18 September 2025 • 6 minute read
Supreme Court Clarifies Employment Boundaries: What Employers Must Do on Contracts and Labour Relationships
On 1 August 2025, the Supreme People’s Court (SPC) released its Interpretation (II) on the Application of Law in the Trial of Labour Dispute Cases (Interpretation (II)), accompanied by six illustrative cases. Earlier, in April 2025, the SPC and the Ministry of Human Resources and Social Security jointly issued the Fourth Batch of Typical Labour Dispute Cases (Fourth Batch Cases). Taken together, these materials highlight how courts should confirm employment relationships and enforce contract obligations, which will be the focus of this article, while the next article1 in the series will turn to the risks that arise when employment ends. The changes to be discussed in this article are significant: they confirm how labour relationships may be established without a written contract, representative offices of foreign companies can now participate in disputes, and employers face clearer rules on written and open-term contracts. For companies operating in China, especially those managing group structures, cross-border secondments, or reorganisations, the Interpretation (II) calls for closer attention to HR and compliance practices.
Confirming Employment Relationships
Written contract as the starting point: Interpretation (II) makes clear that if there is a written employment contract, the court will confirm the relationship on that basis. If there is no written contract, however, courts will look at factual indicators such as working hours, actual duties, payment of remuneration, and social insurance contributions. This creates risk that an employment relationship may be recognised beyond the named employing entity.
Affiliated companies: If an employee requests that affiliated companies be held jointly liable where no written contract exists, courts may impose joint liability (not joint and several liability) for unpaid wages, benefits, etc.
Representative offices of foreign companies: Interpretation (II) resolves long-standing uncertainty by confirming that representative offices - though not separate legal entities - may now be named as parties in labour disputes. In some cases, the foreign company itself can also be brought in.
Contractors and subcontractors: Interpretation (II) affirms the liability for payment of labour remuneration and work-related injury insurance benefits when a contractor assigns or subcontracts services to an unqualified organisation or individual. In Case 1 of the Interpretation (II) cases, a worker hired by an individual subcontractor was injured; the court held the principal construction company liable for benefits. While most multinational employers do not engage unregistered contractors or subcontractors, this principle may still be relevant where an overseas parent with no PRC entity seeks to engage workers directly. In that scenario, a Chinese affiliate could still be deemed the employer if the statutory factors are met.
Retirees: The Interpretation (II) deleted the previous rule treating retirees as providing “services” rather than forming employment relationships. This aligns with a draft regulation on elder-worker protections and suggests that hiring retirees will carry higher compliance costs.
Employment of Foreign Employees
Interpretation (II) also clarifies the status of foreigners. Both foreigners who have permanent residency in China and foreigners with valid work authorisation - that is, a work permit and residence permit - are now explicitly entitled to have Chinese labour law apply to them.
Previously, some courts upheld contract clauses excluding PRC law or foreign-law secondment agreements to deny labour protections. Under the Interpretation (II), these approaches seem no longer viable. For companies with foreign workers in China that rely on secondment arrangements stating that employment is governed by foreign law, they should review these arrangements given employees seconded to China are likely covered by PRC labour law.
Written Employment Contracts
Double-salary liability: Employers that fail to execute written contracts must pay compensation equal to double the employee’s monthly salary, prorated for service periods of less than one month. The Interpretation (II) also confirms exemptions in limited cases such as force majeure, employee intentional misconduct or gross negligence in failing to sign labour contract, or statutory protection periods (medical treatment, maternity leave, union posts).
Employee non-cooperation (illustrative case).
In Case 1 of the Fourth Batch Cases, an employee who suffered a work injury refused to cooperate with procedures required to extend his suspension of work period, despite repeated employer reminders. The court rejected his claim and upheld the employer’s switch to sick-leave wages. Although the case concerned medical benefits, it demonstrates that courts will not penalise employers mechanically: where employees obstruct statutory procedures, courts take this into account. Employers should document non-cooperation - for example, by issuing written notices and keeping records of refusals - as protection in contract and benefits disputes.
Automatic extension scenarios. If a contract automatically extends due to statutory protection (e.g. maternity leave), the employer is not liable for double salary even if a written contract is not signed during that period.
If an employee continues working after expiry and the employer does not object within one month, courts will uphold the employee’s request for a renewed contract on the same terms.
Open-Term Employment Contracts
Interpretation (II) strengthens rules on mandatory open-term contracts. In particular, the rule that after two consecutive fixed-term contracts, an open-term contract must be signed.
- Extensions of more than one year are treated as a new fixed term, triggering open-term obligations once the two-term limit is reached.
- If there is an automatic extension clause, the automatic extension is also treated as a new fixed term, triggering open term obligation once the extension period has expired.
- If the employee continues the work in the same premises and same role, while the employer continues to manage the employee, a change in the entity signing the employment contract will be treated as a second fixed term, triggering open term obligation once the employment period with the new signing entity has expired. This prevents employers from “resetting the clock” through internal transfers.
This creates obligations but also possible flexibility: short extensions of less than one year might be a strategic possibility before moving to a second fixed term. Employers need to be careful when employees are transferred within a group or to a buyer in an M&A, as the above provisions in Interpretation (II) may make it easier for courts to rule that both service years and contract counts must carry over during such transfers, though this is not explicitly stated in Interpretation (II).
Practical Takeaways for Employers
- Intra-group transfers and M&A: More careful planning to address the risk that both service years and contract counts carry over during such transfers, and anticipate open-term obligations accordingly.
- Foreign employees and secondments: Review secondment agreements and foreign-law clauses given it's likely they can no longer exclude PRC labour protections.
- Written contracts: Ensure contracts are signed promptly, and document any employee refusals or non-cooperation. Consider whether short extensions can be used strategically without breaching the new rules on open term contracts.
- Representative offices and retirees. Recognise that representative offices can now be parties to disputes, and retirees will increasingly enjoy labour protections.