On 1 August 2025, the Supreme People’s Court of the People’s Republic of China issued the Interpretation II of Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (“Judicial Interpretation II”). Comprising 21 articles, the Judicial Interpretation II establishes uniform legal standards for several high-profile issues that have arisen in recent years, including co-employment arrangements, the determination of employment relationships involving foreign nationals, non-compete obligations, social insurance disputes, and the criteria for concluding a second fixed-term labor contract. Overall, it strikes a balance in safeguarding the lawful rights and interests of both employees and employers, thereby further refining China’s labor employment and social security legal framework.
The Judicial Interpretation II addresses the prevalent issue of employers evading liability or shifting obligations to insolvent entities in labor disputes arising from subcontracting, labor outsourcing, affiliated operations, and co-employment arrangements. It expressly stipulates that licensed contractors, host enterprises, and affiliated entities shall assume primary employer liabilities, including wage payment obligations and work-related injury insurance benefits. Specifically, it states that licensed contractors bear employer liabilities for workers hired by unlicensed subcontractors, and licensed enterprises assume employer liabilities for workers employed by unlicensed affiliated entities. For workers alternately or simultaneously used by multiple affiliated enterprises, their employment relationships shall be determined by executed written labor contracts or, following a comprehensive consideration of actual employment management practices, working hours, job responsibilities, wage payment records, and social insurance contributions.
The Judicial Interpretation II establishes specific provisions regarding the determination of employment relationships involving foreign nationals and the standing of parties in labor disputes. According to it, an employment relationship between a foreign national and a Chinese domestic employer shall be recognized when the foreign national has obtained permanent residence status, has held a valid work permit and maintains lawful residency in China, or has completed all required registration procedures. Meanwhile, foreign enterprises or resident representative offices of foreign enterprises established in China may participate as parties in labor dispute cases.
The Judicial Interpretation II addresses the prevalent issues of overly broad and abusive non-compete clauses while affirming the validity of properly constituted agreements. It provides that non-compete obligations shall not apply to any trade secrets or confidential information unknown to or inaccessible by the employee. In addition, duly executed in-term non-compete clauses with confidentiality-bound personnel remain legally enforceable without requiring economic compensation from the employer. For violations of valid non-compete agreements, employers may seek restitution of paid economic compensation or claim contractual penalties as stipulated.
The Judicial Interpretation II establishes adjudication rules regarding severance compensation in social insurance contribution disputes, affirming employers’ statutory obligation to make social insurance contributions. Following the Judicial Interpretation II, any agreement or undertaking between employers and employees waiving social insurance contributions shall be null and void. Where an employer fails to make required social insurance contributions, the employee may lawfully terminate the employment contract and claim unpaid social insurance contributions.
The Labor Contract Law of the People’s Republic of China (“Labor Contract Law”) provides that employers failing to execute written labor contracts shall pay double wages as a penalty, and a second fixed-term contract expiration triggers the right to demand an open-ended contract. On the double wage penalty, the Judicial Interpretation II states that no double wage penalty applies when failure results from force majeure, the worker’s intentional act or gross negligence, or other legally prescribed circumstances. The double wage penalty shall be calculated monthly. For partial months, it is computed based on actual working days. On the criteria for determining successive fixed-term contracts, the Judicial Interpretation II lists the following four situations that should be considered as second renewals: 1. Contract Extensions: cumulative extension period ≥1 year through mutual agreement.2. Automatic Renewals: The contract contains an automatic renewal clause upon expiration.3. Employer Avoidance: worker continues in the original position under a new contracting entity due to employer restructuring.4. Bad Faith Practices: any renewal violating good faith principles to circumvent open-ended contract obligations.
Article 48 of the Labor Contract Law points out that where an employer unlawfully terminates or rescinds a labor contract, the employee may either demand contract reinstatement or claim compensation where reinstatement is impracticable. For reinstated contracts, Judicial Interpretation II provides that employees may claim back wages covering the period from the termination date to actual reinstatement. The wage calculation shall be based on the employee’s standard remuneration during normal employment. For impracticability of reinstatement, the Judicial Interpretation II provides that reinstatement shall not be ordered when the contract expires during arbitration/litigation without legal grounds for renewal; the employee reaches statutory retirement age or has established new employment relationships; the employer is declared bankrupt or undergoes dissolution; or other legally prescribed circumstances render performance impossible.
In conclusion, the Judicial Interpretation II introduces several material developments in China’s labor law, including broadening the definition of qualifying employers and extends their corresponding legal responsibilities, precisely delimiting enforceable application boundaries of non-compete clause, expressly invalidating any contractual avoidance of social insurance contributions, enumerating four qualifying scenarios for successive fixed-term contracts and six circumstances precluding contract reinstatement. Furthermore, it addresses occupational health examinations’ impact on termination validity and clarifies statute of limitations defenses in arbitration proceedings. The Judicial Interpretation II will come into effect on 1 September 2025 and shall apply to newly accepted labor dispute cases thereafter.
