Hiring your first employee in China isn’t like adding headcount in London, New York, or Singapore. The moment you decide to employ someone in China—whether a local hire or a foreign national with work authorization—you’re entering a formal legal relationship governed by the Labor Contract Law of the People’s Republic of China. This law doesn’t offer much flexibility. It mandates written contracts, defines precise termination grounds, and creates statutory obligations that can’t be waived by mutual agreement. For foreign employers, understanding these rules isn’t optional—it’s the difference between compliant operations and expensive legal disputes.
The Labor Contract Law, enacted in 2008 and amended in 2012, establishes China’s contract employment system. Unlike at-will employment common in some Western jurisdictions, China requires employers to document the employment relationship in writing, specify key terms clearly, and follow strict procedures for changes or terminations. The law applies to all enterprises operating in China, including wholly foreign-owned enterprises (WFOEs), joint ventures, and representative offices. Foreign employees with valid work permits or permanent residency fall under the same framework—there’s no carve-out for expats or international staff. If you’re hiring in China, you’re bound by Chinese labor law, regardless of what your home country’s employment practices look like.
Employment Contracts: Not a Formality, But a Legal Requirement
In China, you must sign a written employment contract within one month of an employee’s start date. This isn’t a best practice—it’s a legal mandate. If you fail to execute a written contract within 30 days, the law presumes the employment relationship exists anyway, and you become liable for double wages starting from the second month until a written contract is signed (capped at 11 months). After one year without a written contract, the law automatically deems the relationship an open-ended contract, giving the employee significantly stronger protections.
Your employment contract must include specific mandatory terms: the employer’s name and address, the employee’s name and ID number, the term of the contract, job description and work location, working hours and rest periods, wage payment terms, and social insurance participation. Optional clauses may cover probation periods, confidentiality obligations, non-compete restrictions, and training agreements. Every clause matters. Vague job descriptions can limit your ability to reassign duties. Unclear wage structures create disputes over overtime calculations. Ambiguous termination language won’t protect you—Chinese courts interpret contracts strictly and tend to favor employees when terms are unclear.
Many foreign employers draft bilingual contracts—Chinese and English—to ensure clarity for both parties. While not legally mandated for all employment scenarios, bilingual contracts are highly recommended when hiring foreign nationals or managing cross-border teams. The Chinese version will govern in case of disputes, so having both languages reviewed by bilingual legal counsel prevents misunderstandings. Don’t rely on machine translation or standard templates downloaded online. Chinese labor law terms don’t always translate neatly into English concepts, and mistranslations can create enforceable obligations you didn’t intend.
China recognizes three types of contract durations: fixed-term (with a specific end date), open-ended (no fixed end date), and project-based (tied to a specific project’s completion). Most employers start with a fixed-term contract, typically three to five years. After two consecutive fixed-term contracts, employees gain the right to request an open-ended contract, and refusing such a request without valid grounds can lead to legal liability. Open-ended contracts don’t mean lifetime employment—they simply remove the expiration date, requiring you to follow standard termination procedures if you need to end the relationship.
Probation Periods: Your Chance to Evaluate, With Limits
Probation periods give employers time to assess whether a new hire is the right fit, but Chinese labor law tightly restricts how long probation can last and what you can do during it. For contracts lasting three months to one year, the probation period cannot exceed one month. For contracts between one and three years, probation is capped at two months. For contracts of three years or more (or open-ended contracts), probation can extend to six months. You can only set one probation period per employee per employer relationship—no extending or resetting probation if performance is borderline.
During probation, you must pay at least 80% of the agreed wage and no less than the local minimum wage. You can terminate during probation without severance pay, but only if the employee fails to meet the conditions for employment as stated in the contract. This means you must have clear, documented performance standards and evidence showing the employee didn’t meet them. Saying “they’re not a good fit” or “we changed our mind” won’t hold up in arbitration. Chinese labor authorities expect objective evidence: failed training assessments, documented performance issues, attendance records, or specific examples of incompetence. Without this documentation, terminating during probation becomes just as difficult—and expensive—as terminating after probation ends.
