In China, an open-term labor contract (无固定期限劳动合同) is a contract where the employer and its employee agree that there is no definitive ending date for the labor relationship. Such a contract generally means the employer must retain the employee until his or her retirement age, though the employee can terminate at any time, with no restriction or penalty.
The PRC Labor Contract Law provides that after execution of two consecutive fixed-term labor contracts, an employee can request an open-term contract (unless grounds for termination exists). However, as is typical of so much relating to China’s employment laws, different places in China have different interpretations. For example, Beijing allows an employer to terminate the employee at the end of the first contract term. But if the employer does not terminate the employee at that time, the contract automatically becomes an open-term contract. This is another reason why we generally advise our employer clients to use an initial employment term of three years and a probation period of six months (the longest probation period possible) for their new employees, because in cities like Beijing, employers get only one shot at fixed-term employment.
In Shanghai, once an employee has completed two fixed-term contracts for an employer, the employee is entitled to an open-ended contract. But Shanghai’s interpretation is different from Beijing in that an employer in Shanghai is free to decide not to retain the employee after the second term. Note though, the employer’s decision to let the employee go is not without monetary obligations: it must pay economic compensation to the employee. Generally, the employer must pay one month’s salary for every full year the employee has worked for the employer and half of a month’s salary for less than six months’ service. If the employee has worked for more than six months but less than one year, it is treated as if he or she had worked for a full year.
To sum up, employees in China are generally entitled to an open-ended contract, provided the following conditions have been met:
- The employee has completed two consecutive fixed-term contracts (but note how Beijing is different on this).
- The employer has no statutory grounds for terminating its employee.
- BOTH parties agree to renew the contract for a third time, and
- The employee requests an open-ended contract.
To repeat, an open-ended term usually will not happen unless both the employer and the employee agree to renew the contract after completion of two terms. Thus, if the employer wants to re-hire the employee but refuses to do so on an open-term basis, the employee will not be able to force the employer to hire him or her on an open-ended basis. So in Shanghai, once the employee has completed two fixed-term contracts, the employer has three options:
- Let the employee go and pay the applicable compensation.
- Enter into an open-term contract with the employee that provides for lifetime employment.
- Persuade the employee to voluntarily accept a third fixed-term contract.
It is the rare employee that turns down lifetime employment in favor of a fixed-term contract, without added monetary incentives.