Labour Dispute Resolution in Shanghai against the Backdrop of a Unified National Market: From Local Practices to National Uniformity

The gradual decline of local practices

For many years, employers have perceived labour dispute resolution in Shanghai as having distinct local characteristics. While national legislation provides the basic framework, local regulations, judicial interpretations and labour arbitration practices often shape how that framework is applied in individual cases. This pattern reflects both the breadth and complexity of China’s labour market and Shanghai’s role as a pioneer in exploring new employment models and workforce management.

This picture, however, is changing. National policy initiatives to construct a unified national market have increasingly prioritised consistent regulatory frameworks governing labour mobility and commercial activities. Concurrently, the Supreme People’s Court (“SPC”) has placed greater emphasis on the uniform application of employment law. A most salient example recently is the Interpretation II of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labour Dispute Cases (“Judicial Interpretation II”), which entered into force on 1 September 2025.

As a result, Shanghai is shifting from a system in which local characteristics significantly influenced case outcomes to one where judicial decisions are increasingly aligned with national standards. This does not imply that all points of divergence have vanished, nor that local practices have been entirely displaced. Rather, employers ought to exercise far greater caution when relying upon the historically employer favourable “Shanghai approach”, where the national law, judicial interpretation or policy points to a different outcome.

The making of national uniform rules

The Guidelines for Building a Unified National Market (Trial), published in January 2025, call for a more integrated, unified labour market and the removal of unreasonable barriers to labour and talent mobility. This document constitutes a policy steering instrument rather than a set of judicial standards of labour dispute resolution. Its relevance resides in its broader regulatory objective: local rules and practices should not create unnecessary disparities affecting how enterprises recruit, manage and terminate employees.

Judicial Interpretation II translates elements of that policy environment into binding rules for courts to apply and the 21 articles contained therein address a broad range of topics, such as:

• successive fixed-term labour contracts;
• continued employment upon contract expiry;
• non-compete;
• cross-entity deployment among affiliated entities;
• social-insurance contributions; and
• the circumstances under which reinstatement is unavailable following unlawful termination of a labour contract.

The SPC expressly states that the interpretation is intended to strengthen adjudicative guidance and unify application of the law.

Binding judicial interpretations are not the sole mechanism at play. The SPC’s release of typical labour dispute cases furnishes courts and market participants with practical illustrations of how national level rules ought to be applied. The Suzhou Labour Court, established in 2021 as China’s first specialised labour court, has likewise provided an institutional platform for developing adjudicative expertise and exploring rules with potential for broader application, notwithstanding that its decisions carry no automatic binding force over Shanghai courts.

Administrative guidance plays a similar role. In September 2025, the Ministry of Human Resources and Social Security (“MHRSS”) issued the Guidelines for Enterprise Compliance with non-compete after consulting enterprises, employees, labour arbitration institutions and courts. The guidelines do not constitute a judicial interpretation, yet their detailed treatment of necessity, proportionality and legal consequences provides employers, arbitrators and judges with a broadly shared analytical framework. Uniformity is consequently being built through a combination of national level rules, typical cases, specialised adjudicative institutions and compliance standards that are gradually converging.

Uniformity of rules does not equate to the mechanical pursuit of absolute consistency. While judicial interpretations are binding upon courts, labour arbitration institutions operate within the administrative system and may require time to internalise newly articulated judicial approaches. Released typical cases guide adjudicative reasoning yet cannot erase factual distinctions across individual cases. Non binding administrative guidelines accrete influence through repeated practical application, rather than drawing authority from formal precedential force. The near-term consequence is a transitional phase in which analytical frameworks grow more consistent before every individual case outcome becomes predictable.

Renewal upon two successive fixed-term contracts: a practical convergence

The treatment of renewal upon two successive fixed term labour contracts constitutes one of the most commercially significant markers of shifting adjudicative positions in Shanghai. Article14 of the Labour Contract Law of the People’s Republic of China (“Labour Contract Law”) provides that, subject to statutorily prescribed exceptions, an open-ended contract shall be entered into (unless the employee specifically requests a fixed-term contract) where:

• an employee and an employer have entered into two consecutive fixed-term labour contracts; and
• the employee proposes or agrees to renew or enter into a further labour contract.

A long-standing dispute has centred on whether an employer retains the unilateral right to decline renewal upon expiry of the second fixed term contract.