Performance evaluations during probation should be formal, written, and delivered to the employee with acknowledgment. If you plan to terminate, provide clear written notice explaining which specific conditions weren’t met. Many foreign employers make the mistake of treating probation as a true “trial period” where they can dismiss freely. That’s not how it works in China. You’re still bound by the employment contract, and you still need a valid, documented reason to terminate.
Working Hours, Overtime, and Leave: Compliance Starts With the Clock
China’s standard workweek is 40 hours—eight hours per day, five days per week. Any time beyond this is overtime and must be compensated at premium rates: 150% of regular wages for weekday overtime, 200% for rest days, and 300% for statutory holidays. You can require overtime, but it’s capped at one hour per day (three hours in special circumstances) and 36 hours per month. Violating these limits doesn’t just create back-pay claims—it can trigger labor bureau investigations and fines.
Employees are entitled to at least one day off per week. If work requirements force them to work seven consecutive days, they must receive compensatory time off or overtime pay. China recognizes 11 statutory public holidays each year, during which employees must be given paid leave. If business needs require work on these days, you must pay triple wages (300% of regular pay) or provide substitute rest days plus 200% overtime pay.
Annual leave entitlement is based on total years of work experience, not tenure with your company. Employees with 1-10 years of cumulative work experience receive 5 days of paid annual leave. Those with 10-20 years get 10 days. Those with over 20 years are entitled to 15 days. If you don’t allow employees to take their annual leave, you must pay them 300% of their daily wage for each unused day. Other mandatory leave includes sick leave (amount varies based on tenure), maternity leave (typically 98-128 days depending on the province), paternity leave (usually 7-30 days), and marriage/bereavement leave (typically 1-3 days).
Wage payment must occur at least monthly, on a fixed date, and in legal currency (RMB). You must provide written pay statements showing how wages are calculated. Delaying or withholding wages—even temporarily—is illegal and can result in penalties, including orders to pay additional compensation up to 50-100% of the withheld amount. Social insurance is mandatory, covering pension, medical, unemployment, work injury, and maternity insurance. Both employer and employee must contribute, and the rates are set by local governments. Failing to register employees for social insurance or underreporting their wages to reduce contributions creates both immediate liability and long-term risk if the employee later files a claim or complaint.
Termination Procedures: Where Most Foreign Employers Face Legal Risk
Terminating an employment contract in China requires valid legal grounds and proper procedure. Unlike at-will employment systems, you cannot simply decide to let someone go. The Labor Contract Law lists specific circumstances under which termination is permitted: mutual agreement, employee resignation, expiration of the contract term, employee fault (such as serious violation of company rules, criminal conduct, or gross negligence), inability to perform the job after training or reassignment, or substantial change in circumstances that makes contract performance impossible.
If you terminate by mutual agreement or due to circumstances not caused by the employee’s fault, you must provide 30 days’ written notice (or pay one month’s wages in lieu of notice) and pay severance. Severance is calculated as one month’s wages for each full year of service (with partial years pro-rated). For example, an employee with 3.5 years of service would receive 3.5 months’ wages as severance. Wages for severance purposes are based on the employee’s average monthly wages over the prior 12 months, capped at three times the local average monthly wage.
Termination for cause—such as serious rule violations or criminal conduct—doesn’t require notice or severance, but it requires solid documentation. “Serious violation” must be defined clearly in your company’s rules and regulations, which must be established through proper procedures (employee consultation or union/worker representative input) and made known to employees. Firing someone for minor misconduct or subjective “attitude problems” won’t qualify as lawful termination for cause. If you get it wrong, the consequences are severe: the employee can claim unlawful termination and demand reinstatement or double severance (two months’ wages per year of service). Plus, you may owe back wages for the period between termination and resolution.
Certain employees have enhanced protections. You cannot terminate someone who is sick or injured (during the statutory medical treatment period), on maternity leave, or suffering from an occupational disease or work-related injury (if not confirmed as having completely or partially lost the ability to work). Employees close to retirement (within five years for men, within one year for women) cannot be easily dismissed. Terminating protected employees—even for performance reasons—often requires creative solutions like role adjustments or mutual separation agreements with enhanced severance packages.