The Judicial Interpretation II addresses the prevalent issue of employers evading liability or shifting obligations to insolvent entities in labor disputes arising from subcontracting, labor outsourcing, affiliated operations, and co-employment arrangements. It expressly stipulates that licensed contractors, host enterprises, and affiliated entities shall assume primary employer liabilities, including wage payment obligations and work-related injury insurance benefits. Specifically, it states that licensed contractors bear employer liabilities for workers hired by unlicensed subcontractors, and licensed enterprises assume employer liabilities for workers employed by unlicensed affiliated entities. For workers alternately or simultaneously used by multiple affiliated enterprises, their employment relationships shall be determined by executed written labor contracts or, following a comprehensive consideration of actual employment management practices, working hours, job responsibilities, wage payment records, and social insurance contributions.
The Judicial Interpretation II establishes specific provisions regarding the determination of employment relationships involving foreign nationals and the standing of parties in labor disputes. According to it, an employment relationship between a foreign national and a Chinese domestic employer shall be recognized when the foreign national has obtained permanent residence status, has held a valid work permit and maintains lawful residency in China, or has completed all required registration procedures. Meanwhile, foreign enterprises or resident representative offices of foreign enterprises established in China may participate as parties in labor dispute cases.
The Judicial Interpretation II addresses the prevalent issues of overly broad and abusive non-compete clauses while affirming the validity of properly constituted agreements. It provides that non-compete obligations shall not apply to any trade secrets or confidential information unknown to or inaccessible by the employee. In addition, duly executed in-term non-compete clauses with confidentiality-bound personnel remain legally enforceable without requiring economic compensation from the employer. For violations of valid non-compete agreements, employers may seek restitution of paid economic compensation or claim contractual penalties as stipulated.
The Judicial Interpretation II establishes adjudication rules regarding severance compensation in social insurance contribution disputes, affirming employers’ statutory obligation to make social insurance contributions. Following the Judicial Interpretation II, any agreement or undertaking between employers and employees waiving social insurance contributions shall be null and void. Where an employer fails to make required social insurance contributions, the employee may lawfully terminate the employment contract and claim unpaid social insurance contributions.
The Labor Contract Law of the People’s Republic of China (“Labor Contract Law”) provides that employers failing to execute written labor contracts shall pay double wages as a penalty, and a second fixed-term contract expiration triggers the right to demand an open-ended contract. On the double wage penalty, the Judicial Interpretation II states that no double wage penalty applies when failure results from force majeure, the worker’s intentional act or gross negligence, or other legally prescribed circumstances. The double wage penalty shall be calculated monthly. For partial months, it is computed based on actual working days. On the criteria for determining successive fixed-term contracts, the Judicial Interpretation II lists the following four situations that should be considered as second renewals: 1. Contract Extensions: cumulative extension period ≥1 year through mutual agreement.2. Automatic Renewals: The contract contains an automatic renewal clause upon expiration.3. Employer Avoidance: worker continues in the original position under a new contracting entity due to employer restructuring.4. Bad Faith Practices: any renewal violating good faith principles to circumvent open-ended contract obligations.
Article 48 of the Labor Contract Law points out that where an employer unlawfully terminates or rescinds a labor contract, the employee may either demand contract reinstatement or claim compensation where reinstatement is impracticable. For reinstated contracts, Judicial Interpretation II provides that employees may claim back wages covering the period from the termination date to actual reinstatement. The wage calculation shall be based on the employee’s standard remuneration during normal employment. For impracticability of reinstatement, the Judicial Interpretation II provides that reinstatement shall not be ordered when the contract expires during arbitration/litigation without legal grounds for renewal; the employee reaches statutory retirement age or has established new employment relationships; the employer is declared bankrupt or undergoes dissolution; or other legally prescribed circumstances render performance impossible.
In conclusion, the Judicial Interpretation II introduces several material developments in China’s labor law, including broadening the definition of qualifying employers and extends their corresponding legal responsibilities, precisely delimiting enforceable application boundaries of non-compete clause, expressly invalidating any contractual avoidance of social insurance contributions, enumerating four qualifying scenarios for successive fixed-term contracts and six circumstances precluding contract reinstatement. Furthermore, it addresses occupational health examinations’ impact on termination validity and clarifies statute of limitations defenses in arbitration proceedings. The Judicial Interpretation II will come into effect on 1 September 2025 and shall apply to newly accepted labor dispute cases thereafter.