China’s supreme court sets clearer rules for foreign employers and expatriate workers
📅 01/09/2025
Foreign businesses and expatriate workers in China will need to adapt their employment practices and contracts in China to reflect the latest judicial interpretation on labour disputes issued by the Supreme People's Court of China.
The recent judicial interpretation by China’s highest court, officially titled Interpretation on Several Issues Concerning the Application of Law in the Trial of Labour Dispute Cases (II) (https://www.court.gov.cn/fabu/xiangqing/472691.html), became effective on 1 September 2025. It addresses a wide range of controversial and frequently litigated employment law issues and offers much-needed clarity and certainty on topics such as group companies’ employer liability, non-compete clauses, social insurance obligations, and limitation defences in employment litigation.
Several provisions are particularly relevant for foreign-invested enterprises (FIEs), representative offices (ROs), and multinational companies operating in China. These clarifications provide greater legal certainty in areas where foreign businesses and expatriate employees frequently encounter labour compliance challenges in China, including the social insurance obligations of foreign companies hiring in China, the employment relationships with expatriates, and the litigation status of representative offices and foreign enterprises.
The supreme court’s guidance extends expatriate employees’ rights and protections, while also considering the legitimate interests of employers, seeking to achieve a fair balance between labour and management.
Judicial interpretations by the Supreme People’s Court of China, such as this, carry binding legal authority and are treated as quasi-legislation within the Chinese legal system. The aim of the interpretation is to unify legal application and clarify judicial standards across all courts in China when hearing relevant cases.
It is important for parties to foreign-related employment contracts and human resources teams of foreign companies to take note of the changes required to comply with national labour law and labour contract regime and to reduce the risk of disputes in China’s evolving labour landscape.
Broadening protection of expatriate employees in China
With the increasing cross-border movement of talent, the forms of employment involving expatriates in China have become more diverse. Previously, under the Regulations on the Administration of Employment of Foreigners in China and prior judicial interpretations, obtaining a work permit was considered a precondition for establishing an employment relationship.
According to the latest interpretation, an employment relationship may be legally recognised when one of the following conditions is met:
- The expatriate has obtained a permanent residence permit.
- The expatriate has a valid work permit and is residing legally in China.
- The expatriate has completed other relevant procedures in accordance with national regulations.
These criteria consolidate previous ambiguities and provide a clearer framework for determining lawful employment status. Essentially, this “catch-all” provision provides flexibility for categories of foreigners exempt from the standard work permit regime. This means more expatriate employees will be protected under China’s labour law and the labour contract law regime. For example, this may include foreign experts holding a Foreign Expert Certificate, offshore oil specialists holding special operation permits, or foreign professionals directly recruited by the government.
The key implication for foreign companies hiring expatriates in China is that once an employment relationship is legally recognised, it will be governed by the Labour Law and the Labour Contract Law, together with related regulations. These domestic laws provide more favourable protection to employees and impose corresponding obligations on employers. The interpretation brings greater certainty to the prerequisites for establishing an employment relationship. Both employers and expatriates should pay close attention to these requirements.
Representative offices and overseas headquarters may act as a party to labour dispute proceedings
Whether representative offices of foreign companies in China can be sued by their employees and the perimeter of their labour liability have long been a legal grey zone. Under the Regulations on the Administration of Registration of Resident Representative Offices of Foreign Enterprises, a representative office (RO) does not have legal person status, nor does it qualify as an independent employer. In practice, ROs typically engage employees through an authorised local service agency, which signs the employment contract with the employee and then dispatches the employee to work at the RO.
In reality, however, the RO often determines the key aspects of employment, such as job responsibilities, remuneration standards, and benefits, while the service agency has limited authority in relation to the employee’s substantive labour rights and obligations.
This arrangement has long given rise to disputes in practice, particularly as to whether employees may bring a claim directly against the RO. Often, the RO has limited assets, making enforcement of labour awards difficult to enforce, and there are also cases where the RO has been deregistered or dissolved. These situations add further ambiguity to the RO’s status in labour disputes, and employees have often sought to add the foreign enterprise itself as a defendant. Courts across China have adopted inconsistent approaches to such cases, resulting in legal uncertainty.
Article 5 of the interpretation makes it clear that a duly established RO of a foreign enterprise may act as a party to labour dispute proceedings. Where a party applies to add the foreign enterprise itself to the proceedings, the court shall support such an application in accordance with the law.
This clarification reflects China’s broader trend of strengthening jurisdiction over foreign-related labour disputes, and enhancing protection of employees’ rights and interests. Importantly, it also addresses the long-standing issue in practice where employees found themselves with ‘no defendant to sue’ in disputes involving ROs. With this development, it is now easier for employees working at foreign firms’ ROs in China to bring employment claims, allowing Chinese courts to examine the relevant facts and applicable law to determine the specific scope, extent and allocation of liability.
For employees, this provision provides greater clarity and an effective legal pathway to safeguard their rights in disputes involving ROs. For employers, including foreign companies, it underscores the importance of compliance and proper employment risk management in China, in order to avoid unnecessary disputes and exposure to joint liability.
Employer remedies when employees breach service terms linked to special benefits
Many employers, particularly foreign-invested enterprises, offer special benefits, such as housing allowance, car leases, relocation reimbursement or training opportunities to attract and retain key talent. A recurring question is whether an employer can require a fixed service period in exchange for these benefits and seek compensation if the employee resigns early in breach of that agreement.
