Practice
Employment Law in China
Employment in China is governed by a protective, procedure-heavy framework: mandatory written contracts, termination only on statutory grounds, fixed severance and compulsory social insurance. This guide maps the rules, recent changes such as the 2025 Supreme People's Court interpretation and the rising retirement age, and how foreign employers can plan around them.
What this covers · 9
- 01Employment contracts and policies
- 02Labour arbitration and litigation
- 03Layoffs, transfers and restructuring
- 04Non-compete obligations
- 05Social insurance, benefits and pensions
- 06Trade unions and collective bargaining
- 07Work permits and mobility
- 08Employment investigations and due diligence
- 09Employee equity incentive plans
Key takeaways
- Termination requires a statutory ground; there is no employment at will in China.
- Severance is one month's wage per year of service, capped for high earners.
- A 2025 Supreme People's Court interpretation invalidates social insurance waivers and narrows non-competes.
- Mass layoffs of 20 or more staff, or 10% of the workforce, require consultation and reporting.
- The statutory retirement age began rising gradually on 1 January 2025.
- Global policies need democratic adoption procedures before they bind Chinese employees.
Employment in China: what employers need to know
Employment in China is governed by a dense, employee-protective framework that differs sharply from at-will systems in the United States and from the more flexible regimes found in Hong Kong and Singapore. Written contracts are mandatory, employers can terminate only on statutory grounds, severance is fixed by law, social insurance is compulsory, and disputes must go through labour arbitration before reaching the courts. Local rules in Shenzhen, Shanghai, Beijing and other cities add detail on wages, leave, housing fund contributions and procedure, so the answer to many questions depends on where staff are employed.
For foreign-invested enterprises, employment in China also intersects with corporate, data and immigration law. The revised Company Law requires employee representatives on the boards of larger companies, the Personal Information Protection Law governs HR data, work permit rules govern foreign staff, and share incentive plans run into foreign exchange and individual income tax rules. A coherent people strategy therefore needs input from several disciplines at once, and decisions taken at headquarters, such as a global reduction in force or a new bonus policy, must be adapted before they reach the Chinese workforce.
The legal framework for employment in China
The core statutes are the Labour Law (1994), the Labour Contract Law (2007, amended in 2012 to tighten labour dispatch), its 2008 implementing regulations, the Labour Dispute Mediation and Arbitration Law (2007), the Social Insurance Law (2010), the Trade Union Law (most recently amended with effect from 1 January 2022), the Employment Promotion Law and the Law on the Protection of Women's Rights and Interests. They are supported by State Council regulations on working hours, leave, work injury insurance and labour dispatch, and by rules issued by the Ministry of Human Resources and Social Security.
Court interpretations matter as much as statute. The Supreme People's Court's Interpretation (II) on labour dispute cases, which took effect on 1 September 2025, clarified several long-debated points: any agreement or promise that social insurance need not be paid is invalid; non-compete clauses do not bind employees who had no access to trade secrets or confidential information; affiliated companies that use an employee interchangeably may be jointly liable; representative offices of foreign enterprises can be parties to labour disputes; and foreign nationals holding work permits and lawful residence can have recognised employment relationships. These points feed directly into contract drafting and dispute strategy.
Two other recent developments affect workforce planning. The NPC Standing Committee decision on gradually raising the statutory retirement age took effect on 1 January 2025, phasing increases over 15 years and raising the minimum contribution period for a basic pension from 2030. And the State Council's employment-first plan for the 15th Five-Year period, published in June 2026, signals more attention to flexible employment and new forms of employment such as platform work.
Key rules at a glance
The table below collects the statutory rules that most often surprise foreign employers. Local variations and contract terms can change the outcome, so treat it as a starting point rather than a substitute for specific advice.
