Tighter employer liability under new labour dispute rules (Part 1)

The Supreme People’s Court has introduced a new judicial interpretation on labour disputes that raises the stakes for employer compliance and risk management. Interpretation (II) of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, which took effect on 1 September 2025, targets long-running trouble spots such as subcontracted and re-subcontracted labour, intermingled employment relations among affiliated companies, non-compete clauses, and agreements to skip social insurance payments.

Drawing on the guidance and related court practice, this article examines the key provisions and what they mean for companies navigating China’s evolving labour regime.

Q: How does Interpretation II change the scope and subjects of liability for employing entities?

A: Interpretation II significantly expands the range of entities that may be held liable as employing entities. It provides that when an organisation or individual without lawful business qualifications conducts operations under the business credentials of a legally qualified company and hires workers, courts shall uphold claims by those workers seeking to hold that qualified company responsible for wages, work injury compensation, and other employment related obligations.

The key change is that such arrangements, where an unlicensed operator conducts business through a licensed company, now fall within the scope of employing entity liability.

Before Interpretation II, article 4 of the Ministry of Labour and Social Security’s Notice on Several Issues Concerning the Establishment of Labour Relations stated: “When enterprises such as those in construction or mining subcontract a project, business operation, or management rights to an organisation or individual lacking the qualifications to employ workers, the legally qualified contractor shall bear employing entity responsibility for the workers hired by that unqualified party.”

That rule applied only to unlawful subcontracting in industries like construction and mining, restricting it to a narrow and highly specific scope.

Article 1 of Interpretation II expands the scope of liability of employers. It stipulates that where a contractor with lawful business qualifications subcontracts or re-subcontracts its business to an organisation or individual lacking such qualifications – and the workers hired by the unqualified party request that the contractor be recognised as the employing entity responsible for wages, work injury insurance benefits, and other related obligations – the people’s court shall uphold such claims.

Accordingly, the category of liable entities is no longer confined to particular sectors such as construction and mining. Now it extends to all contractors and entities possessing lawful business qualifications.

The interpretation does not define what constitutes lack of lawful business qualifications. In practice, determination commonly follows two criteria:

1. Whether the entity satisfies formal legal requirements, such as holding a valid business licence without irregularities; and
2. Whether it possesses the necessary industry specific permits, such as construction engineering qualifications.

Where an entity holds a business licence but lacks the requisite industry permit – often referred to as being “licensed but uncertified” – it may still be regarded as not having lawful business qualifications.

Such ambiguity is likely to increase the complexity of judicial proceedings, and courts may have to rely on determinations issued by market regulators when assessing an entity’s qualifications.

The interpretation also extends the substantive scope of employing entity responsibility.

Liability is no longer restricted to work injury insurance benefits and unpaid wages for migrant workers, but now covers “work injury insurance benefits, wages, and other employment related entitlements”.

Inclusion of the term “other” suggests liability may include double wages for not signing a labour contract, social insurance and housing fund contributions, and paid annual leave. The exact scope remains to be clarified in future judicial practice.

Also, Interpretation II does not specify whether responsibility assumed by the qualified contractor constitutes a reimbursement obligation or joint and several liability.

According to the Regulation on the Payment of Wages to Migrant Workers, a contractor with lawful business qualifications that fulfils worker claims may recover the amount from the actual employer, suggesting a reimbursement obligation.

Conversely, article 94 of the Labour Contract Law provides that a contracting organisation and individual business operator shall bear joint and several liability.

The interpretation appears aimed at safeguarding workers’ rights, while the ultimate allocation of responsibility should be determined as stated in contractual agreements and relevant provisions of the Civil Code.

Q: How does Interpretation II address overlapping employment among affiliated companies?

A: To tackle longstanding issues where employees work interchangeably across related companies, blurring the boundaries of their employment relationships, article 3 of Interpretation II introduces clearer rules.

It provides: “When a worker is employed alternately or simultaneously by multiple affiliated entities and seeks recognition of an employment relationship, courts should proceed as follows: (1) If a written labour contract exists, and the worker requests confirmation on that basis, the court should uphold the claim; and (2) if no written contract exists, the court should determine the employment relationship according to actual management practices, taking into account factors such as working hours, job duties, wage payments and social insurance contributions.

“Where a worker in the second situation asks that the affiliated entities be held jointly liable for pay, benefits and other entitlements, the court is to support the claim – unless those entities have lawfully agreed with the worker on how such entitlements are allocated, and the worker has given consent.”

The provision aims to clarify both the recognition of employment relationships and division of liability in cases of shared or mixed employment within corporate groups.

The first paragraph generally continues existing practice by treating either a written contract or actual management control as the key determinant. The second paragraph, however, adds flexibility, allowing affiliated enterprises to limit one another’s responsibility through an agreement approved by the employee.

The rule does not require written consent, meaning oral agreement could in theory suffice. Yet simply showing that a worker was informed is unlikely to meet the standard of “consent”.

Companies therefore face a practical evidentiary risk. To reduce it, written confirmation should be secured from the employee, preferably with a signature, to demonstrate clear and voluntary agreement.

Gu Hanbing is a partner at Ronly & Tenwen Partners