Signing of Open-Ended Labor Contracts in China
According to the Labour Contract Law of the PRC (hereinafter referred to as the Labour Contract Law), if an employee has entered into two consecutive fixed-term labour contracts and there are no statutory exceptions, i.e. the situations stipulated in Article 39 and item (1) and item (2) of Article 40 of the Labour Contract Law, the employer must enter into an open-ended labour contract with the employee unless the employee waives the right.
In practice, some employers may extend the contract term of the original labour contract by signing a change agreement before the expiration of the first labour contract with the employee, or by changing the signing party, arranging for the employee to resign and then sign a new labour contract, etc., to circumvent its legal obligation to sign an open-ended labour contract due to conclusion of two consecutive fixed-term labour contracts.
To clarify the relating disputes, Article 10 of the Interpretation of the Supreme People's Court on the Application of Law in the Trial of Labour Dispute Cases (II) further explains the situation that meets the criteria for "conclusion of two consecutive fixed-term labour contracts". According to the provision of Article 10, the following circumstances shall be deemed as "conclusion of two consecutive fixed-term labour contracts":
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The term of the labour contract has been extended through negotiation for a cumulative period of more than one year and the extension period expires.
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The automatic renewal period of the labour contract expires.
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The employer changes the signing party of the labour contract, but the employee still works at the original workplace or job position, the employer continues to manage the employee and the term of the changed labour contract expires.
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The employer sign the second labour contract by other means that violating the principle of good faith and the term of the labour contract expires.
According to the above provisions, it will be deemed invalid if an employer maliciously circumvents its obligation to conclude open-ended labour contract by violating the principle of good faith.
If an employer fails to sign an open-ended labour contract with an employee under the circumstances specified in Article 14 of the Labour Contract Law, it must pay double monthly salary to the employee from the date the open-ended labour contract should be signed until the contract has been signed by both parties. If the employer illegally cancels or terminates the labour contract, then they shall pay double compensation to the employee based on the statutory economic compensation standard.
To avoid potential legal risks, the employer should standardize the signing of labour contracts, especially the renewal of labour contracts, and strengthen the management of the employee’s labour contracts. It should verify and determine whether there are statutory mandatory situations for signing open-ended labor contracts (For example, the employee has worked for the employer for ten consecutive years or has signed two consecutive fixed-term labour contracts with the employer.) strictly in accordance with relevant laws, regulations, and judicial interpretations, and whether there are statutory exceptions (For example, the employee seriously violates the rules and regulations of the employer, or causes significant damage to the employer due to gross misconducts, etc.). Before the expiration of an employee's first labuor contract, it is necessary to promptly evaluate and determine whether to renew the labour contract with the employee. If not renewed, the employer should notify the employee in a timely manner that the their labour relationship will be terminated upon the expiration of the labour contract.
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