Proper termination procedure includes: issuing written notice specifying the legal grounds, settling final wages and benefits within 15 days, issuing a certificate of contract termination, transferring the employee’s employment file, and completing social insurance formalities. The termination certificate is critical—employees need it to claim unemployment benefits and register with new employers. Failing to issue it on time can result in administrative penalties.
Non-Compete and Confidentiality Agreements: Narrow and Enforceable, If Done Right
China permits non-compete agreements, but only for specific categories of employees: senior managers, senior technical personnel, and other employees with confidentiality obligations. You can’t impose non-competes on rank-and-file staff. The non-compete period cannot exceed two years, and you must pay monthly compensation during the restriction period—typically 20-50% of the employee’s average monthly wages, though some courts require at least 30% of the local average monthly wage to be enforceable.
The geographic scope and industry restrictions must be reasonable. Blanket prohibitions on “working in any related industry” or “anywhere in China” are unlikely to be enforced. Courts look for reasonable limitations that protect your legitimate business interests without unreasonably restricting the employee’s ability to earn a living. If you fail to pay the monthly compensation on time, the non-compete obligation ceases. If the employee violates the non-compete, you can seek injunctive relief and liquidated damages (if specified in the agreement), but enforcement often depends on your ability to prove actual violation—not always easy when employees work for competitors under different titles or through related entities.
Confidentiality agreements are separate from non-competes and can apply to any employee with access to sensitive information. These agreements restrict disclosure of trade secrets and proprietary information but don’t prevent the employee from working for competitors. Unlike non-competes, confidentiality obligations don’t require ongoing compensation after employment ends—they’re enforced under trade secret protection laws. However, you must clearly define what constitutes confidential information and implement reasonable measures to protect it (such as labeling documents, restricting access, and requiring acknowledgments).
Dispute Resolution: Arbitration First, Then Court
Employment disputes in China follow a mandatory arbitration-first process. Employees (or employers) must file a claim with the local labor arbitration committee before going to court. The arbitration process is relatively quick—decisions are typically issued within 45-60 days—and the filing fee is low (often just 10 RMB). Arbitration awards below a certain threshold (currently 12 months’ local minimum wage or less) are final and binding. For larger amounts or complex claims, either party can appeal to the people’s court within 15 days of receiving the award.
Labor arbitration committees tend to favor employees, especially when employers lack clear documentation or fail to follow procedures. This makes prevention—getting contracts, policies, and terminations right from the start—far more effective than defense. Once you’re in arbitration, the burden often shifts to the employer to prove compliance. If you can’t produce the signed employment contract, detailed performance records, or proper termination notices, you’ll lose, regardless of the underlying merits.
Specifying governing law and dispute resolution jurisdiction in your employment contract is important but won’t override mandatory arbitration. Your contract can’t force employees to waive arbitration rights or agree to foreign jurisdiction for employment claims. What you can do is clearly state that Chinese law governs, identify the specific arbitration committee with jurisdiction (typically where the employer is registered or where the contract was performed), and include a bilingual clause explaining the dispute resolution process.
Practical Considerations for International Companies
For international companies entering the China market, labor compliance starts before you post the first job ad. You need compliant HR policies that cover employee handbooks, performance evaluation systems, attendance tracking, leave management, and disciplinary procedures. These policies must be established through a democratic process—either through a workers’ congress, trade union, or direct employee consultation—and employees must acknowledge receipt in writing. Courts and arbitration committees regularly ask to see these policies, and missing or improperly adopted policies can undermine your ability to enforce rules or terminate for cause.
Your onboarding process should include: signing the written employment contract on or before the start date, completing social insurance registration within 30 days, conducting a formal orientation covering company policies, and creating an employee file that includes the signed contract, job application materials, ID documents, and acknowledgment forms. Use checklists to ensure nothing is missed—small procedural failures create disproportionate risk.
Managing foreign employees in China adds complexity. Foreign nationals must have valid work permits and residence permits before starting employment. The work permit application requires submission of the employment contract, so timing is critical. If you’re relying on secondment arrangements or stating in your contract that foreign law governs the relationship, you’re creating risk. Chinese courts and arbitration committees have increasingly ruled that such clauses are unenforceable for work performed in China. If a foreign employee works physically in China, Chinese labor law applies, regardless of what your contract says.