| Topic | General rule | Practical consequence |
|---|---|---|
| Written contract | Must be signed within one month of start; double wages are payable for up to 11 further months if not | Onboarding checklists should track signature dates |
| Probation | Up to one, two or six months depending on contract length; only one probation per employee | Probation dismissals still need evidence that hiring criteria were not met |
| Open-ended contracts | Required after ten years' service or on renewal following two consecutive fixed-term contracts, subject to exceptions | Fixed-term renewal decisions need planning; 2025 interpretation targets circumvention |
| Termination | Only on statutory grounds, with notice or pay in lieu where required | No termination at will; mutual agreement is the most common exit |
| Severance | One month's wage per year of service, with a cap for high earners at three times the local average wage and 12 years | Model costs city by city |
| Unlawful termination | Reinstatement or compensation at twice the statutory severance | Weak evidence doubles exposure |
| Mass layoff | 20 or more employees, or fewer than 20 but 10% or more of the workforce: 30 days' explanation to the union or all staff and a report to the labour authority | Statutory grounds required; consultation cannot be skipped |
| Non-compete | Post-employment restriction of up to two years, with monthly compensation | Only for senior managers, senior technical staff and others with confidentiality duties |
| Labour dispatch | Dispatched workers capped at 10% of total headcount; only temporary, auxiliary or substitute roles | Audit headcount before relying on agency staff |
| Limitation period | One year from when the claimant knew or should have known of the infringement | Wage arrears claims during employment are not time-barred until employment ends |
Working hours, pay and leave
The standard working time system is eight hours a day and 40 hours a week. Overtime is limited, as a rule, to three hours a day and 36 hours a month, and must be paid at 150% of the wage on working days, 200% on rest days where time off in lieu is not given, and 300% on statutory public holidays. Employers can apply to the local labour authority for a comprehensive working hours system, which averages hours over a longer period, or a flexible working hours system for roles such as senior managers and field sales staff. Without approval, these systems are not effective, and overtime claims are one of the most common items in labour arbitration.
Leave entitlements are set nationally with local additions. Statutory paid annual leave is five, ten or fifteen days depending on an employee's cumulative years of work, not only service with the current employer. Following a State Council amendment, the number of national public holidays increased to 13 days from 1 January 2025. National maternity leave is 98 days, with provinces and cities adding extended maternity, paternity and childcare leave, often generously. Medical treatment periods, during which termination is restricted, run from three to 24 months depending on years of service.
Wages must be paid in cash currency, at least monthly, and not below the local minimum wage set by provincial governments. Year-end bonuses, the "13th month" and commissions are contractual rather than statutory, but once a pattern of payment exists, tribunals may treat them as part of wages for severance calculations. Clear bonus plan rules, with discretion and eligibility conditions such as being employed on the payment date, reduce disputes.
The employment lifecycle step by step
Viewing employment in China as a lifecycle helps employers place each legal requirement at the moment it bites.
- Recruitment. Job advertisements and selection must not discriminate on gender, ethnicity, religion, disability, hepatitis B carrier status or other protected grounds. Background checks and medical examinations must respect personal information rules and be proportionate to the role.
- Onboarding. Sign the written contract on or before the first day, register for social insurance and the housing fund within the statutory period, collect handbook acknowledgements, and obtain separate consent where sensitive personal information is processed.
- Probation and performance. Set written hiring criteria and objectives during probation. Later in employment, record objectives, reviews and improvement plans so that any incompetence finding is supported.
- Changes during employment. Changes to role, location or pay generally need written agreement. Unilateral transfers are permitted only in limited cases, such as after a finding of incompetence or a medical inability to perform the original role.
- Discipline. Investigate promptly, give the employee a chance to respond, apply the handbook consistently, and notify the union before any unilateral termination.
- Exit. Choose the correct legal route, calculate severance and any non-compete compensation, issue the termination certificate, transfer social insurance and personnel files within the statutory periods, and secure the return of property and confidential information.
Our employment in China practice areas
Our employment pages explain each part of the employment lifecycle in more depth. Together they cover the main decisions an employer faces, from hiring and documentation to incentives, investigations and exit.
Employment contracts and policies
Employment contracts and policies explains mandatory contract terms, probation, working hour systems, employee handbooks adopted through democratic procedures, confidentiality and IP assignment, and how to align global policies with local requirements.
Labour arbitration and litigation
Labour arbitration and litigation walks through mandatory arbitration, time limits, final awards for smaller claims, the burden of proof on employers, appeals to the courts and settlement strategy.
Layoffs, transfers and restructuring
Layoffs, transfers and restructuring covers economic layoffs, objective-change terminations, mutual termination programmes, employee transfers in mergers and asset deals, relocations and closures.
