New Developments In Labor Law: Rising Compliance Risks For Employers

The Supreme People’s Court of the People’s Republic of China has recently issued a judicial interpretation — Interpretation (II) of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (the “Interpretation”), which took effect on September 1, 2025. The Interpretation is expected to have significant implications for all employers in China, including foreign invested enterprises, and marks a further tightening of the requirements imposed on employers under China’s labor laws in the context of labor dispute arbitration and judicial practice.

1. Payment of social insurance contributions as a mandatory obligation

The Interpretation explicitly provides that any agreement, regardless of its form, under which an employer and its employee agree not to pay social insurance contributions for the employee is deemed invalid. Such agreements cannot exempt the employer from its statutory obligation to make social insurance contributions for employees. Furthermore, entering into such agreements may expose the employer to liability for default interests and penalties, as well as the risk that employees may terminate the labor contract on this basis and claim severance pay. In labor dispute arbitration, such circumstances will serve as strong grounds for employees to assert their rights.

It is noteworthy that, while employers are obliged to make social insurance contributions for their foreign employees as well (including senior officers such as general managers), local authorities in different regions have applied these requirements inconsistently in the past. Moreover, many foreign employees from countries with well-established social security systems have shown little intention of participating in China’s social insurance scheme, often leading to arrangements with employers to forgo such contributions. The Interpretation invalidates such voluntarily concluded agreements, requiring employers to exercise heightened caution when making social insurance arrangements for their foreign employees. For example, employers may rely on benefits provided under China’s social security treaties with certain countries, such as Germany, to obtain exemptions from contributing to China’s system for eligible foreign employees.

2. Recognition of diversified models for the employment of foreign employees

Under previous judicial practice, whether a foreign national (excluding holders of Chinese permanent residence permits) possessed a work permit for employment with a domestic employer was the sole criterion for determining the existence of a labor relationship. The Interpretation broadens the criterion, recognizing that, in addition to foreign nationals who have obtained a Chinese permanent residence permit or a work permit, there may be other circumstances in which the legal relationship between a foreign national and the employing entity should be treated as a labor relationship, if they have “gone through the relevant procedures in accordance with applicable national regulations”.

This means that foreign nationals working in China whose employment is based on specific policies, bilateral agreements or potentially emerging employment models in the future may also be recognized as having entered into a labor relationship with the employer. Consequently, employers are subject not only to the fulfillment of general contractual obligations but also to stricter labor law obligations and liabilities. In labor dispute, the determination of the employment relationship directly affects whether the employer is liable for unlawful termination, severance pay, and other obligations.

We recommend that employers conduct a comprehensive review of their current employment models for foreign employees, including employees’ labor contracts, work permits and residence permits, to clearly determine whether each employment arrangement falls under Chinese labor law. Employers should also establish and improve their employment compliance systems, particularly with respect to the hiring of foreign nationals, to mitigate the risk of potential labor disputes.

3. Continued performance of the labor contract: highlighted as one of the legal consequences of unlawful termination

Under the Labor Contract Law, if an employer unlawfully terminates an employee’s labor contract, the employee is entitled either to claim compensation equivalent to 200% of the severance pay that would have been owed in the event of a lawful termination, or to request the continued performance of their labor contract. Previously, in cases where the employee opted to request continued performance, there were no clear statutory criteria to guide labor arbitration institutions or courts in deciding whether to uphold the request. The Interpretation has now formally clarified these criteria. Furthermore, the Interpretation stipulates that if an employee requests continued performance following an unlawful termination and this request is upheld by labor arbitration institutions or courts, the employer is obliged to pay the employee’s regular salary for the period between the termination and the resumption of contract performance.

Therefore, before deciding to terminate an employee’s labor contract unilaterally, an employer should conduct a thorough legal risk assessment and ensure that the grounds for termination are sufficient and the procedures lawful. This helps avoid dual liabilities arising from a defective or unlawful termination, namely the retroactive payment of substantial salaries, in addition to reinstating the labor contract. This provision further strengthens the protections afforded to workers under Chinese labor law; employers must exercise caution when terminating employment relationships to avoid labor dispute arbitration resulting from unlawful termination.

4. Clarification of the rules on non-compete obligation

The Interpretation imposes restrictions on the establishment and scope of non-compete obligations. Its guiding principle is that the imposition and scope of such obligation must correspond to whether, and to what extent, the employee actually had access to the employer’s confidential information during their employment. Accordingly, employers should not impose non-compete obligation on employees who had no access to confidential information, nor should they arbitrarily expand the geographical, temporal or other scope of such obligation.

As enterprises are increasingly placing greater emphasis on the protection of trade secrets, it is advisable for them to seek professional assistance when strengthening their confidentiality systems, so as to avoid non-compete agreements concluded with employees being deemed invalid due to violations of the above restrictions. For example, employers may consider tailoring non-compete agreements according to the confidentiality level of different positions and, where necessary, providing for a period of restricted access to confidential information prior to the termination of employment.

The issuance of these Interpretations signifies that the enforcement of China’s labor laws and the oversight of labor compliance will impose higher standards on employers. In particular, employers will face stricter scrutiny in labor dispute arbitration proceedings. Companies should take a professional approach to strengthening risk prevention, especially in high-risk areas such as termination of employment and unlawful termination. They should refine their employment management systems to mitigate the risk of losing arbitration cases and use this opportunity to further improve their overall employment management framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.