Highest Chinese Court Issues Uniform Standards for Employment Relationships, Including Foreign Employees
- Rose Li, XL Law & Consulting
- Feb 5
- 5 min read
On August 1, 2025, the PRC Supreme People’s Court issued the Interpretation II on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, which establishes uniform legal standards in several employment situations that have raised questions in recent years, including the employment relationship in affiliation arrangements, foreign employees, double wages, and two consecutive fixed-term contracts.
U.S. institutions with an RO or WFOE in the PRC should review and update their human resources documentation and policies to ensure compliance with Interpretation II.
In order to strengthen judicial guidance, ensure the uniform application of laws and implementation of China’s employment and social security systems, as well as to promote harmonious labor relations, on August 1, 2025, the PRC Supreme People’s Court issued the Interpretation II on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (“Interpretation II”). The Interpretation II, which took effect September 1, 2025, establishes uniform legal standards in several employment situations that have raised questions in recent years, including the employment relationship in affiliation arrangements, foreign employees, double wages, and two consecutive fixed-term contracts.
Key Highlights
The Employment Relationship in Affiliation Arrangements
The Interpretation II defines the criteria for determining the employment relationship in affiliation arrangements, giving priority to those who have signed written employment contracts with the employee. If an employee works for multiple affiliated entities:
The PRC court will uphold that the labor relationship is established between the employee and the entity that enters into an employment contract with the employee.
If no employment contract is concluded, the PRC court will consider factors such as management, working hours, work content, payment of wages, and social insurance to identify the employer. Any agreement entered into by and between the affiliated entities on the employee’s wages and social benefits shall be subject to the employee’s consent; otherwise, the employee may claim that the affiliated entities bear joint and several liability.
Foreign Employees
The Interpretation II clarifies that an employment relationship between a foreigner and a PRC employer is established only if the foreigner meets one of the following requirements:
The foreigner has permanent residency;
The foreigner holds a valid work permit and residence permit; or
The foreigner has completed the necessary procedures in accordance with PRC law. For instance, foreigners engaged in offshore petroleum operations must obtain a Work Permit for Foreigners Engaged in Offshore Petroleum Operations in the PRC, and foreigners performing in commercial artistic performances must obtain a Temporary Commercial Performance Permit.
Double Wages
The PRC employment laws require a written employment contract to be concluded within one month of the start date. If an employer fails to enter into a written employment contract with an employee within one month of their start date, the employer must pay the employee double their normal wages for each month that they work without a contract. If such a contract has not been concluded within one year of the start date, an open-ended contract shall be deemed to have been concluded between the employer and the employee. The Interpretation II provides for some exceptions where the employer is exempt from paying double wages:
The failure results from a force majeure event;
The failure results from the employee’s intentional misconduct or gross negligence;
Other circumstances specified in the PRC laws and regulations;
Upon expiration of an employment contract, the contract is automatically extended if either of the following circumstances applies: i) circumstances under which employers may not terminate employment contracts as stipulated by the PRC employment laws; ii) the service period prescribed in PRC employment laws has not expired; iii) the term of office prescribed in the PRC Trade Union Law has not expired.; or
If the employer hasn’t concluded the employment contract with the employee for more than one year, the employer is exempt from paying double wages for periods exceeding one year.
Two Consecutive Fixed-Term Contracts
The PRC employment laws provide that an open-ended contract must be concluded when an employment contract is renewed following the completion of two consecutive fixed-term contracts, unless the employee requests a fixed-term contract. The Interpretation II specifies that the following scenarios are considered to be two consecutive fixed-term contracts:
The employer and the employee have negotiated for a cumulative employment contract extension of at least one year, which has expired;
The employer and the employee have agreed that the employment contract will be automatically extended upon expiration, and this extension has expired;
The employee continues to work at the original workplace or in the original position for reasons not attributable to the employee, the employer changes the party that concludes the employment contract but continues to exercise labor management over the employee, and the contract expires; or
The employment contract is concluded through conduct that circumvents the principle of good faith, and the contract expires.
This means, then, that if the total extension period is less than one year, it does not count as two consecutive contracts. This gives employers more flexibility, enabling them to extend a contract for up to one year without being obliged to offer an open-ended contract.
Implications for U.S. Higher Education Institutions
As background, U.S. institutions of higher education can hire faculty and/or staff in China in any of the following ways:
Establishing a representative office (“RO”) in China and hiring the faculty/staff through a licensed professional employer organization (“PEO”). An RO is not permitted to hire employees directly and must enter into a labor dispatch contract with a licensed PEO to hire employees in China. The PEO enters into an employment contract with the employees, serves as the PRC employer, and handles the visa and work permits (if the faculty/staff are not Chinese), payroll, social insurance, and taxes for the faculty/staff in China;
Establishing a wholly-owned enterprise (“WFOE”) in China and hiring the faculty/staff through the WFOE. The WFOE serves as the PRC employer and handles the visa and work permit (if applicable), payroll, social insurance and taxes for the faculty/staff in China;
Working with an employer of record (“EOR”) in China, which is a third-party organization that may hire the faculty/staff on behalf of U.S. institutions. An EOR serves as the PRC employer and handles the visa and work permit (if applicable), payroll, social insurance and taxes for the faculty/staff in China;
Working with their PRC partner to hire the faculty/staff. The PRC partner serves as the PRC employer of the faculty/staff and handles the visa and work permit (if applicable), payroll, social insurance and taxes for the faculty/staff in China;
Engaging faculty/staff through an independent contractor agreement, if the faculty/staff are Chinese individuals. The faculty/staff are paid by the U.S. institution but are responsible for handling taxes by themselves. However, independent contractors and employees differ in terms of the business relationship, schedule, tools necessary for work, training, taxes, tax forms, mandatory benefits, compensation, and employer supervision under U.S. employment laws. Moreover, U.S. institutions may face penalties if U.S. authorities determine that they have misclassified employees as independent contractors; or
Hiring faculty/staff directly as employees of the U.S. institution and then dispatching them to work in China, if the faculty/staff are Chinese individuals. If the faculty/staff cannot be classified as independent contractors (as addressed in #5), U.S. institutions would have to hire them as employees and dispatch them to work in China.
Since U.S. institutions are not PRC employers, the relationships between U.S. institutions and their faculty/staff are subject to PRC employment law, including Interpretation II, which clarifies the rules on employment relationships. U.S. institutions of higher education with an RO or WFOE in the PRC should review and update their human resources documentation and policies to ensure compliance with Interpretation II.
