Tighter employer liability under new labour dispute rules (Part 2)

Responding to a surge in labour disputes in recent years, the Supreme People’s Court has introduced a new judicial interpretation that refines judicial standards, raising new challenges for corporate compliance and employment risk management.

Interpretation (II) of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, which took effect on 1 September 2025, serves as a pivotal regulatory document in the field of labour and employment law.

Previously, in Part 1, the author examined key provisions of Interpretation II. In this instalment, the analysis continues with a focus on additional clauses, drawing on related judicial practices to offer guidance on identifying employment risks and enhancing corporate management systems.

Q: How does Interpretation II determine “consecutive execution of two fixed-term employment contracts”?

A: The determination of “consecutive execution of two fixed-term employment contracts” is addressed in article 10. This states that a people’s court should deem the situation as compliant with article 14, paragraph 2, item 3 of the Labour Contract Law under any of four circumstances, namely:

1. Where the employer and employee negotiate to extend the labour contract for a cumulative period exceeding one year, and the extended period expires;
2. Where the employer and employee agree that the labour contract will automatically renew on expiration, and the renewed period expires;
3. Where the employee, without fault on their part, continues working at the same workplace and position, but the employer changes the contracting entity while still managing the employee, and the contract term expires; and
4. Where the employer, through other acts of bad faith, signs another labour contract to circumvent the law, and the term of this new contract expires.

This provision strengthens employee protection while imposing stricter compliance requirements on employers. In detailed analysis, the first clause explicitly states that extending a labour contract for more than one year is equivalent to signing a second fixed-term contract. This prevents employers from abusing contract extensions to avoid legal obligations tied to executing a second contract.

Regarding the second clause, employers should avoid including automatic renewal clauses in labour contracts. Once triggered, such a clause deprives employers of the right to terminate the first fixed-term contract.

Additionally, the law does not specify a duration for automatic renewals. Even a brief renewal could be interpreted as a second fixed-term contract, eliminating the employer’s right to terminate.

The third clause clarifies that employers cannot evade recognition of a second contract by altering the contracting entity, provided they retain control over the employee’s work. This aligns with the legislative spirit of article 46 of the earlier Interpretation (I) of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases.

Article 10 also establishes that, after completion of two fixed-term contracts, employers cannot unilaterally terminate the labour relationship at will. This unifies judicial practices that previously varied across regions.

For example, Shanghai courts previously permitted employers to exercise unilateral termination rights on expiry of the second fixed-term contract. This practice was based on Document of Shanghai Higher People’s Court (2009) No. 73.

However, since the 2025 update, this judicial practice has changed. Although no official documents have been issued, the change has already been implemented in practice.

If employers are undecided about whether to terminate a contract at the end of the first term – or wish to further evaluate an employee’s performance – it is permissible to negotiate an extension of the contract. However, the extension should not exceed 12 months.

Under Interpretation II, such a short extension is not considered a second fixed-term contract, and the employer retains the right to terminate the relationship when it ends.

Q: What changes does Interpretation II introduce regarding the objection period for continued employment after a labour contract expires?

A: Interpretation II introduces a “one-month objection period” setting stricter rules on how employers handle situations where employees continue working after their labour contracts expire.

According to article 11, if an employee keeps working beyond the contract’s expiration and the employer does not raise an objection within one month, the court will uphold the employee’s request to renew the contract under the same terms.

If the conditions for signing an open-ended labour contract are met, the court will uphold the employee’s request to enter into such a contract under the original terms. Additionally, if the employer chooses to terminate the contract, the court will back the employee’s claim for any legal consequences arising from the termination.

Previously, under article 34 of Interpretation I, if an employee continued working after the contract expired and the employer did not object, it was presumed that both parties had agreed to continue the contract under the original terms. Either party could then terminate the relationship and the courts would recognise this decision.

Interpretation II now expands on Interpretation I by introducing a one-month objection period for employers. Since the first clause of article 34 in Interpretation I has not been repealed, under the combined application of the two interpretations employers retain the legal right to terminate the labour contract within one month of the first contract’s expiration.

However, ambiguity arises in cases where an employee continues working for more than one month, but less than a year, without formally requesting contract renewal. Does the employer still retain the right to terminate the relationship in such cases? The legislative intent is clear: Interpretation I treats an employer’s silence as agreement to continue the labour contract under the original terms, while Interpretation II imposes a specific time limit for objections.

The purpose of this new interpretation apparently requires employers to decide whether to terminate a labour contract within the prescribed time frame, rather than allowing prolonged delays. As a result, employers in such cases lose the right to terminate the contract after the objection period expires.

Gu Hanbing is a partner at Ronly & Tenwen Partners

Read more about labour dispute rules

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Tighter employer liability under new labour dispute rules (Part 1)

The Supreme People’s Court has introduced a new judicial interpretation on labour disputes that raises the stakes for employer compliance and risk management

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