Two consecutive one-year contracts create a right to an open-ended contract. Judicial Interpretation II closed the workarounds in 2025.
Company A, a mid-sized U.S. software company, wanted a sales lead in Shanghai but did not want the cost and complexity of setting up its own China entity. So it hired through an Employer of Record: the EOR's China entity became the legal employer on paper, while the employee worked exclusively for Company A day to day.
The EOR proposed what sounded like the safest, most flexible option, a one-year fixed-term contract renewed annually. Company A liked it, because it sounded just like an at-will arrangement back home. Year one went fine. Year two, the EOR auto-renewed the same one-year contract without much discussion. Going into year three, Company A decided to restructure its China go-to-market and wanted to end the role.
That was when the EOR delivered the news: because the employee had just completed two consecutive fixed-term contracts, she was legally entitled to demand an open-ended contract for the next term, and she had. Simply not renewing was no longer a clean option.
To end the relationship now, Company A needed a valid statutory ground for termination, which it did not clearly have, or a negotiated severance package to secure her agreement to leave.
What looked like a routine non-renewal turned into a negotiated exit costing several months' salary, plus weeks of legal back-and-forth nobody had budgeted for. The number itself was survivable. The surprise was that the cheap exit had quietly expired two years earlier.
Article 14 of China's Labor Contract Law requires an employer to offer an open-ended contract, one with no fixed expiry date, when any of these apply.
Trigger three is the one that quietly catches foreign companies using EOR arrangements, because serial one-year renewable contracts are exactly the pattern that satisfies it. By the third contract cycle the employer has lost its let it expire off-ramp entirely, unless it can point to documented cause.
The trap is not that the rule is hidden. It is that the rule was never relevant during the sales conversation, which is the only point at which most clients think about contract length.
For years some EOR and PEO providers worked around this by rotating the employee's paperwork between different affiliated legal entities on each renewal, so no single entity ever technically signed two consecutive contracts. Others used short automatic extensions or informal keep-working-while-we-sort-out-the-paperwork gaps to muddy the count.
That workaround is now largely gone. China's Supreme People's Court issued Judicial Interpretation II, effective 1 September 2025, which instructs courts to treat the following as two consecutive fixed-term contracts regardless of paperwork gymnastics.
In short, courts now look at the substance of the employment relationship, not at which shell entity's letterhead is on the contract that month. Any EOR strategy built on entity-shuffling is a live compliance risk rather than a safe workaround.
That also changes what diligence looks like. Asking how many contracts the current entity has signed is no longer enough; the question is how many the employee has had across the group.
It is usually not malice but incentives and scale. Many global EOR platforms operate across 100-plus countries on standardised templates and a subscription-per-headcount model. Their sales conversation is optimised around making hiring in China fast and simple, not around the specific PRC statute that will limit your options in year three.
The cost of that gap does not fall on the EOR when it eventually surfaces. It falls on the client, usually at the worst possible moment: when the client is trying to exit an employee.
This is worth being precise about, because it is often overdramatised in one direction and underexplained in the other. An open-ended contract is not a guarantee of permanent employment. An employer can still lawfully end it through statutory routes.
What it removes is the simple, low-conflict, low-cost option a fixed-term contract gives you: just not renewing it. There is no natural expiry date to let lapse. Terminate without a valid statutory basis and without a mutual agreement, and you risk a finding of unlawful termination with double severance under Article 87, on top of possible reinstatement claims.
Two practical notes on economics. Standard severance is roughly one month's average wage per full year of service under Articles 46 and 47, and unlawful termination roughly doubles that. Local judicial practice is also not perfectly uniform: courts in different cities have historically taken different views on whether an employer can decline to renew at all once the two-contract point is reached, even before Judicial Interpretation II. That is the kind of nuance to get local counsel on rather than assume.
These five questions belong in the procurement conversation, not in year three.
The trap is not that Chinese labor law is unusually harsh. It is a well-established, predictable rule that has been on the books since 2008 and was clarified further in 2025. The trap is that many EOR vendors sell simplicity without disclosing the point at which simplicity ends.
If you are hiring in China through an EOR, ask about year three before you sign year one. Company A is a composite, illustrative case, not any specific client; consult qualified PRC counsel for case-specific guidance.
Rowint is your China expansion partner, helping international companies build, manage and grow teams in China. With local support from Shanghai since 2012, we bring together China Recruitment, Employer of Record (EOR), PEO, and China Entity and Finance services. Our EOR offering covers employment contracts, payroll and individual income tax, social insurance, benefits and leave, and employee lifecycle administration, helping companies hire in China without setting up their own local entity. If any of this sounds familiar, reach out to us for a free compliance check-up at rowint.com.
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