China’s Judicial Interpretation II on Labor Disputes clarifies key legal standards for handling employment disputes in China. This article examines its legislative context, major changes, and why foreign-invested enterprises must proactively review their employment practices.
On August 1, 2025, China’s Supreme People’s Court (SPC) released the long-awaited Judicial Interpretation II on the Application of Law in Labor Dispute Cases (Fa Shi [2025] No. 12, hereinafter “Judicial Interpretation II on Labor Disputes” or “Judicial Interpretation II”), along with a set of illustrative cases. Both will take effect on September 1, 2025.
The interpretation addresses several contentious and complex issues in labor dispute adjudication, including employer liability in outsourcing and subcontracting arrangements; the determination of labor relationships in mixed employment scenarios; exceptions to double wage compensation for failure to sign written labor contracts; eligibility to enforce non-compete obligations; legal liability for failing to contribute to social insurance; and arbitration time-limit defenses raised during litigation, among others.
This new interpretation reflects the SPC’s ongoing effort to unify judicial standards and provide clearer guidance for handling labor disputes in an increasingly complex employment environment. In this article, we offer a high-level overview of the interpretation background, drafting process, and key provisions. In subsequent articles of this series, we will delve deeper into specific rules and analyze their practical implications for employers and HR compliance teams. Subscribe to stay updated on these critical developments.
Judicial Interpretation II on Labor Disputes Series:
- Subcontracting Risks: When Hiring an Unlicensed Entity Creates Employer Liability (Article 1-2)
- Who’s the Employer? Managing Risks in Intra-Group and Dual Employment Scenarios (Article 3)
- Employment of Foreign Nationals and Foreign Enterprises: What’s New?
- Double Wage Liability: When Failing to Sign a Contract Gets Expensive (Article 6-7)
- Automatic Renewals and Open-Ended Contracts: What Triggers What? (Article 8-11)
- Training Costs and Service Periods: When Can Employers Claim Damages? (Article 12)
- Non-Compete Agreements: How to Stay Within the Legal Boundaries (Article 13-15)
- Illegal Termination and Continuation of Employment: Key Legal Consequences (Article 16-18)
- Social Insurance Compliance: No Waivers, No Excuses (Article 19)
- Arbitration Time Limits: How New Evidence Can Still Change the Case (Article 20)
Background and legislative process
In line with the rollout of China’s Civil Code, the SPC has been working to streamline and modernize its judicial interpretations, including those governing labor disputes. This effort began with the release of Judicial Interpretation I in 2021, which consolidated four previous documents into a unified framework.
Since then, China’s labor landscape has continued to evolve. Disputes involving non-compete clauses, employee benefits, and social insurance obligations have become more frequent and complex, posing new risks for employers and complicating efforts to maintain compliant and stable labor relations. For HR teams and legal departments, the lack of unified judicial standards in these areas has made dispute prevention and resolution more challenging.
To address these gaps, the SPC released a draft version of Judicial Interpretation II in 2023, prompting extensive feedback from legal practitioners and the business community. Over the next 18 months, the SPC reviewed this input and made significant revisions.
The current final version reflects a more targeted approach. The number of provisions was reduced from 27 to 21, with several contentious clauses—such as those on equity incentive disputes and special time limits for annual leave claims—removed. The remaining provisions were revised for clarity and practical application, with a focus on balancing employee protection and employer accountability.
For companies operating in China, the interpretation offers much-needed legal clarity on several long-standing grey areas. Understanding these changes is essential for updating employment practices, managing compliance risk, and handling disputes effectively.
Guiding principles and key highlights
Judicial Interpretation II is built on three guiding principles: supporting employment stability alongside high-quality economic development; balancing the protection of employee rights with employer sustainability; and combining fairness with differentiated treatment based on real-world scenarios. The interpretation addresses both long-standing ambiguities and emerging challenges in China’s evolving labor landscape.
Below are some of the key highlights:
Promoting stable employment and supporting economic development
One of the core objectives of the interpretation is to encourage employers to uphold their social responsibilities around job stability. Frequent use of short-term labor contracts undermines employment security and weakens long-term workforce development. To address this, the interpretation clarifies what constitutes “two consecutive fixed-term contracts” under Article 14 of the Labor Contract Law—often a trigger for mandatory non-fixed term employment. Specific situations now recognized include:
- Contract extensions totaling over one year;
- Automatic contract renewals after expiry; and
- Changes in contract signatory entities not caused by the employee.
These clarifications aim to reduce disputes and prevent employers from circumventing obligations to offer open-ended contracts, thereby promoting more stable employment relationships.
The interpretation also encourages the healthy flow of talent. It limits the enforceability of non-compete clauses, stating that such clauses are invalid if the employee was not actually exposed to trade secrets or confidential IP-related information. Furthermore, non-compete terms must be reasonably aligned with the scope, region, and duration of the confidential exposure. This supports labor market fluidity and reduces overly broad contractual restrictions that can hinder innovation and mobility.
Balancing employee protection with employer operations
The interpretation emphasizes the principle of good faith, encouraging both parties to honor contractual commitments. For example, if an employer provides special treatment (such as training subsidies or relocation benefits) under an agreed term of service, and the employee fails to fulfill that term, courts may award compensation based on actual losses, the degree of fault, and the duration of service performed.
