On August 1, 2025, China's Supreme People's Court (SPC) issued the Interpretation (II) of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (Fa Shi [2025] No. 12) (the "Judicial Interpretation II"), along with six accompanying representative labor dispute cases (the "Representative Cases").
Scheduled to take effect on September 1, 2025, Judicial Interpretation II clarifies contentious issues in contemporary labor disputes—particularly non-compete clauses, social insurance, and employee benefits—to unify judicial standards and improve adjudicative consistency. The Representative Cases—drawn from proactive judicial practice—illustrate how Judicial Interpretation II applies to real-world disputes.
This article provides an analysis of Judicial Interpretation II's pivotal provisions and newly established rules, assesses their practical implications for corporate employment management, and offers useful recommendations for the compliance advice of workplace management.
1. Joint liability of affiliated entities regarding remuneration & benefits in co-employment arrangements.
Article 3 of Judicial Interpretation II:
"Where an employee is employed alternately or simultaneously by multiple entities with an affiliated relationship, and requests confirmation of the existence of a labor relationship, the people's court shall handle the case according to the following circumstances: (1) Where a written labor contract has been concluded and the employee requests confirmation of the labor relationship in accordance with the labor contract, the people's court shall support such claim in accordance with the law; (2) Where no written labor contract has been concluded, the labor relationship shall be confirmed based on employment management acts, considering factors such as working hours, work content, payment of labor remuneration, and payment of social insurance premiums. Where an employee requests that the affiliated entities jointly bear responsibilities such as payment of labor remuneration and welfare benefits in circumstances as specified in item (2) of the preceding paragraph, the people's court shall support such claim in accordance with the law, except where the affiliated entities have made agreements on labor remuneration and welfare benefits with the employee in accordance with the law and with the employee's consent."
In practice, mixed employment arrangements among affiliated enterprises remain common, leading to persistent disputes over labor relationship identification and remuneration obligations. Judicial Interpretation II provides clarity on this matter: where employees are alternately or concurrently employed by affiliated entities without written contracts, courts will assess employment relationships based on substantive factors including actual employment management practices, working hours, job functions, remuneration payment, and social security contributions, while generally supporting employees' claims for joint liability regarding unpaid wages and benefits among such entities. Importantly, this joint liability may be avoided if the affiliated entities have established agreements on remuneration and benefits with the employee's explicit consent. Representative Case II reinforces these principles by clarifying the standards and the criteria in such disputes.
Recommendations for Compliance: Affiliated entities engaging in co-employment arrangements face material joint liability risks if they cannot demonstrate clear independent employment relationships. To mitigate such exposure, enterprises may consider implementing the following measures:
A. Explicitly designate the employing entity, social insurance contributor, and salary-paying entity in written labor contracts.
B. For necessary cross-enterprise workforce sharing, execute formal secondment agreements or equivalent written contracts that clearly delineate liability allocation, while securing the employee's written consent to avoid joint liability under Judicial Interpretation II.
2. Foreign enterprises are included as participants in labor dispute litigation in accordance with the law.
Article 5 of Judicial Interpretation II:
"A lawfully established representative office of a foreign enterprise may be a party to a labor dispute case. Where a party applies to add the foreign enterprise as a party to the litigation, the people's court shall support such application in accordance with the law."
Under Chinese law, representative offices of foreign enterprises ("the Representative Offices") are not considered legal employers and must hire employees via authorized labor dispatch providers. In practice, while courts generally recognize Representative Offices as proper litigation parties and hold them jointly liable with dispatch agencies, their limited assets often result in unenforced judgments. Consequently, it is difficult for claimants to request to enforce the awards on the foreign enterprises themselves.
Article 5 of Judicial Interpretation II addresses this issue by explicitly recognizing the litigation eligibility of Representative Offices while allowing parties to petition for the inclusion of foreign enterprises as participants. This rule strengthens the liability framework for foreign enterprises operating in China, ensuring that claimants' rights are not compromised due to the Representative Offices' special status.
Recommendations for Compliance: The final text of Judicial Interpretation II revised the draft provision's phrasing from "adding a party to the proceedings" to "adding as a litigation participant." While this clarification addresses procedural participation, uncertainty persists regarding both the legal standing of foreign enterprises in China's labor dispute litigation and their potential direct liability. To mitigate risks, enterprises may consider the following measures:
A. Representative Offices should engage employees exclusively through qualified foreign service agencies under labor dispatch arrangements to avoid direct employment.
B. Dispatch agreements should clearly delineate the scope of rights and obligations of all parties to establish clear liability boundaries, thereby preventing the potential extension of Representative Offices' liabilities to their parent foreign enterprises.
3. The circumstances and criteria for determining "consecutively concluding two fixed-term labor contracts " entitling employees to request open-ended employment contracts are clarified.