Non-compete obligations
Non-compete obligations addresses who can be bound, compensation, duration and scope, release and enforcement, and the interplay with trade secret protection.
Social insurance, benefits and pensions
Social insurance, benefits and pensions explains the five insurances and the housing fund, contribution bases, foreign national participation and totalisation agreements, enterprise annuities and the rising retirement age.
Trade unions and collective bargaining
Trade unions and collective bargaining looks at enterprise unions, union funding, consultation duties, collective contracts and employee representative congresses.
Work permits and mobility
Work permits and mobility covers the foreigner work permit categories, residence permits, short-term assignments, secondments, Hong Kong, Macao and Taiwan residents and Greater Bay Area mobility.
Employment investigations and due diligence
Employment investigations and due diligence explains workplace investigations, evidence and data constraints, whistleblowing, and labour due diligence in M&A transactions.
Employee equity incentive plans
Employee equity incentive plans covers offshore and onshore share plans, SAFE registration for domestic participants, individual income tax treatment, employee shareholding platforms and leaver provisions.
A cross-border perspective on employment in China
Multinationals often discover that headquarters-driven employment decisions cannot be implemented in China as planned. Four themes come up repeatedly.
- Global reductions in force. A US-style notice and release model does not fit. Terminations in China need a statutory ground or a negotiated mutual termination, and mass layoffs trigger consultation and reporting. Timelines and budgets must reflect this.
- Global policies and codes of conduct. Disciplinary rules are only enforceable against Chinese employees if adopted through democratic procedures and properly communicated. A code that is valid in London or Singapore may carry no disciplinary weight in Shenzhen without these steps.
- HR data. Sending employee data to group HR systems abroad engages the Personal Information Protection Law and cross-border data transfer rules, including relaxations introduced in March 2024 for transfers necessary for cross-border HR management. See employee personal information.
- Dual employment and secondments. Executives who work across Hong Kong, the Mainland and other countries need clear documentation on employer, payroll, tax residence and social insurance, particularly in the Greater Bay Area.
Groups operating across the Greater Bay Area often employ staff on both sides of the boundary. The comparison below shows why Hong Kong and Mainland arrangements cannot simply be copied from one to the other.
| Issue | Mainland China | Hong Kong |
|---|---|---|
| Termination | Statutory grounds only; mutual termination common | Termination on notice permitted, subject to protections against unreasonable and unlawful dismissal |
| Severance | Statutory severance for most terminations other than misconduct or employee resignation | Severance or long service payment where statutory conditions are met |
| Post-employment restrictions | Non-compete up to two years with monthly compensation | Restraint of trade clauses enforceable only if reasonable; no statutory compensation |
| Retirement savings | State social insurance including basic pension | Mandatory Provident Fund contributions |
| Disputes | Mandatory labour arbitration before court | Labour Tribunal or court, without a mandatory arbitration step |
Chinese companies expanding abroad face the mirror image: assumptions drawn from employment in China, such as heavy reliance on fixed-term contracts or standard non-compete compensation, do not travel well to the EU, UK, US or Southeast Asia, where works councils, at-will employment or different restrictive covenant rules apply. Our overseas compliance work addresses this.
Common mistakes and how to avoid them
Most employment disputes in China that employers lose turn on evidence and procedure rather than on the merits of the business decision. Arbitration tribunals expect employers to prove the facts behind a termination, the content of the rule relied on, and the fact that the employee was told about it. The mistakes we see most often include:
- Terminating for "poor performance" without documented targets, a performance improvement process and a formal finding of incompetence followed by training or reassignment.
- Relying on an employee handbook that was never consulted on with employees or the union, or never acknowledged in writing.
- Allowing fixed-term contracts to lapse or roll over without a decision, creating open-ended contract or double wage exposure.
- Paying social insurance on a reduced base, or not at all, at the employee's request; the 2025 interpretation confirms such waivers are invalid.
- Signing non-compete clauses with junior staff, then paying compensation for restrictions that cannot be enforced.
- Using labour dispatch or outsourcing for core roles, or exceeding the 10% cap.
- Announcing restructuring plans globally before the China consultation and communications plan is ready.