Work closely with local employment counsel—not just for contract drafting, but for ongoing advice on policy updates, termination planning, and dispute prevention. Chinese labor law is not static. Recent amendments and local regulations continuously reshape requirements around retirement age, overtime caps, and termination procedures. What worked last year may not work today.
Quick Compliance Checklist for International Teams
Before hiring your first employee in China, confirm you can answer “yes” to these questions:
- Have you registered a legal entity in China authorized to employ staff directly (WFOE, JV, or similar)?
- Do you have a legally compliant employment contract template reviewed by bilingual counsel familiar with both Chinese labor law and your industry?
- Have you established written HR policies covering probation, performance evaluation, attendance, leave, and disciplinary procedures—and followed the proper adoption process?
- Do you have systems in place to track working hours, calculate overtime accurately, and ensure timely wage payment?
- Are you prepared to register employees for social insurance and make contributions within the statutory deadlines?
- Do you have documented processes for performance management during probation and throughout employment?
- Can you issue compliant termination notices with proper legal grounds, notice periods, and severance calculations?
- Have you identified the correct local labor arbitration committee for dispute resolution?
If the answer to any question is “no,” pause before hiring. The cost of getting it right upfront is far less than the cost of fixing it during an arbitration proceeding.
Common Pitfalls to Avoid
Foreign employers new to China frequently make the same mistakes: failing to sign written contracts within 30 days (or at all), using English-only contracts without proper Chinese translations, copying employment policies from other jurisdictions without adapting them to Chinese law, treating probation as an unrestricted trial period, imposing non-competes on regular employees or without paying ongoing compensation, terminating employees without valid legal grounds or proper documentation, and failing to maintain detailed performance records and written warnings.
Another frequent error: assuming that settling social insurance contributions at reduced rates or “under the table” salary arrangements will go unnoticed. Employees often file claims after termination, demanding back contributions and penalties. Tax authorities are increasingly scrutinizing payroll compliance, and the consequences of misclassification or underreporting extend beyond labor disputes into tax liability.
Don’t draft overly broad non-compete clauses covering “any business remotely related to the company” or lasting for “as long as legally permissible.” Courts will narrow or void them. Don’t terminate employees without written notice specifying clear legal grounds, even if the situation seems obvious. Don’t rely on verbal agreements, informal email exchanges, or unsigned documents to prove your case. In Chinese labor arbitration, paper trails win cases—everything else is hearsay.
Conclusion: Get It Right From the Start
The Labor Contract Law of the People’s Republic of China is unforgiving. It requires written contracts, mandates specific procedures for termination, and imposes severance obligations that can’t be waived. For foreign employers, understanding these rules isn’t about legal theory—it’s about making smart decisions before you sign your first employee. The stakes are high: unlawful terminations result in double severance payments or reinstatement orders, wage violations trigger back pay and penalties, and procedural failures shift the burden of proof to you in arbitration.
The core concepts are straightforward: execute written contracts within 30 days of hiring, document performance issues carefully and consistently, follow proper procedures when terminating employees and calculate severance accurately, use non-compete agreements only for eligible employees with reasonable restrictions and ongoing compensation, and ensure full compliance with wage payment, working hours, and social insurance requirements.
But straightforward doesn’t mean simple. Chinese labor law operates within a context of local regulations, judicial interpretations, and enforcement practices that vary by city and province. What’s considered “serious misconduct” in Shanghai may not be in Shenzhen. Severance caps differ across regions. Social insurance contribution rates change annually.
This is why engaging local counsel isn’t optional. Before you hire your first employee in China, work with bilingual legal advisors who understand both Chinese labor law and international employment practices. Have them review your contracts, establish your HR policies, and provide guidance on termination planning. The cost of prevention is always lower than the cost of litigation.
China’s market opportunity is immense, but employment compliance is the foundation. Get this right, and you can build a stable, productive workforce that drives your China operations forward. Get it wrong, and you’ll spend more time in arbitration than in business meetings. The choice is yours—but the law is non-negotiable.