From Reinstatement to Non-Competes

On 1 August 2025, the Supreme People’s Court issued its Interpretation (II) on the Application of Law in the Trial of Labour Dispute Cases (Interpretation (II)), accompanied by six illustrative cases. While Article 1¹ of this series addressed confirmation of employment relationships and contract requirements, this article turns to the risks that arise when employment ends. Interpretation (II) provides clearer rules on reinstatement, backpay, and non-compete agreements, and also touches on disputes over social insurance waivers and the statute of limitations. Following this, on September 4, 2025, the Ministry of Human Resources and Social Security issued the Guidelines for Corporate Implementation of Non-Compete Compliance (Guidelines) to provide more granular standards for employers to implement non-compete agreements. These developments standardise judicial practice but also raise the stakes for employers in termination disputes.

 

Reinstatement of Employment

The Labour Contract Law (2008) provides that if a termination is unlawful, courts may order reinstatement plus backpay of the salary, unless the employee does not request it or reinstatement is impossible. For the past 17 years, courts have interpreted “impossible” differently - sometimes refusing reinstatement where an employee had already found another job, or where the position (e.g., senior executive) had been filled and could not be duplicated.

The Interpretation (II) now sets out six scenarios where reinstatement cannot be ordered:

1. The employment contract expires without mandatory extension.
2. The employee starts receiving a pension.
3. The employer is bankrupt.
4. The employer is dissolved (other than merger/division).
5. The employee establishes another employment relationship that materially affects reinstatement, or refuses to terminate the secondary employment when demanded by its original employer.
6. Other objective circumstances under which reinstatement is impossible.

This list codifies practice² but also narrows it. For example, if an employee has another job, reinstatement is not automatically denied - courts must now consider whether the new job materially conflicts with the original role. Similarly, while many courts in the past refused reinstatement for senior executives whose posts had been filled, the Interpretation (II) does not expressly include this. Employers may still argue it under “other objective circumstances,” but the scope is tighter.

Backpay clarified: Previously, different regions calculated backpay from different points (e.g. from the arbitration filing date in Shanghai). Interpretation (II) now standardises this: if reinstatement is ordered, backpay runs from the day after termination until reinstatement.

 

Non-Compete Agreements

Interpretation (II) also reins in the abuse of non-compete clauses by clarifying key terms:

• Who can be bound. Non-competes are invalid for employees who lack access to trade secrets or confidential information.
• Scope and duration. Clauses that extend beyond what is reasonably necessary to protect the employer’s confidential information are invalid.
• Employers are not required to pay compensation during employment; post-employment compensation is enforceable, but courts may reduce excessive amounts of liquidated damages.
• Employer remedies. If the employee breaches, courts will uphold the employer’s claims for back payment of non-compete compensation and liquidated damages, subject to reduction if excessive.

The above principle is exemplified in Case 4 of the Interpretation (II) cases. Mr. Zheng, formerly CTO at Company A with access to two specific drugs’ confidential information from Company A’s affiliate (Company B), signed a 24-month non-compete agreement upon resigning in September 2021 and later joined Biotech Company C. Company A sued, claiming Company C was a competitor and seeking damages. The court dismissed all of Company A’s claims, ruling that: (1) an employee’s non-compete obligations must align with the specific trade secrets they actually accessed (limiting Mr. Zheng’s duty to the two drugs, not the entire biopharmaceutical sector); and (2) a “competitor” is defined by product substitutability, finding Company C’s cancer treatments had no overlap with Company A/B’s drugs in terms of medical indications or clinical use. This case signals a clear judicial stance against overreaching non-compete clauses.

The recent Guidelines, though not binding, provide further detailed recommendations on the content of non-compete agreements and could be persuasive for courts when ruling on whether certain clauses are reasonable. Key highlights include:

• Scope and Applicability: Non-compete agreements should only apply to employees with access to genuine commercial secrets, such as senior management, senior technical staff, and others with confidentiality obligations.
• Agreement Requirements: Employers must clearly specify the non-compete scope, duration (maximum 2 years), geographic limits, and compensation terms in written agreements. Blanket restrictions (e.g., nationwide bans) require sufficient justification.
• Economic Compensation: Monthly compensation during the non-compete period should generally be no less than 30% of the employee’s average monthly salary over the past 12 months, and not below the local minimum wage. If the term exceeds one year, 50% is recommended.
• Liquidated Damages Limits: Employers and employees may agree on breach penalties, but the amount must be reasonable - based on the potential economic loss from trade secret disclosure and the total non-compete compensation paid, and generally shall not exceed five times the total amount of the agreed non-compete compensation.
• Termination and Enforcement: Employers may terminate non-compete agreements with notice and additional compensation. Employees may cease compliance if compensation is delayed beyond one month (after reminder) or three months without payment.

The Guidelines aim to balance the protection of corporate interests with employees’ right to employment, while curbing the misuse of non-compete clauses that hinder fair market competition and the orderly mobility of labor.

 

Termination-Related Disputes

 

Social insurance waivers: These often appear in termination settlements, where parties try to close off future claims. The Interpretation (II) and accompanying cases reaffirm that such waivers are void.

• Case 6 of the Interpretation (II) cases. An employer and employee agreed to waive social insurance contributions. The court invalidated the agreement and ordered the employer to pay economic compensation. This underscores that employers cannot contract out of statutory obligations, even in negotiated exits.

Statute of limitations: Interpretation (II) also clarifies procedural risk: the statute of limitations defense must be raised at the arbitration stage. Courts will not consider it at trial unless new evidence appears. Employers must therefore prepare limitation arguments early.

 

Practical Takeaways for Employers

1. Reinstatement risks: Employers should assume reinstatement remains a real possibility. Standardise termination procedures, and budget for backpay from the termination date if reinstatement is ordered.
2. Non-competes: Narrow non-competes to employees with access to genuine confidential information; ensure compensation is adequate and the liquidated damages are not excessive. Review existing non-compete agreements and internal policies to align with Interpretation (II) and the Guidelines.
3. Termination settlements: Avoid relying on social insurance waiver clauses; they will not hold up in court.
4. Case management: Raise limitation defenses at arbitration, not later.

 

 

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¹Supreme Court Clarifies Employment Boundaries: What Employers Must Do on Contracts and Labour Relationships | DLA Piper
²Please also see our previous observations on the Beijing judicial guidance.