Llinks Corporate Compliance & Legal Alert (January 2026)

Spotlight on News

1. Beijing and Shanghai successively issued typical labor dispute cases, providing guidance for enterprises implementing non-compete restrictions. 

From December 26 to 30, 2025, Beijing and Shanghai respectively published typical labor dispute cases. The disputes involving non-compete restrictions offered references such as supervisory boundaries, subject identification, and contract standardization. These cases echo the spirit of the Ministry of Human Resources and Social Security's Compliance Guidelines for Enterprise Implementation of Non-Compete Restrictions, providing guidance for enterprises to implement non-compete measures compliantly and to balance employer and employee rights. 

First, regarding the supervision of employees' non-compete performance, Beijing's Case No. 8 states that while it is reasonable for an employer to require an employee to fulfill non-compete reporting obligations, such requests must adhere to principles of reasonableness and necessity. Documents like employment contracts, social insurance records, and tax certificates are sufficient for supervision. Requiring intrusive materials-such as workplace selfies or frequent location tracking-has weak relevance to supervision and violates the least necessity principle by infringing on employees' right to information, privacy, and re-employment. Crucially, an employer must not directly presume that an employee's failure to fulfill such excessive reporting obligations constitutes a substantive breach of non compete obligations and claim liquidated damages, as doing so confuses procedural ancillary obligations with core non-compete duties, inappropriately expands the scope of breach liability, and violates the principle of equivalence of rights and obligations.

Second, concerning agreement content, Shanghai's Case No. 2 emphasizes that non-compete clauses should be specific and clear. Agreements with new-economy workers like online streamers must clarify core issues such as account ownership and follower-counting criteria. Key metrics like followers and sales should be quantified to avoid unenforceable vagueness. Shanghai's Case No. 3 further clarifies that enforcing non-compete is subject to actual access to trade secrets. If an employee accesses the employer's technical or business information, he/she qualifies as having confidentiality obligations. At the same time, stipulated liquidated damages must be reasonable to balance the employer's competitive interests with the employee's freedom of employment.

2. Supreme People's Court issued a judicial reply clarifying conditions under which the medical insurance fund may advance payments in cases involving third-party tort and similar situations. 

On January 6, 2026, the Supreme People's Court issued the Reply on the Legal Application of Conditions for Advance Payment from the Basic Medical Insurance Fund (hereinafter referred to as the "Reply"), effective February 1, 2026. The Reply responds to a 2024 inquiry from the High People's Court of Anhui Province regarding whether advance payment under the basic medical insurance fund requires the insured person not to have paid the medical expenses at the time of medical expense settlement, among other questions. 

The Reply clarifies that, in accordance with Article 30 of the Social Insurance Law of the People's Republic of China and Articles 2 and 3 of the Interim Measures for Advance Payment from Social Insurance Funds, where an insured person suffers injury or illness due to a third party who should bear the medical expenses, the basic medical insurance fund shall provide an advance payment if the third party fails to pay or cannot be identified. In their written application to the local social insurance handling agency, the insured person must state the cause of injury or illness and confirm that the third party has not paid or is untraceable. Following review, the agency shall disburse the corresponding medical expenses according to the payment rules of the local basic medical insurance fund.

Furthermore, the Reply specifies that the insured person's statutory right to apply for advance payment is not contingent upon whether they have already paid the medical expenses. If the social insurance handling agency refuses advance payment solely on the ground that the insured person has already paid, and the insured person files a lawsuit requesting the agency to perform its payment obligation, the people's court shall support such claim. For any medical expenses already advanced, the agency may seek recovery pursuant to Articles 11 and 12 of the Interim Measures for Advance Payment from Social Insurance Funds.

The issuance of the Reply helps clarify the applicable conditions for advance payment under the basic medical insurance fund, unifies judicial application standards, and contributes positively to the timely protection of employees' lawful rights and interests, as well as to the security of social insurance funds.

Legislation Updates

1. The CSRC issued the Regulatory Rules for Board Secretaries of Listed Companies (Draft for Comment) for public consultation. 

On December 31, 2025, the China Securities Regulatory Commission (CSRC) issued the Regulatory Rules for Board Secretaries of Listed Companies (Draft for Comment) (hereinafter referred to as the "Regulatory Rules") and invited public consultation until January 31, 2026. As the first dedicated regulatory document targeting board secretaries of listed companies, the Regulatory Rules aims to systematically standardize their duties and clarify their authority, thereby enhancing corporate governance.

