China Issues New Judicial Interpretation on Labor Dispute Cases

by Zhengwei Yang

I. Background & Summary

China's labor laws are considered employee-friendly in many ways, particularly when compared to some Western countries (for example, there is no concept of “at-will employment” in China). Under recent practice, some market players have viewed these labor laws as somewhat overprotective of employees, for example in terms of how difficult and expensive it can be to terminate workers.

However, a new interpretation of labor laws from China’s Supreme People’s Court (“SPC”) appears to move the dial back a bit in favor of employers and create some balance. On 1 August 2025, the SPC issued the Judicial Interpretation of the Supreme People's Court on the Application of Law in the Adjudication of Labor Dispute Cases (II) (“Interpretation II”), which will take effect on 1 September 2025, contains several provisions that favor employers in the arena of labor disputes. Some key takeaways for businesses include the following:

a) Interpretation II adds exceptions to compensation obligations for employers that fail to sign labor contracts with employees (please see section II below).

b) For the first time, Interpretation II confirms the validity of non-compete clauses during employment (as opposed to after a worker leaves the job). Employers are not required to pay additional economic compensation for non-compete obligations during a worker’s employment (please see section III below).

c) Regarding labor disputes over unlawful termination, Interpretation II provides clarity over when employers are not automatically required to renew contracts with employees (please see section IV below).

Please read on for detailed analysis of the above provisions.

II. Adding Exceptions to Employer Compensation Obligations for Failure to Sign Labor Contracts, Ensuring Fairness and Reasonableness

The PRC Labor Contract Law imposes on employers the obligation and responsibility for signing written labor contracts. If this law is strictly applied, employers must pay double wages if a written labor contract is not signed, regardless of the reason. The Labor Contract Law does not provide exceptions to this double wage penalty.

In practice, however, there are reasons why the employer is not at fault for failing to sign a written labor contract, such as intentional actions or gross negligence by the employee. Holding employers liable for double wages in such cases, without considering fault, is inconsistent with practical employment realities and substantive justice.

Interpretation II thus clarifies that failure to sign a labor contract does not automatically result in double wage liability; instead, liability depends on the specific reasons for the failure. If the failure is due to the worker’s actions or gross negligence, the employer is not liable for double wages.

III. Confirming the Validity of Non-Compete Clauses during Employment for the First Time

Previously, whether non-compete obligations can be imposed during employment and whether employers are required to pay compensation for such obligations was not clearly stipulated under PRC labor laws. Interpretation II, for the first time at the judicial interpretation level, clarifies that employers can impose non-compete obligations during employment without paying economic compensation, providing a new avenue for protecting confidential information during employment.

In other words, if an employee signs a non-compete clause that is effective during their employment, that employee has a duty of loyalty during employment and must not engage in self-operated businesses or work for others in competition with their employer without permission, even if no additional compensation is paid for the non-compete obligation.

If a worker violates a valid non-compete clause, employers may claim economic compensation and liquidated damages. Interpretation II does not limit liquidated damages to post-employment violations, meaning employers may also claim damages for breaches during employment.

However, non-compete clauses must not be abused. If the scope, geographic area, or duration of a non-compete clause is unreasonable, it may be deemed invalid.

IV. When Unlawful Termination Leads to Arbitration or Litigation, Employers are not Automatically Required to Renew Contracts with Employees

According to the Labor Contract Law, if an employer unlawfully terminates a labor contract, the employee may request to continue performing that contract, except for cases where “the labor contract can no longer be performed”, or claim compensation for the unlawful termination. When employees request continued performance, employers often disagree, which makes the question of whether the contract can still be performed a key issue in such cases. Due to the lack of clear legal provisions defining when “the labor contract can no longer be performed,” judicial practices and standards vary across regions.

In some judicial practices, some courts and arbitration commissions may support an employee’s request to continue performing the labor contract. In these instances, employers may thus be required to pay wages from the day after the termination to the expiration of the labor contract term, as well as economic compensation for not renewing the contract.

Interpretation II provides specific criteria for determining when a contract “can no longer be performed”. It specifies that a court may deem the contract “no longer performable” in the following circumstances:

a) The labor contract expires during arbitration or litigation, and there are no circumstances requiring renewal or extension by law.

b) The employee begins to receive basic pension insurance benefits in accordance with the law.

c) The employer is declared bankrupt.

d) The employer is dissolved (except in cases of dissolution due to merger or division).

e) The employee has established a labor relationship with another employer, which significantly affects the employee’s ability to perform tasks for the original employer, or the employee refuses to terminate the new labor relationship upon the original employer’s request.

f) Other circumstances where the labor contract objectively cannot be performed.

Considering the above, in cases where arbitration or litigation arises from unlawful termination, if the labor contract expires during the dispute resolution process, or the employee has established another labor relationship, the contract may be deemed no longer performable, and the employer will not be required to automatically renew the contract or pay compensation for not renewing. This generally applies when the employee’s first fixed-term labor contract expires during arbitration or litigation, and there are no circumstances requiring the establishment of an open-ended labor contract or special statutory conditions such as pregnancy, maternity leave, or work-related injury.