Part II of the Analysis of the Interpretation on the Application of Law in the Trial of Labor Dispute Cases (II) (Mainland China)

On August 1, 2025, the Supreme People's Court issued the "Interpretation on the Application of Law in Labor Dispute Cases (II)" (hereinafter "Interpretation II").  This article continues from the previous one to analyze the provisions in Interpretation II that have significant impacts on employers, for reference purposes.

I. Determination of Contract Renewal and the Avoidance of Indefinite-Term Contracts

Article 8 of the Interpretation (II) specifies the circumstances under which employment contracts are automatically renewed in accordance with the law after expiration (e.g., medical leave, pregnancy, maternity leave, breastfeeding period, service period not yet concluded, and union term not yet completed).  During these periods, it does not constitute the employer's failure to enter into a written employment contract, thus the employer is not required to pay double wages.  Article 10 clarifies the invalid actions deemed as evading the signing of an indefinite-term employment contract, including: (1) the cumulative extension of the employment contract period between the employer and the employee reaching over one year, with the extended period having expired; (2) the employer and the employee agreeing that the employment contract shall automatically renew upon expiration, with the renewal period having expired; (3) the employee continues to work at the original workplace and position not due to their own reasons, while the employer changes the contracting party but continues to manage the employee, with the contract period having expired; (4) re-entering into an employment contract through other actions that violate the principle of good faith, with the term having expired.

Article 8 clarifies the employment risks during statutory extension periods. Article 10 completely blocks avenues for employers to evade signing indefinite-term labor contracts with workers through "manipulation," emphasizing the safeguarding of the principle of good faith.

Compliance Recommendations:

1. Identify statutory renewal scenarios: The HR department must be proficient in understanding the statutory automatic renewal provisions of the Labor Contract Law, promptly review contracts before expiration, and avoid illegal termination.

2. Honest and compliant employment: Abandon the practice of avoiding the obligation to sign indefinite-term labor contracts through methods such as alternating contracts with affiliated companies or stipulating automatic renewals.  For employees who meet the conditions for indefinite-term contracts, employers should proactively communicate and legally establish such contracts.

II. Standardizing Non-Competition Clauses

Article 13 of the Interpretation (II) clarifies that non-compete clauses should not be abused.  For employees who have not accessed trade secrets, such non-compete clauses are not enforceable; if the agreed scope, territory, or duration exceeds reasonable limits, the portion beyond a reasonable proportion may be deemed invalid.  Article 14 explicitly stipulates that for senior management personnel, senior technical personnel, and other individuals with confidentiality obligations, a non-compete agreement during employment remains valid even in the absence of financial compensation.

This means that employers cannot arbitrarily agree on non-compete clauses with all employees; such agreements must target specific groups of employees and include reasonable terms, otherwise they may not be upheld by the court.

Compliance Recommendations:

1. Precisely define the scope of non-compete personnel: limited to senior management personnel, senior technical personnel, and other individuals who genuinely bear confidentiality obligations, avoiding "universal non-compete restrictions."

2. Reasonable Agreement Terms: The scope, territory, and duration of non-compete restrictions should be proportionate to the importance of the trade secrets known by the employee and should be reasonable.  For example, the territory should not be expanded to cover the entire country without justifiable reasons, and the duration should not exceed two years.

3. Distinguishing Between In-Service and Post-Termination Non-Competition Agreements: According to Article 14 of "Interpretation II," for senior management personnel, a non-competition agreement during employment does not require economic compensation, and employers can fully utilize this rule.

4. Timely Payment of Economic Compensation: For post-employment non-compete agreements, it is essential to pay the economic compensation as agreed or in accordance with statutory standards in a timely manner.  Otherwise, the employee has the right to request the termination of the non-compete agreement.

III. Invalidity and Consequences of Abandoning Social Insurance Agreements

Article 19 of the Interpretation (II) once again explicitly states that waiving the payment of social insurance premiums is invalid.  The worker can still terminate the labor contract and claim economic compensation based on this.  At the same time, it is also stipulated that employers can request employees to return the social insurance subsidies they have received after making up for the social insurance contributions.  This regulation clarifies that the agreement to replace "social insurance subsidies" with "giving up social insurance participation" is invalid, and employers will still face the risk of paying economic compensation.  But allowing the recovery of social insurance subsidies to some extent balances interests and reduces direct economic losses for enterprises.

Compliance Recommendations:

1. Resolutely pay social insurance premiums in accordance with the law: Paying social insurance premiums in accordance with the law is a mandatory obligation, and any form of avoidance carries enormous risks (including labor supervision, social insurance audits, labor disputes, and the responsibility of paying differences for work-related injury compensation).

2. No longer pay "social insurance subsidies": Avoid granting so-called "social insurance subsidies" in cash, which will become evidence for future claims.

3. Properly handle historical issues: For situations where social insurance subsidies have already been paid and social insurance premiums have been waived, it may be considered to negotiate with workers, gradually standardize, and solve social insurance premium payment issues through compliant methods.