Shanghai Closes Labor Loophole, Bolstering Worker Job Security

A major shift in Shanghai’s interpretation of China’s labor law is underway, closing a loophole long exploited by companies to avoid granting employees permanent job security and aligning the city’s labor standards with those across the nation[para. 1]. Previously, Shanghai adhered to a "mutual agreement theory," where employers could choose not to renew a contract after two consecutive fixed-term contracts without offering permanent status, simply paying standard severance upon termination[para. 3]. However, this is no longer the case, with both the city’s labor arbitration commissions and courts now ruling that eligible employees are entitled to non-fixed-term contracts after two consecutive fixed-term ones. Refusal to grant such contracts is increasingly deemed an unlawful termination, triggering a requirement for double the standard severance pay[para. 2][para. 4].

The prior approach in Shanghai gave significant advantage to companies, as terminations after refusal to grant a permanent contract were almost always found legal, and only standard severance was required, even after multiple appeals[para. 5]. The change, which began to manifest in early 2025 in the city’s courts, has now been adopted by both courts and labor arbitration commissions, bringing Shanghai's practices in line with the rest of China[para. 6]. Several labor lawyers confirmed that the arbitration and court standards are now consistent, marking a dramatic realignment in the city’s handling of such cases[para. 6].

This shift was catalyzed by a series of legal debates, including a January seminar by the Shanghai High People’s Court’s civil trial division, where the prevailing view held that employer willingness was not a prerequisite for non-fixed-term contracts after two fixed-term ones[para. 7]. Furthermore, a Supreme People’s Court judicial interpretation taking effect on September 1 reinforced that courts should support employees’ requests for permanent contracts where eligible[para. 7]. The transition became explicit in October during a public legal lecture, during which a Shanghai High People’s Court official affirmed the new standard: employers are now obligated to convert a worker to a permanent status after two fixed-term contracts if the worker requests it[para. 8].

Under China’s Labor Contract Law, unlawful termination for refusal to offer a required permanent contract demands double severance, the amount of which is based on the employee’s years of service[para. 9]. A notable example from a November 6, 2024 arbitration case saw an employee, after requesting a permanent contract, awarded an extra 50,000 yuan (about $6,900 USD) on top of 70,000 yuan ($9,700) in standard severance, totaling about 135,589.4 yuan ($18,800), based on a previous monthly salary of approximately 11,008.41 yuan ($1,500)[para. 10].

However, workers whose contracts ended before the new rules took effect feel aggrieved, as their appeals were decided under the old interpretation[para. 11][para. 12]. Some, like Meng Jie and Zhang Xi, experienced the cut-off firsthand, with legal outcomes unfavorable due to timing and procedural tactics from employers[para. 13][para. 14].

The changes come at a time of economic uncertainty for China, placing greater cost sensitivity on companies[para. 15]. Some firms strategize to avoid granting permanent status, but labor experts emphasize that a permanent contract does not guarantee lifetime employment—firms may still legally terminate employees for cause, as per Article 39 of the Labor Contract Law[para. 16][para. 17]. Lawyers recommend that companies adopt rigorous performance evaluation and clear workplace rules to manage workforce risks under the updated labor law landscape[para. 18].

(All interviewees were given pseudonyms; reporting by Bao Zhiming)[para. 19][para. 20].