China Employment Contracts for WFOEs: Fixed-Term, Open-Ended, Probation Rules, and Legal Obligations

Fixed-Term Employment Contracts

The fixed-term employment contract is the most common employment arrangement in China and the default choice for most foreign WFOEs when hiring local staff. Under the PRC Employment Contract Law, a fixed-term contract specifies a definite start date and end date. The term can range from a few months to several years — there is no statutory minimum or maximum, although the probation period (discussed below) is tied to the contract duration.

Foreign employers should be aware that after an employee completes two consecutive fixed-term contracts, the employee gains the right to demand an open-ended contract upon renewal of the third term. This legal entitlement cannot be waived by agreement, and attempts to circumvent it — for example, by inserting a break between contracts — are viewed unfavourably by labour arbitration tribunals. WFOEs in Shenzhen and Guangzhou in particular have reported strict enforcement of this rule by local labour authorities.

Fixed-term contracts are well suited for project-based roles, positions tied to a specific business cycle, or when an employer wants to preserve flexibility. However, they should be drafted carefully to avoid inadvertently triggering the open-ended contract conversion right sooner than intended.

Open-Ended Employment Contracts

An open-ended employment contract has no specified end date and continues until terminated by either party in accordance with the law. These contracts provide the strongest job security for employees and carry the highest termination burden for employers.

An employee is entitled to an open-ended contract in any of the following circumstances: the employee has worked for the employer for ten consecutive years; the employee is renewing after two consecutive fixed-term contracts and has not committed serious misconduct; or the employer is a state-owned enterprise restructuring its employment relationships. For most foreign WFOEs, the two-consecutive-contracts trigger is the most practically relevant.

While open-ended contracts sound rigid, they do not mean the employee can never be terminated. Termination is still possible on statutory grounds — including serious violation of company rules, incompetence after training or position adjustment, or major changes in objective circumstances. However, the evidentiary burden on the employer is high, and procedural requirements must be strictly followed.

Part-Time and Project-Based Contracts

Chinese law also recognises part-time employment, defined as work averaging no more than four hours per day and no more than 24 hours per week. Part-time arrangements offer flexibility: the contract may be oral rather than written, either party may terminate at any time without severance pay, and social insurance obligations are limited. However, the hourly wage must meet or exceed the local minimum hourly wage, and the employer must still register the worker for work-related injury insurance.

Project-based contracts — that is, contracts to complete a specific task or project — are also permitted. These terminate upon completion of the defined task. If the project ends early, severance pay is still owed. Employers using project-based contracts should ensure the task is genuinely discrete and finite; using them as a substitute for fixed-term contracts to avoid open-ended contract conversion is a common legal risk.

Probation Period Rules and Restrictions

Probation periods in China are strictly regulated, and employers have limited discretion. The maximum probation period is determined by the contract duration:

• Contract of 3 months to less than 1 year: maximum 1 month probation
• Contract of 1 year to less than 3 years: maximum 2 months probation
• Contract of 3 years or more (including open-ended): maximum 6 months probation
• Contract of less than 3 months or project-based: no probation permitted

An employer may only impose one probation period per employment relationship. Extending a probation period beyond the statutory maximum, imposing a second probation period on the same employee (even in a different role), or paying less than 80% of the contractual wage during probation is unlawful and exposes the employer to penalties and back-pay claims.

During probation, the employer may terminate the employee for failing to meet recruitment conditions — but the employer must prove that the conditions were clearly communicated before hiring, that they were objectively measurable, and that the employee genuinely failed to meet them. A vague “poor performance” dismissal during probation is likely to be overturned at arbitration.

Mandatory Contract Terms Under Chinese Law

The PRC Employment Contract Law requires every written employment contract to include the following mandatory terms: the employer’s name, address, and legal representative; the employee’s name, address, and ID number; the contract term; the job description and work location; working hours, rest days, and leave entitlements; remuneration; social insurance coverage; labour protection, working conditions, and occupational hazard protection; and any other matters required by law or regulation.