Prior to 2025, the judicial views reflected in Shanghai’s publicly available court rulings tended to hold that the employer reserves the right to choose not to renew. On that reading, so long as the employee’s continuous length of service had not reached ten years, the employer could allow the second fixed term contract to expire, pay statutory economic compensation and thereby avoid an open-ended labour contract. This position diverged from the more employee protective approach prevailing across most other jurisdictions in mainland China, under which the employee’s statutory request following the second contract deprived the employer of the right to terminate the relationship by contractual expiry.

Article 10 of Judicial Interpretation II sets out the circumstances that should be treated as “two successive fixed-term labour contracts”, including a negotiated extension of the contract term totalling one year or more, an agreed automatic renewal upon expiry, a change of contracting entity while the employee’s management remains unchanged and otherbad-faith arrangements to evade the obligation to conclude an open-ended labour contract. Article 11 separately protects an employee who continues working for more than one month after expiry without objection from the employer and confirms the employee’s right to request an open-ended contract where the statutory conditions are met.

The foregoing provisions further reinforce the aim of preventing circumvention of statutory obligations and narrow the scope for such circumvention. Against this background, observations from legal practice indicate that starting in early 2025, Shanghai courts began to apply stricter scrutiny to employers’ terminations following the second fixed-term labour contract. Where an eligible employee requests an open-ended contract and no statutory exception applies, judicial opinions are increasingly inclined to regard the employer’s refusal to renew the contract as an unlawful termination, rather than a normal termination upon expiry of the contract term.

This shift did not happen overnight. Labour-dispute cases must first go through labour arbitration and it then takes time for cases to reach first instance and second instance courts. Observations from legal practices further indicate that some arbitration decisions in 2025 still followed the earlier expiry based approach, even as court judgments moved toward the new direction, creating a period when likely outcomes could differ between arbitration and litigation. By early 2026, however, the views reflected in Shanghai labour arbitration decisions appear to be increasingly aligned with those of the courts.

For employers in Shanghai, the practical lesson is clear. Contract expiry following the second fixed term labour contract should no longer be treated as a routine non-renewal under previous Shanghai practice. Before issuing any notice of termination or non-renewal, an employer should review the full contractual history, any term extensions, changes of employing entity, work performed after expiry and the employee’s stated preferences. It must also assess the risk of double statutory severance and reinstatement.

Reinstatement is becoming harder to resist

Article 48 of the Labour Contract Law makes continued performance the primary remedy where an employee challenges an unlawful termination and asks to return to work. Compensation in the amount of twice statutory severance applies only when the employee does not seek continued performance or where the contract can no longer be performed. The central practical question has therefore always been what makes continued performance impossible.

Shanghai courts were traditionally cautious about ordering reinstatement, particularly in disputes involving senior or sensitive positions. Shanghai’s publicly available court rulings reflect reasoning that emphasised the personal and cooperative nature of employment, the importance of mutual trust and the difficulty of restoring the working relationship after prolonged and intense legal proceedings. Courts may award compensation rather than order reinstatement of the employment relationship if:

• someone else has already filled the unique role;
• if mutual trust between the parties has been significantly damaged; or
• if there is a strong likelihood of ongoing conflict after reinstatement.

Judicial Interpretation II narrows the scope of discretion. Article 16 lists the circumstances in which a court may determine that a contract can no longer be performed:

• the contract expires during the proceedings with no statutory basis for renewal or extension;
• the employee begins to receive pension;
• the employer is declared bankrupt;
• the employer is dissolved, other than dissolution required by a merger or division;
• the employee has taken up employment with another employer in a way that severely affects the performance of duties or refuses to end that other employment when asked; and
• other circumstances where the contract cannot be performed objectively.

The assessment focuses on objective inability to perform, rather than the parties’ subjective unwillingness to work together.

Article 18 of Judicial Interpretation II further strengthens the practical effect of this approach by requiring payment, at the employee’s normal wage, for the period between the unlawful termination and the reinstatement. Where both parties are at fault for the termination or dissolution, each party shall bear the corresponding responsibility. The longer proceedings continue, the greater the potential exposure to back wages. An employer that assumes compensation will automatically substitute for reinstatement may therefore underestimate both the legal risk and the amount to be financially set aside.