It also clarifies employer liability regarding unsigned labor contracts. While the Labor Contract Law requires written contracts and mandates double wage penalties for non-compliance, the interpretation limits this liability when the employer can prove that the employee deliberately or negligently refused to sign a written contract. This provision offers some protection for employers acting in good faith but facing non-cooperative behavior from employees.
Strengthening fairness while addressing real-world complexities
The interpretation tackles persistent issues in labor practices, such as illegal subcontracting, use of affiliated companies, and avoidance of social insurance obligations:
- Subcontracting and affiliation: If a contractor or affiliated party subcontracts work to an unqualified entity or allows unauthorized parties to “attach” to their license, they remain responsible for employee wages and workplace injury insurance.
- Mixed employment scenarios: Where no formal contract exists but multiple affiliated companies are involved, courts will assess actual work arrangements, including job duties, wage payments, and social insurance contributions, to determine the true employer.
- Social insurance obligations: Any agreement between employer and employee to waive social insurance contributions is invalid. If an employee resigns on the grounds that contributions were not made and claims severance pay, the court will support that claim. Employers may recover reimbursed contributions made in accordance with administrative orders.
These rules are intended to uphold the integrity of the social insurance system, safeguard employee entitlements, and reduce compliance risks—especially important in the context of population aging and increasing labor costs.
Additional clarifications
The interpretation also provides guidance on other practical issues, including:
- Labor relationships involving foreign employees;
- Employer obligations when work continues beyond contract expiry;
- Conditions under which labor contracts are deemed impossible to perform;
- The impact of occupational health assessments on dismissal decisions; and
- How arbitration time limits can be raised as a defense in court proceedings.
Six model cases were released alongside the interpretation to illustrate how these rules are applied in practice. These examples, drawn from local court experience, provide valuable reference points for companies navigating labor risk.
Why FIEs should pay attention
Foreign-invested enterprises (FIEs) operating in China often maintain relatively standardized human resources practices. However, the complexity of China’s labor law system, particularly the regional variations and frequent policy updates, presents ongoing compliance challenges. For FIEs, legal predictability and compliance costs are top of mind, as labor disputes can directly impact operational efficiency, internal morale, and corporate reputation.
Judicial Interpretation II addresses many of the high-risk areas where labor disputes frequently arise and establishes clearer judicial standards for how such cases will be adjudicated going forward. As a result, it has direct implications for how FIEs manage labor relationships in China across several key areas.
For example, the interpretation provides specific guidance on commonly disputed matters such as contract formation and termination. These are central to determining whether an enterprise’s employment practices meet legal requirements. In this sense, the interpretation serves as both a compliance benchmark and a risk-prevention tool.
FIEs also tend to rely on employment structures such as intra-group secondment, outsourcing, and the hiring of foreign nationals. These arrangements, while often operationally necessary, are prone to being classified as “de facto employment relationships” under Chinese law—potentially shifting labor liabilities onto the FIE itself. Judicial Interpretation II introduces stricter criteria for determining the legitimacy of such arrangements, making it essential for FIEs to clearly define employment responsibilities and avoid informal or undocumented labor practices.
Moreover, intellectual property and trade secret protection are a top priority for many FIEs. Non-compete agreements are a common tool to retain key personnel and safeguard confidential information. The interpretation refines the enforceability criteria for non-compete clauses, including rules on geographic scope, duration, compensation standards, and liability for breach. This calls for FIEs to revisit the design of their non-compete agreements—ensuring, for example, that they specify competitor lists, clarify payment mechanisms, and strictly fulfill compensation obligations post-termination to uphold the agreement’s validity.
Action points: Ensure compliance before September 1, 2025
Judicial Interpretation II is not an isolated legal update—it is part of China’s ongoing effort to modernize and refine its labor law system. At its core, the interpretation aims to clarify legal rules, unify adjudication standards, and strike a balance between protecting employee rights and preserving employer autonomy in workforce management.
For FIEs, this development should be viewed not only as a legal compliance requirement but also as a strategic opportunity. While minimizing legal exposure is a necessary defensive move, proactively aligning employment practices with interpretation can help optimize labor management, reduce internal friction, and improve operational efficiency.
To prepare for the implementation of the interpretation, FIEs should conduct a targeted review of their employment practices and policies. Key actions include:
- Review qualifications of contracting partners: Terminate cooperation with unlicensed subcontractors or affiliated entities. Clearly assign employment responsibilities in service agreements to avoid liability spillover.
- Standardize intra-group employment practices: Harmonize employment terms across group entities and eliminate undocumented cross-entity labor arrangements. Use tripartite agreements to define labor relationships between the employee, dispatching entity, and host company.
- Upgrade labor contract templates: Incorporate triggers for open-ended contracts, append non-compete scope and restrictions, and specify how damages will be calculated if service period obligations are breached.
By taking these steps before Judicial Interpretation II comes into force on September 1, 2025, FIEs can better manage compliance risks and create a more stable, trustworthy employment environment in the China market.
About Us
China Briefing is one of five regional Asia Briefing publications, supported by Dezan Shira & Associates. For a complimentary subscription to China Briefing’s content products, please click here.
Dezan Shira & Associates assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Haikou, Zhongshan, Shenzhen, and Hong Kong. We also have offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Dubai (UAE) and partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh, and Australia. For assistance in China, please contact the firm at china@dezshira.com or visit our website at www.dezshira.com.
