Changes in Shanghai's practices for non-renewal of second fixed-term contracts

At a glance

• Under national law, employers must offer an open-term contract after two consecutive fixed-term contracts unless the employee requests otherwise—though Shanghai has historically allowed employers more discretion not to renew.
• Recent internal guidance from the Shanghai High People’s Court reflects divided views on whether employers must renew contracts as open-term, and a local court ruling suggests stricter enforcement, though no binding precedent or official rule change has been issued.
• Due to ongoing ambiguity and lack of authoritative guidance, companies should handle contract renewals cautiously, assess risks case by case, and stay alert to legal developments.

Under the Employment Contract Law of the People's Republic of China, an open-term contract must be concluded when an employment relationship is renewed following the completion of two consecutive fixed-term contracts, unless the employee requests a fixed-term contract. In most provinces and cities in China, this requirement means that the company cannot decide not to renew the contract upon the expiry of the second fixed-term contract and must automatically convert it to an open-term contract unless the employee requests otherwise.

However, unlike most cities in China, in Shanghai, this requirement is understood to apply when the employer intends to renew. Therefore, Shanghai allows companies to decide not to renew the contract upon the expiry of the second fixed-term contract. Employers can even let the fixed-term contract expire at the end of each term.

The position taken by Shanghai has seen some shifts. The Shanghai High People's Court has internally issued the 'Extracts of Opinions on Difficult Issues in the Application of Labour Dispute Law' (Opinions), effective from 1 January 2025. The Opinions summarise the 'majority view' and the 'minority view' on ten controversial issues in practice. Regarding contract renewal upon the expiry of the second fixed-term contract, the majority opinion holds that 'if the employee proposes to sign an indefinite-term employment contract, the employer must sign it, regardless of the employer's willingness to renew the contract.' The minority view, however, reiterates that the employer has the right to decide whether to renew the contract, allowing the company to end the contract at its discretion upon expiry.

Additionally, a judgment by the Minhang District Court, which has circulated online, ruled that a company's termination of a contract upon the expiry of the second fixed-term contract was wrongful, ordering the company to pay double statutory severance to the employee. However, this judgment has not been published on the official China Judgments online website.

To date, no official rule or guideline has been published to explicitly reverse the practice adopted by Shanghai labour arbitration commissions or courts for years. Even though a local district court made a judgment in line with the majority view stated in the Opinions, China does not follow the doctrine of precedent.

Additionally, the following issues also remain unclear:

• What evidence the employee is required to produce to prove that they did propose to enter an open-term contract upon the expiry of the second fixed-term contract.
• The timeframe within which the employee must request an open-term contract, and when the employee loses the right to request it.
• If the company issues a non-renewal notice and the termination is deemed wrongful, whether the employee has the right to claim reinstatement, whether reinstatement is possible given the contract's expiry, or if the maximum exposure would just be damages equivalent to double statutory severance.
• Assuming a third or fourth fixed term contract is concluded whether the company has right to let the contract expire or the company has no choice but is obligated to offer an open term contract upon expiry of each subsequent fixed term contract.

In the absence of official rules and judicial interpretations on this issue or instructive judgement publicised by High People's Court or the Supreme Court, companies should be cautious when handling contract non-renewals, adopting a strategic approach on a case-by-case basis in response to potential employee reactions and risks. Moreover, companies should closely monitor any legal updates and adjust their approach accordingly in a timely manner.