The Regulatory Rules consists of thirty-eight articles which focus on three key areas: (1) clarifying the scope of duties specifying the board secretary's responsibilities in areas such as information disclosure, corporate governance, and internal and external communication; (2) strengthening safeguards for performance-ensuring protections related to information access, performance platforms, and remedy mechanisms to support full and lawful execution of duties; and (3) improving professional and compliance requirements, prohibiting concurrent roles that could create conflicts of interest, and mandating that nomination committees review qualifications.

Notably, Articles 24 and 38 of the Regulatory Rules set out clear mechanisms for dismissal and accountability. Where a board secretary is continuously unable to perform duties for more than one month, or where material misconduct results in significant losses to the company or investors, the board is required to promptly deliberate on dismissal upon becoming aware of such circumstances. In addition, where a listed company or its related parties violate the Rules, the CSRC may impose regulatory measures, including ordering rectification, issuing warning letters, or imposing administrative penalties, thereby establishing a rigorous and clearly defined framework of internal and external accountability.

2. Ministry of Commerce issued the Guidelines on Corporate Social Responsibility for Overseas Operations, providing guidance for overseas employment practices. 

On December 30, 2025, China's Ministry of Commerce issued the Guidelines on Corporate Social Responsibility for Overseas Operations (hereinafter referred to as the "Guidelines"), providing a systematic framework for enterprises operating abroad. The Guidelines is structured around five core dimensions: supporting host-country development, promoting social welfare, advancing environmental protection, safeguarding market order, and strengthening corporate implementation capacity. To ensure effectiveness, the Guidelines requires companies to integrate social responsibility into their core strategy and operations. 

In the key area of overseas employment management, the Guidelines stipulates that enterprises must strictly comply with host-country laws on recruitment, employment, welfare, and social security (Article 15), upholds legal compliance and equal employment, and explicitly prohibits child labor and forced labor (Article 16). For cross-border labor cooperation, enterprises should dispatch personnel in accordance with required qualifications and procedures (Article 12) and enhance management and protection of expatriate Chinese employees, including providing necessary training, legally obtaining work permits, and signing standardized contracts to safeguard lawful rights and interests (Article 17). Additionally, the Guidelines encourages enterprises to establish mechanisms for daily communication and dispute negotiation, assist employees in hardship, and offer equal skills training and development opportunities for both domestic and international staff (Articles 19-20).

3. China's first national ESG evaluation standard for the financial sector was officially released, incorporating the protection of basic employee rights and occupational welfare into its evaluation framework. 

Recently, under the guidance of the People's Bank of China, China Central Depository & Clearing Co., Ltd. led the development of the National Standard - Environmental, Social and Governance (ESG) Evaluation Framework for Bond Issuers (GB/T 46912-2025) (hereinafter referred to as the "Framework"), which was officially released and will take effect on April 1, 2026.  

The Framework provides systematic guidance for assessing the ESG performance of bond issuers, with a focus on key strategic areas such as green finance and technological innovation, and core themes including climate change, ecological protection, and sustainable governance. Within the Social (S) dimension, the Framework identifies employees as a central evaluation factor and sets out four principal assessment areas: (1) basic rights protection, which examines the company's systems and practices for safeguarding fundamental employee rights—such as labor contract execution rates, timely payment of wages and social insurance contributions, prohibitions on child labor, workforce diversity, anti-discrimination policies, working hours, workplace safety, and maternity protection; (2) occupational welfare, which evaluates measures including trade union activities, support for employees with disabilities or financial hardship, and the creation of female-friendly working environments; (3) career development, which reviews the establishment and operation of employee training and development systems, including training types, frequency, duration, investment, and career progression mechanisms; and (4) interest protection, which assesses mechanisms for safeguarding employee interests and overall satisfaction, including effective complaint handling and dispute resolution procedures, as well as the monitoring of labor disputes and their outcomes.

The Framework is expected to support financial institutions and third-party evaluators in conducting consistent ESG assessments and strengthening risk management.

Case Study

1. The Beijing No. 3 Intermediate People's Court held that a non-compete penalty should be upheld where it does not exceed the cap of “five times the total non-compete economic compensation” as prescribed in Article 14 of the Guidelines for Enterprises on Implementing Competition Restriction Compliance. 

• Facts
  
  Qin, who joined a Beijing-based company in 2005 and later served as Deputy Manager of the Technical Quality Department, was considered core technical personnel. In December 2021, he and the company entered into a two-year non-compete agreement, under which Qin would be required to refund all compensation received and pay triple that amount as a penalty in the event of a breach. After leaving the company in March 2022, Qin received 19 months of non-compete compensation totaling RMB 266,785.65. 
  
  The company later found that Qin's spouse, Chen, had become the general manager and de facto controller of a newly established Hebei Technology Company, which manufactured competing hydrogen storage bottles. Although Qin claimed to work for unrelated companies, evidence showed he had received payments and “reimbursements” from Hebei Technology Company.
  