Article 12 of the interpretation clarifies this issue. It confirms that if an employer and employee have agreed to a service period in return for special benefits (beyond regular salary), and the employee resigns early without statutory grounds under the Labour Contract Law, the court may award compensation to the employer. The amount of compensation will be determined by considering the employer’s actual loss, the degree of fault of the parties and the length of time the employee has already served.
For any employers considering providing special benefits in exchange for a service commitment, it is essential to set out a clear, written agreement with the employee. The agreement should specify the nature and value of the benefits, the agreed-upon service period, and a reasonable method for calculating compensation if the employee breaches the contract. This will help reduce the risk of disputes and increase the likelihood that the service period agreements in question will be upheld in court.
Employees should be mindful that by signing such agreements, they will be bound by the service commitment and may be required to compensate the employer in case of early resignation in breach of the agreed term.
Non-compete clauses must be proportionate and reasonable
Non-compete agreements serve as an important tool for protecting an employer’s trade secrets and intellectual property. However, in practice, such non-compete clauses are sometimes overused, with unreasonable restrictions imposed on employees who do not even have access to confidential information. Such misuse can unduly restrict employees’ freedom of employment, hinder the efficient flow of human resources, and ultimately undermine the overall business environment.
Drawing on recent judicial decisions, articles 13-15 of the interpretation provide key clarifications on non-compete clauses, including defining the scope of restrictions, non-compete obligations during employment, and the remedies for employers when a valid non-compete agreement is breached by an employee.
The interpretation now makes it clear that non-compete obligations must not extend beyond the scope of the confidential information or intellectual property that the employee has accessed or become aware of. So if an employee has not been made aware of or has no access to the employer’s trade secrets or IP-related confidential information, the non-compete agreement between the employer and the employee will be invalid.
The scope, geographical area, and duration of a non-compete clause must be proportionate to the employee’s knowledge and access to such information. Any part of a clause exceeding a reasonable scope may also be considered invalid.
The interpretation sets out that employers may agree with employees on non-compete obligations during their employment without having to pay compensation for that period. If an employee violates this in-service non-compete clause, the employer is entitled to seek damages in accordance with the agreement.
If an employee breaches a valid non-compete agreement, the employer may claim repayment of any economic compensation already paid under the agreement, and require the employee to pay liquidated damages as agreed between the parties.
It is important that employers should avoid using a one-size-fits-all non-compete agreement. They should tailor the agreement to the specific employee's role, responsibilities, and the level of confidential information they handle, while ensuring the scope, territory, and duration of the restrictions are reasonable. Where in-service non-compete clauses are included, employers should clearly define the terms and the corresponding penalties for a breach.
For employees, particularly senior executives, technical specialists and managers, it is essential to carefully review any non-compete clause before signing, ensuring the scope, geographical coverage, and duration of these clauses are proportionate to their actual roles and responsibilities. Special attention should also be paid to any clauses relating to non-compete obligations during employment, as they are enforceable even without offering extra pay and employees who breach these provisions risk liability for repayment of compensation and liquidated damages.
Agreements to waive social insurance participation are invalid
Key contacts / Authors
Yuhua YANG: yuhua.yang@thornhill-legal.com
April XIAO: april.xiao@thornhill-legal.com
Rhea YU: rhea.yu@thornhill-legal.com
Participation in social insurance is a legal obligation for both employers and employees in China. For expatriates, the Interim Measures for Foreigners Working in China to Participate in Social Insurance requires employers to register and contribute to social insurance within 30 days of the issuance of the relevant work permit.
In the past, some employees and employers would agree to waive participation in social insurance. This may arise either because the employer seeks to reduce employment costs, or because the employee prefers to receive a cash equivalent of the contributions in order to maximise short-term financial gain.
However, the interpretation now explicitly provides that any agreement whereby an employer and employee agree to forgo social insurance, or any promise by the employee not to require participation, is invalid.
The interpretation has also clarified the remedies and consequences for employers failing to pay mandatory social insurance contributions. Employees are entitled to terminate their contract and claim economic compensation in case of non-compliance by their employers. If the employer later makes the required contributions, it may recover from the employee any cash-in-lieu payments already made in respect of their agreement to waive social insurance participation.
The Chinese government is tightening enforcement on social insurance compliance in line with demographic and sustainability concerns. Employers should not agree to waive social insurance contributions or provide cash-in-lieu of payments. These arrangements are now explicitly non-compliant and can expose the employer to significant legal risks.
The new clarification serves a double-edged sword for employees, offering both strengthened rights and added complexity. On one hand, employees now have the right to terminate their employment and claim compensation if their employers fail to enrol them in China’s social insurance system. On the other hand, if the employer later fulfils their obligation and pays the social insurance premiums, the employee may be required to return any cash-in-lieu payment previously received in place of formal contributions. Although this judicial interpretation does not expressly provide for retroactive effect, there is a prevailing view that it may apply to disputes still pending after 1 September 2025, potentially extending to employment conduct and waiver arrangements that occurred prior to that date.
Despite the recent development, it is worth noting that employers and expatriates, particularly those on secondment from certain countries, may still be exempt from mandatory social insurance contributions in China, provided that a bilateral or multilateral social insurance treaty between China and their home countries. To date, China has entered into social security treaties with 13 countries, including Germany, South Korea, Denmark, Finland, Canada, Switzerland, the Netherlands, Spain, Luxembourg, Japan, Serbia, France and Kyrgyzstan.