what we think

By Maarten Roos, Stacey Wu

The PRC Labor Contract Law states that an open-term contract must be offered after two consecutive fixed-term contracts, unless the employee opts for another fixed term. Across China, this is interpreted to mean that employers cannot refuse renewal after the second term and must switch to an open-term contract. As a result, an employer can unilaterally decide to terminate after expiry of the first fixed-term contract only.

Shanghai labor arbitration tribunals and courts have generally interpreted the law differently: the requirement to offer an open-term contract only applies if the employer intends to renew. As a result, Shanghai employers can decide to terminate the employment contract at the end of the second or any subsequent fixed term, without automatic conversion (subject to payment of severance).

This interpretation is now under debate. Starting 1 January 2025, the Shanghai Higher People's Court's Opinions on Difficult Labour Disputes present two views:

• The majority view: If an employee requests an open-term contract after two terms, the employer must comply.

• The minority view: Employers can still decide not to renew.

So far, we have seen one case where a local court in Minhang District ruled the employer's refusal to renew as unlawful, ordering economic compensation (instead of severance). This decision is not binding on other courts, but may be indicative of what is to come.

What this means to your Shanghai business?

It remains to be seen whether all labor arbitration tribunals and courts in Shanghai will follow this new interpretation, but the general expectation is that Shanghai will fall in line with the rest of the country sooner rather than later.

In any case, companies in Shanghai should consider what this means for their business. Recommended steps include:

• Review of general employment contract practices in light of this new risk.
• Strengthen employment management to develop alternative grounds for termination of employees that do not meet expectations.
• Consider this new development when handling specific termination cases.
• Continue to closely monitor legal developments.

R&P's China employment team has been repeatedly recognized by the Legal500 as a leader in the field. Key focuses include termination of senior management, mass redundancy projects all over China, 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]).