Following the implementation of Judicial Interpretation II, some courts in the Shanghai region have begun to assess employers’ defences against reinstatement in line with the narrower national standards laid down in this judicial interpretation. At present, no publicly available documents set out separate local rules for Shanghai and case outcomes remain fact-specific. However, where the employer is unable to prove an objective impediment to continued performance, it may not be sufficient to prevent reinstatement in the future by mere assertions that:

• the employment relationship has broken down;
• the parties have been engaged in intense litigation; or
• the original position has been filled by another person.

Consequently, employers should assess litigation risks at the point of termination, rather than addressing them after unlawful termination is established. Employers must properly preserve evidence of organisational restructuring and abolition of the job position and carefully evaluate whether a temporary replacement arrangement could obstruct reinstatement under the previous labour contract. For senior management roles, mutual trust remains a relevant factual consideration. However, such trust-based breakdowns cannot be treated as standalone exceptions that operate independently of national standards.

Non-compete: from broad application to evidence-based review of proportionality

Non-compete disputes reflect this same shift toward the national level convergence, with particularly notable impacts on Shanghai’s artificial intelligence, life sciences, semiconductor, internet, financial services and platform based businesses. Broad scope non-compete clauses were once widely adopted for protective purposes:

• they covered large groups of employees;
• defined competitors by industry;
• imposed the maximum two year non-compete period; and
• set substantial liquidated damages.

However, Judicial Interpretation II and MHRSS guidelines, taken together, make this traditional model far more difficult to uphold.

The first criterion is whether the employee is eligible to be subject to non-compete restrictions at all. Under Article 13 of Judicial Interpretation II, a non-compete obligation does not bind an employee who neither knows of, nor has access to, the employer’s trade secrets or confidential matters connected with intellectual property. The MHRSS guidelines similarly require an employer to identify relevant confidential information and assess whether a non-compete obligation is genuinely necessary, rather than relying merely on the employee’s job title or the general confidentiality obligation.

The second criterion is proportionality. The business scope, geographical coverage and duration of any non-compete obligation must align with the confidential information the employee accesses and its commercial shelf life. A landmark Shanghai court judgment clarifies that competitive relationships should be assessed based on substantive business operations. Mere overlap in registered business scopes or broad industrial categorisation is insufficient to establish that the employee’s new position endangers the former employer’s legally protected interests.

Determining competitive relationships has evolved into a multidimensional assessment. Relevant evidence includes actual products and services, customer groups, technical approaches, geographic markets, the employee’s new job responsibilities and the potential application of protected confidential information in the new role. For corporate groups with diversified businesses, competition within a single business line cannot automatically justify restrictive obligations covering all affiliated entities or all employee positions. Also, purely listing competitor names in a non-compete clause fails to capture dynamic commercial realities. Such static wording may misstate actual competitive relationships when competitors undergo corporate restructuring or new market entrants emerge.

The third criterion concerns liability. Article 15 of Judicial Interpretation II stipulates that an employee who breaches a valid non-compete obligation may be ordered to refund previously received compensation and pay the agreed liquidated damages. Nonetheless, courts retain discretion to review and reduce excessive liquidated damages. The MHRSS guidelines further emphasise that both non-compete compensation and liquidated damages must be reasonably calibrated.

For Shanghai employers, enforceable non-compete provisions should be grounded in balanced risk assessment, rather than one sided, employer favourable templates. This heightened judicial scrutiny does not render non-compete arrangements unworkable. Instead, it restores their legitimate purpose: targeted protection for genuinely sensitive roles, with costs and restrictive scope proportionate to the employer’s protected interests. This evolving framework fosters greater nationwide consistency, while allowing Shanghai arbitration institutions and courts to make fact specific determinations tailored to individual commercial circumstances.

National rules converge towards Shanghai practice on over-age workers

Convergence is not entirely a story of Shanghai abandoning its local approaches. In certain areas, newer national rules show continuity with solutions that Shanghai had already applied for many years. The most prominent example relates to employment of individuals who have reached or exceeded the statutory retirement age.

As early as 2003, Shanghai’s “Notice on Several Issues Concerning Special Employment Relationships” places certain workers, including those already receiving pensions, in a category falling between standard employment and purely civil service relationships. While the parties may agree on many aspects of the engagement, core labour standards on working time, labour protection and minimum wages still apply. This avoids all or nothing choice between full employment protection and no protection at all.

