Labour law on the move: China tightens the rules of the game

published on 4 september 2025 | reading time approx. 4 minutes

The new Interpretation (II) of the Supreme People's Court on labour law disputes has been in force since 1 September 2025. It brings more clarity and at the same time increases the pressure on employers. For European SMEs in China in particular, this means that those who are not prepared risk expensive back payments, unwanted long-term contracts or ineffective non-compete clauses.

Social security - the biggest liability risk

One of the most controversial issues concerns social insurance. The court makes it clear that any agreement between employer and employee not to pay contributions, or to pay them only in part, is invalid. A medium-sized company that paid too little for years was recently confronted by the authorities with claims for millions, penalties and compensation. In such cases, employees can terminate the contract immediately - and also demand compensation. Even if employers pay in retrospectively, there is still the risk of having to sue for compensation that has already been paid.

Conclusion: If you don't have your social security processes under control in China, you are sitting on a ticking time bomb.

Non-compete clauses - only with a sense of proportion

Non-compete clauses are also in the spotlight. They are still permissible during and for up to 24 months after the end of the contract, but the court has placed significant restrictions on them:

Ineffective if the employee did not have access to the relevant business secrets.
Reasonable scope: regional or factual prohibitions that are too broad are overturned.

The employer must continue to pay at least 30 percent of the average salary during the post-contractual non-compete period. If the employee violates this provision, the employer may reclaim the compensation paid and sue for (liquidated) damages.

Conclusion: Standard non-compete clauses are no longer sufficient - they must be customized and formulated in a watertight manner in each individual case.

Written contracts - avoid double salaries

Another gateway for claims for employee compensation is the lack of written employment contracts. The rule: a written contract must be available no later than one month after the start of work . Otherwise, the employer owes double pay. The new Interpretation clarifies: Even an incomplete period of a few days triggers claims. An employer is only exempt if it can prove, e.g., force majeure, or if the employee actively refused to sign. However, the burden of proof lies with the employer.

In certain cases, the contract is automatically extended, e.g. in the event of illness, pregnancy, an accident at work or if employees are about to retire. The court makes it clear that this automatic extension cannot be seen as an "omission" on the part of the employer - there is no threat of double pay.

Open-ended contracts - unwanted long-term commitments

The Interpretation also provides some clarity on the subject of open-ended contracts. In principle, the following applies:

After two fixed-term contracts, an entitlement to a open-ended contract arises.
In certain cases, contractually agreed (automatic) extensions or certain “workarounds" can also lead to the entitlement of an open-ended contract.
Even if a new contract is formally concluded with another employer in order to circumvent the obligation, courts will discover this - and force the employer into an open-ended employment relationship.

Conclusion: Employers need to rethink their contract strategy - trickery will be seen through.

Re-employment after termination: Not always possible

In principle, employees can demand reinstatement in the event of unlawful dismissal. However, the court defines cases in which this is objectively impossible:

If the company is insolvent or dissolved,
if the employee is already receiving a pension,
if he/she is now working for another employer and it is unreasonable to expect him to return.

In these cases, however, the employer is liable for double the statutory severance payment.

Continued payment of wages: litigation leads to more costs

The new Interpretation exacerbates the cost risks: If an employee is illegally dismissed, they are entitled to payment of wages until the day before they are reinstated. Litigation that drags on for months or years can lead to massive costs.

Time limit trap: asserting the limitation period in arbitration proceedings

Labour law claims generally become time-barred after one year. The Interpretation clarifies that the one-year limitation period can only be effective if it is already asserted in the labour arbitration proceedings. Anyone who misses this moment loses the right to raise it later in court proceedings. Even in appeal proceedings or in a retrial, the possibility is then lost.

Multiple employment and subcontractors

A particularly tricky area concerns employees who work for several affiliated companies at the same time or constellations with unauthorised subcontractors. The court makes it clear:

The respective qualified company remains responsible - for salaries, social security and accidents.
Even if internal agreements exist between companies, these do not automatically protect against liability if they are not clearly set out in a contract.

Foreign employees: what is sufficient for an employment relationship

The Interpretation implicitly confirms that foreign employees with a Chinese green card do not require an additional work permit. This clarifies a previously uncertain practice.

Recommendations for action

Stricter rules apply from 1 September 2025. Chinese labor law, which is already very employee-friendly, tightens the compliance requirements for employers. Social security, non-competition clauses and employment contracts are under particular scrutiny. The Interpretation also brings changes to dismissals and labor law litigation. They concern, for example, continued payment of wages, reinstatement, the statute of limitations and potential liability for multiple employment. For foreign-invested companies in China, this means higher costs, stricter requirements and less room to maneuver.

Our advice: Review your contract templates, social security processes and HR guidelines today. We can help you recognize risks at an early stage and avoid disputes. The new rules make terminations and litigation riskier. Even small mistakes regarding deadlines or structural issues can lead to high costs. Companies should therefore seek legal advice on terminations, restructuring and multiple hiring. We support you in managing procedures with more legal certainty and avoiding liability traps.