Interpretation (II) of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, which came into effect on 1 September 2025, is a major regulatory document in the field of employment and labour law. It further clarifies the adjudication rules for several high-frequency dispute issues, posing new challenges for corporate risk management in human resources.
As the concluding piece in this series, this article continues to analyse the key provisions and offers guidance for companies aiming to identify potential compliance risks and enhance their employment practices.
Q: How does Interpretation II extend beyond previous restrictions on service-term agreements?
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A: Article 12 provides that, “where, in addition to paying standard remuneration, an employer agrees with an employee on a fixed service term and provides special benefits, and the employee terminates the labour contract early in breach of such agreement, absent circumstances that justify unilateral termination under article 38 of the Labour Contract Law, the people’s court may determine the compensation payable by the employee by taking into account actual losses, degree of fault, and duration of performance”.
This represents a notable breakthrough, compared to article 22(1) of the Labour Contract Law, which allows service-term agreements only when employers incur specific training expenses for professional or technical training.
Judicial practice has long taken that provision as the benchmark for assessing the validity of service-term clauses. By contrast, Interpretation II broadens the permissible basis for such agreements from “professional training” to situations where the employer provides “special benefits”.
The change reflects practical needs. Many employers grant employees household registration assistance, staff accommodation or signing bonuses, yet previously had limited legal recourse to ensure a balance between input and return.
In fact, even before the new interpretation was issued, courts had ruled in favour of employers in cases where employees breached service-term commitments after employers had helped them obtain household registration. Interpretation II now codifies that judicial reasoning, providing a clear legal foundation for service-term agreements tied to special benefits.
It is worth noting that the phrase “the employer may claim compensation for losses” differs from the Labour Contract Law’s article 22(2), which refers to payment of “liquidated damages”. Under the new interpretation, courts will apply the principle of loss compensation rather than fixed liquidated damages, placing a heavier evidentiary burden on employers.
Companies are therefore advised to document, in writing, the monetary value of any special benefits granted so that these can serve as reference points should actual losses prove difficult to substantiate.
Q: What are the key changes to non-compete clauses under Interpretation II?
A: Interpretation II refines the existing framework for non-compete arrangements through articles 13, 14 and 15. It strikes a balance between protecting corporate trade secrets and employees’ rights to career mobility, while further clarifying the boundaries of non-compete restrictions.
Article 13 stipulates: “Where an employee has not become aware of or had access to an employer’s trade secrets, or confidential information relating to intellectual property, and the employee claims that a non-compete clause is invalid, the people’s court shall uphold that claim. If the scope, territory or duration of the agreed non-compete obligations is disproportionate to the trade secrets or confidential information the employee had access to, the court shall support a claim that the excessive portion is invalid.”
This provision limits the ability of employers to impose sweeping non-compete obligations, aiming to protect employees’ legitimate rights and encourage the free flow of talent.
Before signing a non-compete clause with an employee, companies should clearly specify in writing the employee’s job responsibilities, the scope of trade secrets they will access, the territorial limits, and the duration of the restriction in order to avoid the clause being deemed invalid or exceeding reasonable limits.
Article 14 provides that: “Where an employer agrees with a senior manager, senior technical staff member, or other employee bound by confidentiality obligations to enforce a non-compete clause during employment, and the employee seeks to invalidate the clause on the grounds that such arrangements are impermissible during employment or that economic compensation has not been paid during employment, the people’s court shall not support the claim.”
This clarifies that non-compete undertakings during employment are valid, and that their effectiveness is not contingent on the employer’s payment of compensation. Nevertheless, Interpretation II does not specify whether an employee who breaches a valid in-service non-compete obligation must pay liquidated damages.
Employers are therefore advised to include a calibrated damages clause when agreeing to such obligations, ensuring that the amount is reasonable and enforceable.
Article 15 states that: “Where an employee breaches a valid post-employment non-compete agreement, and the employer seeks the employee’s return of paid compensation and payment of liquidated damages as agreed, the people’s court shall uphold the claim.”
This article clarifies the “dual liability” mechanism. Employees who breach valid non-compete obligations must both return the economic compensation received and pay liquidated damages. These two remedies are cumulative rather than mutually exclusive.
However, the article does not specify whether the employer may reclaim compensation corresponding to the period of compliance if the employee abides by the non-compete obligation before breaching it. On this issue, further observation of judicial practice and rulings will be necessary to determine how it is handled in practice.
Gu Hanbing is a partner at Ronly & Tenwen Partners
Ronly & Tenwen Partners
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Read more about labour dispute rules
Tighter employer liability under new labour dispute rules (Part 2)
Responding to a surge in labour disputes in recent years, the Supreme People’s Court has introduced a new judicial interpretation that refines judicial standards, raising new challenges for corporate compliance and employment risk management
For more stories about labour disputes, visit law.asia.