In contrast, national legislation and judicial practice have long lacked a consistent and stable definition of the employment status of workers above the statutory retirement age, especially those who had reached statutory retirement age but had not yet started drawing their basic pension. In May 2026, five governmental departments jointly issued the “Interim Provisions on the Protection of Basic Rights and Interests of Over-age Workers” (“Interim Provisions”), which entered into force on 1 July 2026 and established a unified national protection framework for this group. The Interim Provisions require the parties to conclude a written employment agreement and guarantee basic rights including remuneration, rest and leave, occupational health and safety and work injury protection. Over-age workers may also file labour arbitration claims for disputes falling within the scope of these provisions.

Rather than establishing a uniform legal classification for such engagements, the new mechanism strengthens minimum statutory protection. It defines clear rights and dispute resolution avenues without categorising every over age engagement as a standard labour relationship fully subject to the Labour Contract Law. This institutional design has significant practical implications: the parties retain autonomy to agree on terms exceeding statutory minimum, albeit contractual freedom cannot be invoked to bypass statutory baseline protections. Employers accordingly need to differentiate negotiable provisions from mandatory legal floors in contract drafting and routine operational management.

National regulations neither explicitly adopt nor utilise Shanghai’s “special employment relationship” notion. Even so, the national approach has effectively converged with Shanghai’s long standing regulatory one: basic employment protections for over-age workers can be assessed independently from whether their engagement satisfies all constituent elements of a standard employment relationship.

Shanghai employers should now interpret local and national frameworks in conjunction. Existing consultancy or service agreements with retirees ought to be reviewed for required written terms and basic-rights protections. The design of payroll, working time, safety and work injury procedures should not rely merely on the title of the agreement. The Interim Provisions bring greater regulatory attention to this group and make under protected “retirement re hiring” arrangements more vulnerable to legal challenges.

Local exploration continues, yet its function is evolving

National level convergence does not eliminate the need for local level exploration. Shanghai’s economy continues to give rise to disputes not fully resolved by national legislation. These include equity incentives involving offshore holding structures, the employment status of directors and senior executives and the dividing line between genuine outsourcing, labour dispatch and direct employment. Shanghai courts will still need to develop solutions to these issues before comprehensive national rules come into shape.

What has truly transformed is the analytical and exploratory function of local judicial practice. Where the national law is silent or allows room for judicial development, Shanghai may continue to pilot targeted solutions and feed its published cases and practical experience into subsequent national rule making. However, where national judicial interpretations or regulations have established clear statutory positions, the scope for distinct local exceptions is substantially narrowed.

Shanghai’s regulatory experience with over age workers shows that viable local practices can emerge before unified national frameworks. By contrast, the evolving judicial treatment of successive fixed term contracts and employment reinstatement demonstrates the reverse trend: once national policies and judicial guidance consolidate a unified approach, local adjudication is recalibrated to align with the national standard.

Summary: measures for employers to ensure compliance

Employers should treat the convergence of rules as an operational management matter rather than a set of isolated adjustments responding to individual cases. Where a corporate group applies nationwide policies to its Shanghai-based operations, it should review those policies in light of current local dispute resolution trends. Conversely, where an organisation maintains Shanghai-specific policies, it should re-examine them to identify any outdated assumptions inherited from former local practices.

For the year 2026 specifically, employers should:

• establish and review the full record of fixed-term contracts, extensions, changes of employing entity and employee’s renewal requests before any decision related to the expiry of the second fixed-term labour contract;
• assess the risks of reinstatement and back wages accruing from termination to potential reinstatement and preserve objective evidence where continued performance of the position or contract is impossible, before any termination or dissolution decision;
• adjust over broad non-compete arrangements applying to large groups of employees into position-specific restrictive measures and document factors reviewed, including:
1. trade secrets;
2. the employee’s access to such trade secrets;
3. competition risks;
4. the scope of restrictions; and
5. the principle of proportionality; and
• update agreements with over age workers to incorporate basic right protections, to comply with the national provisions taking effect on 1 July 2026.

The core trend is not that Shanghai labour law has become identical to every other region. Rather, existing divergences now demand stronger legal and factual justification and nationally promulgated rules increasingly set the boundaries for permissible local variation. Employers who continue to rely on historic labels or informal assumptions face greater risk than those who redesign their employment processes around the converging national framework.