Its common practice for disputes between employer and employee to arise in relation to the conclusion of open-ended labor contracts, among which, the issue of whether an employer has the right to terminate the labor contract or to sign an open-ended labor contract with the employee after signing two fixed-term labor contracts, usually raises concerns. The main reason for such disputes is that employers and employees have different understandings of the relevant legal clauses. In actual fact, judicial practices in different regions of China also have different understandings of this issue.
Legal Stipulations and Analysis
Related laws – Paragraph 2, Article 14 of Labor Contract Law of the People’s Republic of China: An open-ended labor contract may be concluded between an employer and an employee upon consultation. If an employee proposes or agrees to renew and conclude a labor contract in any of the following circumstances, an open-ended labor contract shall be concluded, unless the employee requests the conclusion of a fixed-term labor contract instead:
- The employee has been working for the employer for ten consecutive years;
- When the employer first introduces the labor contract system or the state-owned enterprise that employs him re-concludes its labor contracts as of restructuring, in which such scenario the employee has both been working for the employer for ten consecutive years and is less than ten years away from his/her legal retirement age; or
- Where a labor contract was concluded as a fixed-term labor contract twice consecutively and the employee, in the absence of any of the circumstances stipulated in Article 39 and Items (1) and (2) of Article 40 hereof (see below for a definition of such parameters), renews such contract.
In view of the circumstances and reasons for an employer to conclude an open-ended labor contract as set forth in the abovementioned laws, there are usually two different interpretations, such as:
Interpretation 1: The prerequisite for an employer to conclude an open-ended labor contract is to reach a consensus on a renewal with the employee. Even if the employee does not fall under any of the circumstances stipulated in Article 39 and item (1) and item (2) of Article 40 of the Labor Contract Law (applicable to employees who have committed serious violations or are unable to perform their duties), if the employer does not have the intention to renew, the employer has the right to choose to terminate the labor contract upon expiration.
Interpretation 2: Upon expiration of the second fixed-term labor contract, as long as the employee does not fall under any of the circumstances stipulated in Article 39 and item (1) and item (2) of Article 40 of the Labor Contract Law, as previously mentioned, and does not make any requests to the contrary, the employer must conclude an open-ended labor contract with the employee.
Therefore, except for instances in which the employee falls under any of the circumstances stipulated in Article 39 and item (1) and item (2) of Article 40 of the Labor Contract Law, which interpretation the court determines to adopt would result in significant differences in the amount of severance/compensation paid by the employer. Specifically, if the first interpretation is adopted, the company shall pay the employee severance upon the expiration of the second fixed-term labor contract; if the second interpretation is adopted, under such circumstances, if the company terminates the labor contract on the grounds of expiration, it shall be deemed as illegal termination of the labor contract, and the company shall pay the employee double compensation.
The judicial practices in Shanghai adopt the first interpretation. Pursuant to item (4), Article 4 of the Circular on Printing and Distributing the Opinions on Several Issues on the Application of the Labor Contract Law promulgated by Shanghai High People’s Court, item (3), paragraph 2, Article 14 of the Labor Contract Law refers to the circumstance when an employer and an employee sign a contract for the third time. The relevant judgements in Shanghai  also indicate that the company must conclude an open-ended employment contract with an employee only if both parties reach a consensus on the renewal of the employment contract. If the company clearly indicates to the employee that the employment contract is terminated and will not be renewed upon expiration, it is generally required to pay the employee severance for the termination upon expiration.
Contrary to Shanghai, the judicial practices in Beijing apply the second interpretation. Pursuant to Article 34 of Minutes of the Seminar of the Beijing Municipal High People’s Court and the Beijing Municipal Arbitration Committee of Labor Dispute on Issues concerning the Application of Laws for the Trial of Labor Dispute Cases (II) promulgated in 2014, upon conclusion of two fixed-term labor contracts in succession, only the employee, rather the employer has the right to enter into a fixed-term employment contract or to terminate the employment contract. The relevant judgements in Beijing  also show that the unilateral termination of the employment contract by a company upon expiration constitutes illegal termination. Even if the company gives the employee notice of termination no later than one month before expiration, the company still has to pay the employee double compensation.
- Other Regions
In addition, it should be noted that Guangdong, Zhejiang, Jiangsu, Tianjin, and other regions also have judgements which tend to apply the second interpretation, whereby the judgement result of labor disputes arising therefrom stipulates that the companies are required to pay its employees double compensation.
Summary and Suggestions
Different regions have different understandings of this legal issue, and judicial practices also differ. Judicial practices in many regions believe that the company does not have the option to terminate the second fixed labor contract upon its expiration, in other words, the second labor contract may be referred to as “fixed” but in nature it may be deemed as “open-ended”. However, when the company signs the second employment contract with the employee, it often ignores the potential risks of illegal termination due to the literal meaning of “fixed”. We advise companies to understand the relevant local policies and judicial practices, choose the types and durations of labor contracts reasonably, and seek professional legal support before the signing of the labor contracts with employees, so as to avoid unexpected losses.
 The wind may change in the future. For example, the Research Group in Sixth Civil Tribunal of Beijing No. 1 Intermediate People’s Court issued the Research Report on the Typical Difficult Problems in the Implementation of Labor Contract Law to discuss this issue and put forward the legislative suggestions more favorable to the employer.