Publications.

Edited Time: October 7, 2025Edited by: charteredlawsCategory: Publications

2. Core Legal Provisions and Judicial Interpretation

2.1 Invalidity of Agreements Waiving Social Insurance Contributions

A landmark provision of Interpretation II clarifies that any agreement or commitment between an employer and an employee to forgo social insurance contributions is legally invalid. This directly addresses the prevalent practice in industries like catering and retail, where employers and employees often collude to avoid social insurance payments in exchange for higher immediate cash wages. Under Article 20 of Interpretation II:

• Invalidity of Waivers: Regardless of whether the agreement is bilateral (between employer and employee) or unilateral (employee’s written commitment), courts shall deem such arrangements void ab initio, as they violate the mandatory provisions of the Social Insurance Law and Labor Contract Law.
• Employee’s Right to Claim Compensation: If an employee terminates the labor contract due to the employer’s failure to pay social insurance contributions, the court shall support the employee’s claim for economic compensation.
• Employer’s Right to Recover Improper Benefits: However, Interpretation II also balances interests by allowing employers to reclaim the “social insurance subsidies” previously paid to employees, provided that the employer has subsequently fulfilled its obligation to make back payments to the social insurance authority.

This provision has significant implications for labor-intensive industries. A survey of 40 catering enterprises conducted by Guangming Net revealed that enterprises with weak compliance records face increased operational costs, while those already adhering to social insurance regulations remain largely unaffected. To mitigate risks, many catering chains have begun restructuring their workforce—increasing the proportion of flexible workers and ensuring full social insurance coverage for regular employees.

2.2 Clarification on “Mixed Employment” in Associated Enterprises

Interpretation II introduces explicit rules for determining labor relationships in cases of “mixed employment,” where employees are alternately or simultaneously employed by multiple associated enterprises. This addresses the long-standing problem of enterprises using complex corporate structures (e.g., parent-subsidiary relationships, franchise models) to evade labor obligations.

Under Article 3 of Interpretation II, courts shall apply a two-step test:

• Existence of Associated Relationship: Enterprises are considered “associated” if they share overlapping business operations, senior management, or financial resources (e.g., unified attendance systems, interrelated shareholders).
• Determination of Labor Relationship:
  • If a written labor contract exists, the employee may claim the contractual employer as the subject of the labor relationship.
  • In the absence of a written contract, courts shall synthesize factors such as work supervision, salary payment, and social insurance contribution to identify the actual employer.
  • Notably, employees may seek joint liability from all associated enterprises involved in the mixed employment, unless the enterprises can prove that the employee explicitly consented to a specific allocation of responsibilities.

A typical case illustrative of this rule involves a digital technology company and its affiliate, where an employee performed tasks for both entities without a clear labor contract. The court ruled that the two companies constituted mixed employment and held them jointly liable for unpaid wages, citing their shared management and overlapping business activities.

2.3 Refinements to Non-Compete Obligations

Interpretation II also refines the adjudication standards for non-compete disputes, addressing ambiguities in the scope and enforceability of non-compete clauses:

• Limitations on Scope: Non-compete restrictions must be proportionate to the employee’s access to trade secrets. Courts shall invalidate clauses that overly restrict an employee’s right to work (e.g., banning employment in an entire industry rather than specific competing entities).
• Definition of “Competing Entities”: A “competitor” is defined as an enterprise offering “closely substitutable products or services,” rather than merely operating in the same sector. This standard was applied in a pharmaceutical industry case, where the court ruled that an employee’s new employer (a manufacturer of unrelated generic drugs) did not constitute a competitor, thus dismissing the former employer’s claim.
• Exclusion of Bad Faith Claims: Employers cannot enforce non-compete clauses if they themselves fail to fulfill their obligations (e.g., non-payment of non-compete compensation for three consecutive months).