Understanding Labour Laws in China: Contracts, Wages, and Termination Rules

As the world’s second-largest economy, China continues to attract multinational companies eager to tap into its massive talent pool and growing consumer base. However, expanding into China requires more than just market analysis—it demands a clear understanding of the country’s complex labor regulations. Labour laws in China govern every aspect of the employer-employee relationship, from the moment of hiring to final separation, including contracts, wages, benefits, social insurance, dispute resolution, and termination procedures.

Unlike many Western jurisdictions, Chinese labor laws place a strong emphasis on employee protection, with substantial consequences for employers who fail to comply. For global businesses hiring employees in China, aligning with local laws is critical not only to avoid penalties but also to build a sustainable, ethical, and engaged workforce. This guide provides a comprehensive overview of the key legal requirements and HR best practices for operating in China, including how solutions like Employer of Record China can help streamline global employment compliance in China.

Table of Contents

• Overview of Labour Laws in China
• Employment Contracts in China
• Wages and Working Hours
• Social Insurance and Employee Benefits
• Termination and Severance Rules
• Labour Disputes and Compliance Risks
• Hiring Through an Employer of Record (EOR) in China
• Conclusion
• FAQs

Overview of Labour Laws in China

The labour legal framework in China is both robust and nuanced, consisting of a network of national laws, regional interpretations, and administrative regulations. It prioritizes fair treatment of employees while requiring employers to follow strict compliance procedures.

Governing Authorities and Legal Framework

The core legal instruments include:

• Labour Law of the People’s Republic of China (1995) – the foundational law covering rights and obligations of both parties.
  
• Labour Contract Law (2008, revised 2013) – which strengthened protections against arbitrary dismissal and expanded contract requirements.
  
• Social Insurance Law (2010) – covering benefits such as pensions, medical care, and unemployment.
  
• Employment Promotion Law and Work Safety Law – ensuring anti-discrimination, equal opportunity, and workplace safety.
  

The Ministry of Human Resources and Social Security (MOHRSS) and its local bureaus implement these laws, manage dispute mediation, conduct inspections, and issue administrative penalties. They collectively create a comprehensive system that governs labor practices across all industries.

Applicability and Local Variations

Although national laws apply throughout China, local governments implement many employment-related policies—especially those involving social security rates, work hours and leave in China, minimum wage standards, and housing fund contributions. For instance, Beijing may have a different base salary calculation or maternity insurance rate than Shenzhen or Chengdu. Understanding these regional variations is essential for effective China HR compliance, especially for businesses operating in multiple cities.

Employment Contracts in China

In China, employers must provide a written employment contract—it’s a legal requirement, not an option. Employers must sign a formal contract with each employee within one month of hiring, or face legal risks including forced compensation and the presumption of open-ended employment.

Types of Contracts and Duration Rules

Chinese labor law recognizes three official types of employment contracts:

1. Fixed-Term Contracts – Most common, with a clearly defined start and end date.
   
2. Open-Ended (Indefinite) Contracts – Must be offered after two renewals of a fixed-term contract or after 10 years of service.
   
3. Project-Based Contracts – End upon completion of a specific project.
   

Under Chinese labor contract law, employers cannot issue rolling short-term contracts indefinitely. If an employee works for 10 continuous years or has renewed a contract twice, the employer is obligated to offer an open-ended agreement.

Mandatory Contract Components

Each contract must contain the following:

• Legal names and addresses of both parties
  
• Term of employment
  
• Job title and responsibilities
  
• Work location and conditions
  
• Salary and payment schedule
  
• Working hours and overtime rules
  
• Social insurance participation
  
• Termination clauses and probation terms
  

Failing to include any of these may void parts of the contract or lead to labor disputes in China, particularly if challenged in arbitration or court.

Probation Periods and Renewals

Probation is allowed but strictly limited:

• 1 month for contracts <1 year
  
• 2 months for contracts ≥1 year and <3 years
  
• 6 months for contracts ≥3 years or open-ended
  

Employers may only impose one probation period per employee, and must clearly state it in the contract. Contract renewals should be documented properly, especially since repeated short-term renewals could inadvertently create open-ended obligations.

Wages and Working Hours

China maintains strict policies to ensure that employees are fairly compensated and protected against exploitation. Wage payment rules and work schedules are outlined under national labor law but must align with local government standards.

Minimum Wage and Salary Standards

China sets minimum wage levels at the provincial and municipal level. As of 2025, cities like Shanghai have the highest minimum monthly wage, while less-developed regions offer lower thresholds. Salaries are typically paid monthly, and late payment may attract penalties and expose employers to claims.

Employers must also clearly define gross salary, base pay, allowances, performance bonuses, and benefits in the employee’s contract to ensure clarity and prevent labor disputes in China.

Suggested Read: Employer of Record China: A Comprehensive Guide on Employer of Record 2025

Working Hours and Overtime Pay

The standard working schedule in China is:

• 8 hours per day
  
• 40 hours per week
  
• Typically Monday to Friday
  

Any work beyond this requires overtime pay, calculated as:

• 150% on weekdays
  
• 200% on weekends (if not compensated by rest days)
  
• 300% on statutory holidays
  

Employers must track hours and ensure work hours and leave in China follow these rules. Failure to comply could lead to fines, disputes, or forced compensation.

Bonuses and Allowances

Though not required by law, 13th-month pay is widely practiced—usually paid before Chinese New Year. Other common benefits include:

• Housing and meal allowances
  
• Transportation reimbursements
  
• Attendance bonuses
  

Such payments, though discretionary, must be honored once contractually promised or included in the company’s internal policies.