Article 10 of Judicial Interpretation II:
"Any of the following circumstances shall be deemed by the people's court as meeting the requirements of 'consecutively concluding two fixed-term labor contracts':
(1) The employer and the employee have agreed to extend the term of the labor contract for a cumulative period of one year or more, and the extension period has expired;
(2) The employer and the employee have agreed that the labor contract shall be automatically extended upon expiration, and the extension period has expired;
(3) The employee, for reasons not attributable to himself/herself, continues to work at the original workplace and position, and the employer changes the contracting entity but continues to manage the employee, and the contract period has expired;
(4) The labor contract is re-concluded by other acts in violation of the principle of good faith to evade the application of the law, and the contract period has expired."
Pursuant to Article 14 of the Labor Contract Law, employees who meet statutory conditions acquire the right to demand open-ended contracts after completing two consecutive fixed-term labor contracts. To resolve inconsistent judicial interpretations regarding what constitutes 'two consecutive fixed-term labor contracts' and to prevent employers from circumventing statutory obligations, Judicial Interpretation II provides explicit clarification by incorporating negotiated contract extensions cumulatively exceeding one year as well as automatic renewal clauses into the assessment framework, with a catch-all provision voiding arrangements contrary to the principle of good faith thus establishing comprehensive safeguards.
Notably, Judicial Interpretation II reinforces the legislative intent of Article 10 of the Implementation Regulations of the Labor Contract Law by expressly stipulating that the count of consecutive labor contracts shall accumulate where employees maintain their original workplace and position and the change of contracting entities for reasons not attributable to themselves. This provision is expected to effectively eliminate a systematic loophole that previously enabled employers to circumvent statutory obligations for open-ended contracts through restructuring of entities under the same company group.
Recommendations for Compliance: To ensure compliance and mitigate legal risks, enterprises are advised to establish and maintain dynamic management systems for labor contracts, prioritizing the following key measures:
A. Implement regular performance reviews of labor contracts, integrated with automated tracking systems to flag approaching termination dates and renewal deadlines.
B. Prohibit from extending the contract term automatically replacing formal renewals or intentionally prolonged contract terms.
C. Conduct comprehensive assessments to identify and address operational practices that could be construed as attempts to circumvent statutory labor obligations.
4. Refined enforceability standards for non-compete clauses.
Article 13 of Judicial Interpretation II:
"Where the employee is not aware of or has not accessed the employer's trade secrets or confidential matters related to intellectual property, and the employee requests confirmation that the non-competition clause is not effective, the people's court shall support such claim in accordance with the law. Where the scope, region, term, and other contents of the non-competition clause as agreed are not commensurate with the trade secrets or confidential matters related to intellectual property that the employee is aware of or has accessed, and the employee requests confirmation that the part of the non-competition clause exceeding a reasonable proportion is invalid, the people's court shall support such claim in accordance with the law."
Article 14 of Judicial Interpretation II:
"Where the employer and senior management personnel, senior technical personnel, and other personnel with confidentiality obligations agree on a non-competition clause during the term of employment, and the employee requests confirmation that the non-competition clause is invalid on the grounds that such a clause may not be agreed upon during the term of employment or that no economic compensation has been paid, the people's court shall not support such claim."
As a key legal instrument for protecting trade secrets and intellectual property, the non-compete system has long faced disputes over its permissible scope in China's judicial practice. Drawing on recent rulings, Judicial Interpretation II now establishes clearer standards for enforceability:
1) Employee Qualification – Non-compete clauses are unenforceable against employees who neither accessed trade secrets nor were bound by IP-related confidentiality obligations.
2) Proportionality Requirement – Restrictions on scope, geography and duration must be reasonably tailored to the trade secrets or confidential information accessed by the employee. The stricter restrictions without reasonable grounds will be deemed invalid.
Notably, the specific criteria for determining "reasonable proportionality"—particularly concerning the restriction on scope, geography, and duration of non-compete clauses—remain further case-by-case judicial clarification. This standard will undoubtedly become a pivotal factor in adjudicating future non-compete disputes in China.
Regarding the controversial issue concerning non-compete obligations during active employment, Article 14 of Judicial Interpretation II establishes landmark clarifications:
1) Validity Confirmation – Explicitly affirms the enforceability of non-compete agreements during active employment.
2) Compensation Principle – Recognizes that the consideration for such obligations is presumptively included in regular wages, absolving employers of compensation obligations.
Although Judicial Interpretation II does not explicitly prescribe penalties for breaches of active-employment non-compete obligations, Supreme Court's Representative Case V confirms that employees who violate such duties during employment may be held contractually liable. Consequently, we understand that penalty or liquidated damages clauses for those employees who violates the non-compete obligations during the employment remain valid and enforceable.
To view the full article please click here.
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.