Before any significant China workforce decision, run a short evidence audit: the signed contract, the job description, the handbook and proof of its adoption and acknowledgement, payroll and social insurance records, and the documents behind the decision. Gaps found before action can usually be closed; gaps found in arbitration usually cannot.
Decision points for 2026 and 2027
Several trends are worth building into 2026 and 2027 planning for employment in China. First, the rising retirement age will extend careers and change the calculus for older-worker restructuring, pension planning and the treatment of employees who reach the old retirement age. Second, labour authorities and courts are scrutinising platform work, outsourcing and individual-business arrangements that disguise employment. Third, enforcement of social insurance compliance continues to tighten, with the 2025 interpretation removing a common defence. Fourth, the Personal Information Protection Law and the network data security regulations in force from 1 January 2025 raise the bar for employee monitoring and HR analytics, a theme explored in AI in employment.
For boards and general counsel, the practical decisions are fairly consistent: whether China handbooks and contracts are up to date with the 2025 interpretation; whether social insurance bases are calculated on actual wages in every city; which non-competes are worth paying for; whether any restructuring planned for 2027 has a lawful ground and a consultation timetable; and whether HR data flows to group systems meet current transfer rules. A short annual review against these questions prevents most of the disputes we see.
Employers should also watch for implementing rules under the employment-first plan, local adjustments to minimum wages and social insurance bases, and any movement on a broader revision of labour legislation, which has been discussed for some time.
How TRW & Co helps with employment in China
TRW & Co's Shenzhen representative office helps multinational and Chinese employers manage employment in China within a global context. We translate headquarters plans into China-ready workstreams, advise on Hong Kong, English and other non-PRC employment and incentive arrangements, structure cross-border secondments and executive packages, negotiate senior executive exits, and run multi-country restructuring projects. We provide information on the Chinese legal environment and how it affects your options. Where PRC legal opinions, filings, or representation in labour arbitration and the courts are required, we work alongside licensed PRC law firms and coordinate their advice with your global teams. To discuss your workforce plans, contact us.
Frequently asked questions
Can a foreign company employ staff in China without a local entity?
A foreign company without a Chinese entity generally cannot employ staff directly. Representative offices must hire through licensed foreign enterprise service agencies, and companies without any presence often use employer-of-record or dispatch providers, which brings its own compliance risks. Setting up a wholly foreign-owned enterprise is the usual long-term solution where a business needs a stable China team.
Is an employee handbook mandatory?
There is no general obligation to have a handbook, but without valid written rules an employer will struggle to dismiss for misconduct, because tribunals require proof of a rule the employee breached. Rules affecting employees' vital interests must be discussed with employees or their representatives, negotiated with the union or representatives, and made known to employees, typically by signed acknowledgement.
Do Chinese employment rules apply to foreign employees?
Foreign employees who hold a work permit and residence permit and work for a Chinese employer are generally covered by the Labour Contract Law, although some rules, such as those on open-ended contracts, are applied differently in some cities. They must also participate in social insurance unless a bilateral social security agreement exempts them, and their work permit validity limits the contract term.
How long do labour disputes take?
Arbitration commissions must normally conclude a case within 45 days of acceptance, extendable by up to 15 days, although backlogs can stretch this. If a party then sues, first-instance and appeal proceedings can add many months. Many disputes settle through mediation at the arbitration stage, which is usually the most efficient point to resolve them.
What is the biggest legal risk in a China workforce reduction?
The largest exposure is unlawful termination, which entitles employees to reinstatement or compensation at twice the statutory severance. Procedural failures, such as skipping union consultation, lacking a valid statutory ground, or dismissing protected employees such as pregnant women or those on medical leave, are the most common causes, together with poor communications that trigger collective action.
Sources
- National Database of Laws and Regulations (NPC) – Labour Law, Labour Contract Law, Social Insurance Law, Trade Union Law
- Supreme People's Court – Interpretation (II) on the Application of Law in Labour Dispute Cases (effective 1 September 2025)
- Ministry of Human Resources and Social Security
- National People's Congress of the PRC
- MOHRSS Interim Provisions on Labour Dispatch (10% cap), STA policy database
General information only, not legal advice. TRW & Co’s Shenzhen representative office does not provide PRC legal services; where a PRC legal opinion is required we work with licensed PRC law firms.