On 1 September 2025, the Supreme People’s Court’s second interpretation on labour disputes came into force and continues to apply in 2026. These clarifications significantly raise the compliance burden for companies operating in China, especially foreign-owned SMEs that often underestimate the risks in human resources management.

These changes relate to China’s social insurance, non-compete clauses, indefinite contracts and work visas.

While the measures bring greater clarity to employees’ rights, they also expose employers to higher financial liabilities, stricter oversight, and reduced flexibility in employment relationships.

Here we set out the most important changes and what foreign companies should be doing now to prepare.

Social Insurance: No More Informal Arrangements

The area carrying the heaviest financial risk is social security. The new rules confirm that any deal between employer and worker to partially skip or reduce contributions is void.

Authorities have already acted on this: one medium-sized firm that had underpaid for years was hit with multi-million renminbi back payments, penalties, and employee compensation.

Key points:

Employees may resign immediately if contributions are missing or incomplete.
They can also claim additional damages, even if the company later pays arrears.
Employers cannot defend themselves with private agreements or employee consent.

We suggest that all SMEs in China review payroll and contribution processes now. Even small errors in calculation or delayed remittances may trigger serious claims. If in any doubt, get in touch with our social security experts.

Post-Employment Restrictions: Stricter Rules on Non-Competes

Non-compete clauses remain lawful in China but are now narrower and more costly for employers.

The latest interpretation states that:

A clause is invalid if the employee did not actually handle sensitive information.
Restrictions must be reasonable in geographic and business scope; sweeping bans will be struck down.
Employers must pay at least 30% of the employee’s average salary during the restricted period.
A new guideline recommends 50% for restrictions longer than one year.
If breached, the employer may claw back payments and demand damages, but compensation is capped at five times what was paid out.

Practical takeaway: Generic templates no longer work. Non-compete clauses must be carefully drafted case by case, tailored to the employee’s role and aligned with current judicial expectations.

Written Contracts: Late Signing Means Double Pay

The importance of timely written contracts has increased. Employers must provide a signed contract within one month of commencement. Failure, even for a few days, creates a right to double salary for that period.

The interpretation clarifies that:

The only valid defences are force majeure or active refusal by the employee.
The employer bears the burden of proof.
Automatic contract extensions in cases of illness, maternity, work injury, or pending retirement do not count as omissions and do not trigger double pay.

For foreign companies it is important to ensure HR teams in China never allow an employee to start without a signed agreement. “Trial work” without paperwork is extremely risky.

Indefinite Contracts: Loopholes No Longer Work

China’s law has long required that after two consecutive fixed-term contracts, the employee gains the right to an indefinite contract. The new interpretation closes common employer workarounds:

Automatic extensions or contractual arrangements still count toward the threshold.
Attempts to transfer the worker to another affiliated company with a “fresh” contract will be ignored by courts.
Employers forced into indefinite contracts cannot rely on formalities to argue otherwise.

This means businesses must plan staffing with the knowledge that long-serving staff will eventually hold open-ended rights.

Reinstatement After Dismissal: Limited Exceptions

Illegally dismissed workers can demand reinstatement. However, courts now define when this is not feasible:

The employer is bankrupt or liquidated.
The employee has already retired and receives a pension.
The employee has joined another company and returning would be unreasonable.

In these situations, instead of reinstatement, the employer must pay double the statutory severance.

This makes improper terminations especially costly—either through reinstatement obligations or heavier severance packages.

Ongoing Salary Obligations During Litigation

If an employee challenges a dismissal and later wins, the employer must pay full salary from the termination date until the day before reinstatement.

Because labour lawsuits in China can last months or even years, this exposes businesses to large liabilities. Even where reinstatement is not ultimately ordered, wage arrears during litigation can still represent a major expense.

Limitation Periods: One Year Rule Becomes Stricter

Labour claims normally expire after one year. The interpretation specifies that this defence must be raised during arbitration, the first mandatory step before going to court.

If the employer fails to raise the limitation at that stage, it loses the chance forever, including in appeal or retrial proceedings.

For foreign firms unused to China’s dispute system, this is a crucial procedural trap: miss the window, and you are permanently exposed.

Group Companies and Subcontracting: Shared Liability

The court also clarified employer obligations in group structures and outsourcing arrangements:

If an employee works for multiple related companies, each may be liable for salary, insurance, and workplace safety.
Private agreements between affiliates do not protect against third-party claims unless explicitly included in employment contracts.
Use of unauthorized subcontractors creates liability risks for the main entities.

Advice: multinational groups must ensure that employment relationships are clearly documented and that any intra-group service arrangements are properly structured.

Foreign Nationals: Green Card Holders Gain Clarity

A long-standing grey area has been resolved: foreigners with a Chinese permanent residence permit (green card) do not require an additional work permit.

This eases compliance for a limited group of expatriates, though the majority of foreign employees will still need both work permits and residence visas.

What This Means for Foreign-Invested Companies

China’s labour regime was already considered employee-friendly. With the 2025 interpretation, the balance tips further toward workers’ rights, limiting employer flexibility and increasing financial exposure.

For European SMEs and other foreign-invested firms, the risks are especially high because:

Social insurance errors can generate huge back payments.
Poorly drafted contracts expose companies to automatic indefinite employment.
Mismanaged terminations may lead to long litigation and wage obligations.

Key Compliance Risks and Employer Exposure Under the 2025 SPC Interpretation

Area of Change	Employer Obligation	Financial / Legal Exposure	Practical Impact for Foreign SMEs
Social Insurance	Full and timely statutory contributions	Back payments, penalties, employee damages	High historical exposure if underreported
Non-Competes	Pay ≥30% (often 50%) compensation	Invalid clauses, capped damages	Templates no longer defensible
Written Contracts	Sign within 1 month	Double salary liability	Zero tolerance for delayed onboarding
Indefinite Contracts	Mandatory after 2 fixed terms	Long-term employment obligations	Workforce planning becomes critical
Dismissal Disputes	Salary during litigation	Months or years of wage liability	Litigation risk must be budgeted
Group Structures	Joint employer liability	Cross-entity claims	Requires clean intra-group documentation

Steps Companies Should Take Now

Audit payroll and social insurance contributions immediately. Correct any discrepancies before they become liabilities.
Update employment contract templates with clear clauses on term, probation, benefits, and non-competes, tailored for each role.
Train HR staff to never allow work to start without a signed contract.
Plan for permanent contracts in long-term roles—budget accordingly.
Seek legal review of dismissal procedures and ensure severance reserves are adequate.
Document intra-group employment relationships to avoid unexpected joint liability.
Raise limitation defences promptly at the arbitration stage.

Recent dispute resolution amendments expand worker protections and shift burden of proof toward employers in termination cases, requiring updated HR policies and documentation practices. HR & payroll specialists at MSA Asia help update your employment practices to reflect new legal requirements. Reach out to audit your labor law compliance.