  In subsequent arbitration and court proceedings, the company claimed the repayment of the compensation plus interest, a penalty of RMB 1,010,977.20, and RMB 30,000 for legal and notarization costs. Qin denied breaching the agreement and argued that, even if a breach occurred, the over-1-million-yuan penalty far exceeded his income and the company's actual losses, and should be substantially reduced as grossly disproportionate.
  
  
• Judge's Viewpoint
  
  Beijing No.3 Intermediate Court found that the company's claim for the agreed penalty was not excessive in light of the following factors: First, as a core technical employee, Qin had access to the company's trade secrets and core technology. Second, by working for Hebei Technology Company, Qin effectively trained a direct competitor, thereby dividing market share and materially harming the company's operating income. Third, his departure for the purpose of establishing a competing business with his spouse violated the principle of good faith and demonstrated clear subjective fault. Fourth, he continuously breached his non-compete obligations throughout the two-year restricted period. Fifth, given the close personal and financial ties between Qin and his spouse, he inevitably benefited from the profits of the competing company. Sixth, under Article 14 of the Guidelines for Enterprises Implementing Compliance with Competition Restrictions issued by the Ministry of Human Resources and Social Security, penalties for breach of non-compete obligations may be agreed between the parties and should be reasonably determined with reference to the potential losses from disclosure of trade secrets and the amount of non-compete compensation paid, and generally should not exceed five times the total agreed compensation. In this case, the agreed penalty—three times the total compensation payable to Qin—fell within the reasonable range contemplated by the Guidelines.  
  
  Taking into account Qin's access to and the importance of the trade secrets, the degree of fault, the duration of the breach, the agreed and paid compensation, Qin's income level, and the benefits derived from the breach, the court concluded that the penalty of RMB 1,010,977.20 awarded at first instance was not excessive and therefore upheld it without adjustment.

2. Beijing No.3 Intermediate People's Court held that termination based solely on the dissolution of the contracting entity constitutes unlawful dismissal when, under circumstances of mixed employment, the affiliated companies remain operational. 

• Facts
  
  Shanghai Company, Hangzhou Company, and Beijing Company are affiliated. Mrs. Wu entered into successive labor contracts with them: with Shanghai Company from June 30, 2021 to June 29, 2024; with Hangzhou Company from December 1, 2021 to November 30, 2024; and with Beijing Company from June 1, 2023 to May  31, 2026. The Beijing contract recognized her service with Hangzhou Company from June 30, 2021, to May 31, 2023 as continuous service, with no reduction in benefits.
  
  On July 26, 2024, Hangzhou Company's HR department issued Mrs. Wu a Notice of Termination of Labor Contract, citing the company's early dissolution and invoking Article 44 of the Labor Contract Law to terminate her employment effective July 31, 2024. The notice was signed under Beijing Company's name and bore its seal. At the time, Mrs. Wu was pregnant.
  
  Following the termination, Mrs. Wu initiated labor arbitration-and later court proceedings-against both Beijing Company and Hangzhou Company, seeking joint compensation for the termination. Beijing Company remained operational throughout the proceedings up to the second-instance judgment.
  
  
• Judge's Viewpoint
  
  The Beijing No.3 Intermediate Court found that, although Mrs. Wu had signed separate labor contracts with Shanghai, Hangzhou and Beijing Companies, her salary from July 2021 to July 2024 was paid alternately by the three companies and the social insurance contributions were made by entities inconsistent with the contracting parties. In addition, the termination notice was issued by Hangzhou Company's HR department. These facts were sufficient to establish a case of mixed employment. In such situations, the lawfulness of a termination must be examined in light of the overall employment arrangement among the affiliated companies, to prevent them from using mixed employment to evade statutory obligations and undermine employee rights.
  
  In this case, although Beijing Company was the contracting employer at the time of termination, the three affiliated companies clearly engaged in mixed employment with the employee, leading to an imbalance in her rights and obligations. Moreover, Mrs. Wu was pregnant at the time of termination and entitled to special legal protection. Although Beijing Company provided evidence of its decision to dissolve early, the other two affiliates-Hangzhou Company and Shanghai Company-remained operational and were fully capable of continuing her employment. By terminating her contract solely on the ground of its own dissolution, Beijing Company violated the statutory rights of a pregnant employee.
  
  The court further noted that, permitting an affiliate in a mixed-employment arrangement to unilaterally end the employment relationship merely by dissolving would allow corporate groups to shift all legal liabilities onto the dissolved entity and evade their obligations under labor law. Accordingly, the court ruled the termination unlawful and ordered Beijing Company and Hangzhou Company to jointly pay compensation to Mrs. Wu.

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