For many years, employers in China relied on what appeared to be a clear statutory framework: fixed-term employment contracts could be renewed once, and upon expiration of the second term, an employer could elect not to renew without necessarily incurring ter-mination liability. That assumption is now increasingly outdated—and, in many jurisdictions, legally dangerous. Recent judicial inter-pretations and court practice across China have crystallized a new reality: the non-renewal of a second fixed-term employment con-tract is often treated as a termination without cause, triggering stat-utory severance obligations akin to wrongful termination. For employers operating in China, this shift is not merely academic. It has direct financial, oper-ational, and compliance consequences, and it demands a more deliberate approach to employment structuring from day one.
The Legal Shift: From Formal Expiry to Substantive Termination
Under China’s Labor Contract Law, an employee who has completed two consecutive fixed-term contracts is, in principle, entitled to request an open-ended (non-fixed-term) contract, unless cer-tain statutory exceptions apply. Some employers viewed the expiration of the second term as a natural off-ramp. However, Chinese courts have adopted a substance-over-form approach.
What courts are now implicitly and explic-itly saying: If an employee has continuously performed their duties, met performance ex-pectations, and committed no statutory mis-conduct, and if the employer unilaterally re-fuses renewal after the second term with a re-fusal not grounded in a clear, provable statu-tory basis, then the non-renewal is treated not as a neutral expiration, but as a de facto unilat-eral termination. In such cases, courts are requiring employ-ers to pay statutory severance, and in some in-stances enhanced compensation, where the non-renewal is deemed abusive or procedur-ally flawed. The judiciary’s message is clear: expiration is no longer a shield.
Why Courts Are Taking This View
This development reflects broader themes in China’s labor jurisprudence. When thinking about the protection of employment stability, Chinese labor law places a high premium on continuity of employment and social stability. Employees who have served multiple contract terms are viewed as having a legitimate expec-tation of ongoing employment. Good-faith performance obligations: Courts increasingly emphasize the employer’s duty of good faith. Non-renewal that appears strategic, cost-driven, or pretextual, rather than perfor-mance-based, invites scrutiny. Prevention of contractual circumvention: Repeated use of fixed-term contracts followed by non-renewal is seen, in some cases, as an attempt to circumvent the statutory framework governing open-ended employment. The Practical Risk for Employers For employers, the risk is twofold. Financial exposure, for example, is at the forefront. Stat-utory severance in China is calculated based on years of service and average monthly salary, often with local caps but still material, espe-cially for senior or long-tenured employees. Labor arbitration and litigation in China is asymmetrical, with a tendency to favor em-ployees procedurally. Employers bear a heavy burden of proof, particularly around perfor-mance and misconduct. In short, treating the second contract’s expira-tion as a clean exit is no longer a defensible risk position.
How Employers Can Mitigate Sever-ance Exposure The solution is not avoidance, but structure. Employers who plan early and document care-fully can significantly reduce exposure. Rethink the fixed-term contract strategy. Fixed-term contracts should not be used re-flexively. Employers should both assess early on whether a role is genuinely project-based or temporary and understand that a second re-newal effectively places the relationship on a trajectory toward permanence. In many cases, the decision point is the first renewal, not the second expiration. Build a defensible performance manage-ment system. Courts are far more receptive to non-renewal or termination where there is a clear job description, objective performance metrics, regular, documented performance re-views, and written warnings or improvement plans, where appropriate absent contempora-neous documentation, post-hoc explanations carry little weight. Use probation and renewal deliberately. Probation periods and renewal decisions should be used strategically. Performance is-sues should be addressed during probation, not deferred, and renewal decisions should be tied to documented evaluations, not inertia. Renewing a contract without addressing known issues significantly weakens the em-ployer’s later position. Consider lawful alternatives to non-renewal. Where business needs change, employers should evaluate multiple issues. First, properly structured and documented mutual termination agreements, second, role adjustments or rede-ployment, where feasible, and finally, volun-tary separation packages that reduce litigation risk. Oftentimes, a controlled exit is far less costly than a disputed non-renewal. Localize and professionalize employment documentation. Generic or foreign-style em-ployment contracts are often ineffective in China. Employers should ensure that contracts are PRC-compliant and localized, company policies and handbooks are properly imple-mented and acknowledged, and internal proce dures align with statutory and judicial expec-tations
A Broader Lesson for Employers in China
This judicial trend underscores a broader truth: China’s labor law environment has matured. It is no longer informal, nor forgiving of struc-tural shortcuts. Courts are sophisticated, pol-icy-aware, and increasingly consistent in pro-tecting employee rights. For employers, success lies not in pushing the limits of formalism, but in designing employ-ment relationships that anticipate how courts will interpret conduct, intent, and fairness. Non-renewal after a second contract term is no longer a low-risk administrative decision. It is a legal event—often indistinguishable, in the eyes of the court, from termination without cause. Those who recognize this early, and structure themselves accordingly, will avoid costly sur-prises. Those who do not may learn the lesson through arbitration awards and court judg-ments.