Social Insurance and Employee Benefits

Employers in China must register all employees for statutory social insurance programs. These provide critical safety nets and are a non-negotiable part of compensation.

Mandatory Social Insurance Programs

There are six key components:

1. Pension Insurance
   
2. Medical Insurance
   
3. Unemployment Insurance
   
4. Work-Related Injury Insurance
   
5. Maternity Insurance
   
6. Housing Provident Fund (technically not insurance, but compulsory)
   

Understanding China social insurance requirements is essential, as failure to enroll employees or underpay contributions may result in penalties, back payments, or legal challenges.

Employer and Employee Contribution Rates

Rates vary by city and are split between employer and employee. For example:

• Employers may contribute 16% toward pension insurance; employees contribute 8%.
  
• Medical insurance: ~10% from employer; ~2% from employee.
  
• Housing fund: ranges between 5% to 12% depending on location.
  

Employers must withhold employee contributions from gross salary and remit payments to the appropriate government agencies each month.

Termination and Severance Rules

Chinese labor law takes employee termination in China seriously. Employers must strictly follow legal grounds and proper processes to terminate an employee.

Grounds for Termination by Employer

Legal reasons for dismissal include:

• Misconduct or violation of internal policies
  
• Inability to perform duties (after retraining or reassignment)
  
• Major changes in business operations requiring layoffs
  
• Employee reaches retirement age
  

In all cases, employers must provide sufficient evidence, follow fair procedures, and document every step.

Notice Periods and Termination Process

Employers must give 30 days’ notice or pay one month’s salary in lieu unless the termination is due to severe misconduct. In addition:

• Written notice must be issued
  
• Exit interviews and final settlements must be documented
  
• Local labor bureaus may be involved if disputes arise
  

Failing to follow the correct procedure may result in a ruling of illegal dismissal, requiring compensation or reinstatement.

Severance Pay and Calculations

Under Chinese law, severance pay in China is calculated as:

• One month’s average salary per year of service
  
• For partial years, anything over 6 months counts as one year
  
• Capped at 12 years’ worth in many regions
  

Employers must use the employee’s average wage over the past 12 months, including bonuses and allowances.

Labour Disputes and Compliance Risks

Labour disputes and compliance risks in China often arise from contract violations, unpaid wages, unlawful termination, or failure to meet social insurance obligations. Employers must maintain accurate documentation and follow legal procedures to avoid penalties and ensure full compliance with labour laws in China.

Common Labour Disputes in China

Some frequent triggers of disputes include:

• Lack of formal contract
  
• Underpayment of wages or bonuses
  
• Non-compliance with social insurance
  
• Unlawful dismissal or lack of severance
  

Companies operating in China should have clear HR documentation, grievance procedures, and training on China HR compliance best practices.

Dispute Resolution Process

The three-stage legal resolution pathway includes:

1. Mediation – voluntary and conducted through labor bureaus
   
2. Arbitration – mandatory and binding for most cases
   
3. Litigation – pursued only after arbitration fails
   

Employees have up to 1 year to file claims after discovering a violation, and authorities often require employers to provide documentation that proves compliance.

Hiring Through an Employer of Record (EOR) in China

Hiring through an Employer of Record (EOR) in China allows foreign companies to legally employ local talent without establishing a legal entity. The EOR becomes the official employer on paper, handling contracts, payroll, taxes, and compliance while the client retains day-to-day operational control. This model simplifies market entry, reduces legal risk, and ensures full adherence to labour laws in China.

What is an EOR and Why Use One in China?

An Employer of Record China (EOR) is a third-party service provider that hires and manages employees on behalf of a foreign company. It becomes the legal employer, while the client retains operational control. This is ideal for companies that:

• Need to hire before setting up a legal entity
  
• Want to test the market
  
• Are managing remote or contract workers
  

EOR Compliance and HR Management

A professional Employer of Record (EOR) helps foreign companies stay fully compliant with labour laws in China by handling core HR and legal responsibilities.

A reliable EOR ensures:

• Contract compliance with Chinese labor contract law
  It prepares legally valid contracts that meet statutory requirements for job terms, compensation, and employment duration.
• Timely payroll and benefits administration
  The EOR manages accurate salary payments, tax deductions, and benefit disbursement in line with local regulations.
• Full adherence to China social insurance requirements
  It registers employees for all mandatory insurances and contributes based on region-specific rates to ensure compliance.
• Proper onboarding and offboarding practices
  The EOR ensures smooth entry and exit processes, including document handling, notice periods, and final settlements.
• Reduced risk of labor disputes in China
  By ensuring accurate contracts, benefits, and legal processes, the EOR minimizes the likelihood of employee claims or legal action.

Using an EOR is one of the most efficient ways for global businesses to achieve full compliance in China without setting up a local legal entity.

Suggested Read: Hire Remote Employees Onboarding Checklist with EOR in China

Conclusion

Complying with labour laws in China is not only a legal requirement but a strategic imperative. The country’s comprehensive labor regulations protect workers, promote fair treatment, and require employers to be diligent, transparent, and proactive.For global companies looking to expand or operate in China, understanding everything from contracts and compensation to social insurance and severance is crucial. Partnering with an Employer of Record China ensures compliant hiring, reduces risk, and simplifies the complexities of China HR compliance, allowing companies to focus on growth in one of the world’s most promising markets.

FAQs

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.