “Where the conditions for the conclusion of an open-ended employment contract are met, and the employee requests the employer to conclude an open-ended employment contract under the original terms, the court shall support such a request in accordance with the law.” This provision aims to prevent employers from deliberately lowering the benefits and conditions of employment contracts when renewing open-ended contracts, in order to pressure employees into choosing not to renew.
Key takeaway: Although the Interpretation grants employers a one-month objection period after the expiry of an employment contract, we recommend that companies do not overly rely on this provision. Instead, employers should establish a sound employment contract management system to ensure timely handling of contract renewal or termination before the contract expires.
In daily business operations, many companies offer employees special benefits (such as assistance with household registration or housing subsidies), and require employees to serve the company for a certain period. If employees fail to fulfil this service period, they must pay a specified amount of compensation to the company. Disputes frequently arise in practice regarding the performance of such agreements. Although Chinese law does not explicitly regulate such arrangements, courts in many regions have upheld employers' claims requiring employees who breach these agreements to return certain benefits or pay compensation proportionally to the unfulfilled service period.
The Interpretation affirms the validity of these arrangements. Article 12 of the Interpretation states: “Where an employer and an employee agree on a service period and the provision of special benefits, and the employee breaches the agreement by unilaterally terminating the employment contract early (except where the termination is permitted under article 38 of the Employment Contract Law), the court may determine the liability for compensation by comprehensively considering the actual losses, the degree of fault of each party, and the length of service already performed.” Under this rule, when employers claim compensation from an employee for breach of such a service period, the court will not only consider the unfulfilled service period, but also other factors such as the employer’s actual losses and the degree of fault of each side.
Key takeaway: Based on this rule, we recommend that employers promptly review, and where necessary, amend employment contract or agreement templates relating to special benefits and service periods. It is important to clearly stipulate the calculation of actual losses and the details of compensation (for example, how to calculate actual loss, and compensation arrangements in different scenarios), so as to provide a clear legal basis when seeking related compensation.
In addition, employers should ensure that agreements specify any payment required from the employee is for compensation, rather than liquidated damages, to avoid breaching legal restrictions on liquidated damages clauses in employment relationships.15
Contents