Importantly, if a WFOE fails to provide a written contract within one month of the employee’s start date, the employee is entitled to double salary for each month the contract remains unsigned, up to a maximum of 11 months. After one year without a written contract, the employment relationship is deemed to have converted to an open-ended contract by operation of law. This is one of the most frequently litigated employment issues in China, and foreign employers must treat contract execution as a day-one priority.

Non-Compete and Confidentiality Clauses

Chinese law permits non-compete clauses, but with important limitations. They may only be imposed on senior management, senior technical personnel, and other employees with access to the employer’s trade secrets. They cannot be applied to rank-and-file employees who lack access to confidential information.

The maximum non-compete period is two years from termination. During this period, the employer must pay monthly compensation to the former employee — in the absence of a contractual agreement on the amount, the statutory default is 30% of the employee’s average monthly salary over the 12 months before termination, subject to a floor equal to the local minimum wage. If the employer fails to pay the compensation for three consecutive months, the employee may petition to void the non-compete obligation.

Confidentiality clauses are distinct from non-compete clauses and can be imposed on any employee with access to confidential business information. They do not require post-termination compensation, but they must be drafted with reasonable specificity — overly broad or vague confidentiality obligations may be unenforceable.

Termination Rules and Severance Pay Obligations

Terminating an employee in China is procedurally demanding. The statutory grounds for unilateral termination by the employer include: serious violation of company rules (which must be lawfully established, published, and consistently enforced); serious dereliction of duty or graft causing substantial damage; the employee has an undisclosed criminal conviction; the employee is incompetent and remains so after training or reassignment; or a major change in objective circumstances renders the contract unperformable and the parties cannot agree on modification.

Except in cases of serious fault by the employee, termination generally triggers a severance obligation. Severance is calculated at one month’s salary for each year of service, with partial years of six months or more counting as one full year. The salary basis is the employee’s average monthly wage over the 12 months preceding termination, capped at three times the local average monthly wage published by the municipal government. The total severance is further capped at 12 months for high-earning employees whose salary exceeds three times the local average.

Certain categories of employees enjoy special protection from termination, including employees who have lost the ability to work due to occupational disease or work-related injury and are in the medical treatment period; female employees during pregnancy, maternity leave, or breastfeeding; and employees within five years of statutory retirement age who have worked for the employer for 15 consecutive years.

City-Specific Considerations: Guangzhou, Shenzhen, Foshan, Dongguan, Jiangmen

While the PRC Employment Contract Law applies nationally, local labour bureau practices and minimum wage levels differ across Guangdong cities and affect the practical application of employment rules.

Guangzhou and Shenzhen have the highest minimum wages in the province and correspondingly higher severance caps because the three-times-local-average-wage ceiling is calibrated to municipal statistics. Employers in these cities face a higher absolute cost per termination. Shenzhen labour arbitration tribunals have also been among the most employee-protective in their interpretation of the termination provisions, and foreign employers should budget for conservative legal outcomes.

Foshan and Dongguan — with large manufacturing bases — see a higher volume of employment disputes, particularly in factory settings. Local labour authorities in these cities often encourage mediation before formal arbitration, and employers with well-documented HR files and clear company rules are in a stronger position. Dongguan’s labour bureau has implemented an online dispute filing system that has accelerated case processing times.

Jiangmen has a smaller foreign employer community, and local labour officials are generally accessible and willing to provide guidance on compliance questions. Employers setting up in Jiangmen should still ensure their employment documentation meets provincial standards, as labour inspections are conducted regularly.

How Dan Young Business Consultancy Can Help

Dan Young Business Consultancy provides comprehensive HR and legal support for foreign WFOEs across Guangdong. Our team drafts and reviews employment contracts in both Chinese and English, ensuring they comply with the PRC Employment Contract Law while protecting the employer’s commercial interests. We develop lawful company rules and employee handbooks, advise on termination strategy and severance calculation, and represent employers in labour arbitration proceedings in Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen.

With over 300 legal services delivered and 900-plus bookkeeping clients, we understand the intersection of HR compliance, payroll, and employment tax that foreign employers face. Contact us to discuss how we can help your WFOE build a legally sound employment framework from day one.