what we think

By Maarten Roos

Employment law in China is in constant flux, but changes to the law – or to how the law is interpreted – are generally quite limited. Recent Interpretations by the Supreme People’s Court (SPC) are the exception; international companies that operate in China, need to take notice and prepare for action.

When China introduced its first Labor Contract Law in 2008, the legislation brought long-needed structure to employment relationships. Two aspects were especially significant:

• It defined specific legal grounds under which an employer may unilaterally terminate an employee.
• It set out clear formulas for severance and compensation, reducing uncertainty for both parties.

Among these provisions, one rule in particular increased predictability for employers: the caps on economic compensation when a termination is found without legal grounds (i.e. unlawful). Under the law, economic compensation equals twice the statutory severance, with severance calculated as:

1. Average monthly salary during the previous 12 months (but no more than three times the local average wage);
2. Multiplied by the number of years of service; but if the average salary reaches three times the local average wage, then no more than 12 years.

This framework allowed companies to assess their maximum financial exposure even in cases where the evidence for termination was incomplete or borderline – such as insufficient proof of poor performance, breach of company rules, or material change of circumstances. Considering the heavy burden on companies to prove such circumstances (and in other cases, the absence thereof altogether), this cap opened the possibility to terminate with a clearly-defined maximum financial risk.

The law included one important caveat: an unlawfully terminated employee could claim for reinstatement. Reinstatement is the worst-case outcome for an employer, since the company must take the employee back and pay wages for the period of dispute. In practice however, labor arbitration tribunals and courts usually rejected reinstatement claims by finding that the employment relationship "could no longer be performed", for example because the position was already filled. Reinstatement was mostly granted only in special cases – such as pregnancy or imminent retirement.

This approach has now shifted.

A New Judicial Interpretation Changes the Landscape

In February 2025, the SPC released its Interpretations (II) on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, which took effect on 1 September 2025. Although judicial interpretations are not legislation, they strongly influence how tribunals and courts apply existing labor laws.

Among others, the new Interpretations specify when an employment contract can no long be performed. We list these circumstances below. Implied is that in all other circumstances, reinstatement should be granted (if an employee asks for it).

1. The contract expires during arbitration or litigation, and no legal ground exists that requires renewal or extension.
2. The employee has begun receiving basic pension insurance benefits.
3. The employer has been declared bankrupt.
4. The employer is dissolved (except when dissolution results from a merger or division).
5. The employee has taken a job with another employer that seriously affects performance of their original duties, or refuses to terminate that new employment upon request.
6. Other situations in which the employment contract objectively cannot be performed.

While these categories may appear straightforward, they narrow the range of scenarios in which reinstatement can be denied.

What We Are Seeing in Practice

Since September 2025, we have seen tribunals and courts take a much more restrictive interpretation of when a contract "cannot be performed." As a result, there have already been multiple cases where employees succeeded in reinstatement claims that likely would have been rejected before the Interpretation took effect.

Whether this trend will persist remains to be seen. The SPC included a catch-all category – "other circumstances where the employment contract cannot be performed objectively" – that still gives tribunals discretion to deny reinstatement. However, recent decisions indicate a meaningful shift toward greater protection against unilateral termination.

Implications for Employers

If this new approach becomes the norm, employers should expect the following practical consequences:

1. Higher Standards for Evidence and Procedure

Companies will need to invest more time in:

• ensuring employment contracts and employee handbooks contain clear, enforceable provisions on performance, conduct, and disciplinary measures,
• documenting performance or misconduct issues, and
• following mandatory legal procedures more rigorously.

Stronger internal systems will be essential to justify termination based on legal grounds.

 2. Increased Importance of Negotiated Settlements

Where evidence for termination is weak, employers may find it more difficult to avoid reinstatement orders. In such situations, larger settlement packages may become necessary to achieve a clean separation.

Conclusions

Terminating employees in China was never simple, but employers could previously rely on predictable compensation caps and a relatively narrow application of reinstatement. The new SPC Interpretation puts this at risk. Although tribunals retain some discretion, early trends suggest that reinstatement is becoming a more realistic outcome for employees.

Companies operating in China should review their employment documentation, internal procedures, and risk management strategies accordingly.

 R&P's China employment team has been repeatedly recognized by the Legal500 as a leader in the field. Key focus area include termination of senior management, mass redundancy projects, compliance investigations, and general employment law support. For more information, please reach out to your trusted contact at R&P, or to managing director Maarten Roos ([email protected]).

This was originally published on LinkedIn as an edition of Maarten's China Law Focus Newsletter. Subscribe here to get regular updates.