Automatic renewal clauses and claims for double wages
Clauses providing for automatic renewal of an employment contract on expiry, whether in the contract or in the employee handbook, are generally upheld in Shanghai, so an employee cannot claim double wages simply because no new written contract was signed. The outcome turns on proof: where the employer cannot show that the handbook was actually delivered to the employee, a renewal clause in it will not defeat a claim for double wages. Beijing, Jiangsu, Zhejiang and Jilin take a similar approach. Employers should nonetheless use such clauses with care after the 2025 change on open-ended contracts.
I. Is a renewal clause in an employee handbook valid? In a Shanghai case, the company's employee handbook provided: "13.14.3 On expiry of the contract, unless the employee proposes a change to its terms, the employment contract is automatically renewed. On the first renewal the term is the same as that of the original contract and the other terms are unchanged; on the second renewal the term is open-ended and the other terms are unchanged. 13.14.4 Where neither party states an intention to renew and the employee continues to work without objection from the company, the above provisions apply."
An employee's first contract expired. The company did not renew it, but the employee continued to work, a dispute arose, and the employee claimed double wages and sued the company. The court of first instance held that the employee had studied the handbook and raised no objection. The renewal provision did not unreasonably exempt or reduce the employer's liability or increase the employee's liability, nor did it exclude the employee's main rights, and it was a valid clause binding on both parties. When the contract expired and the employee continued to work, the contract was automatically renewed for the same term on the same terms. The claim for a difference in double wages for the period without a written contract therefore had no basis.
The arbitration commission, the court of second instance and the court hearing the retrial all held that the company had to pay the employee the difference in double wages for the period in which no written contract was in place. The employee had signed an undertaking on joining containing the statement "I have carefully read the employee handbook", but that undertaking was plainly a standard clause printed in advance by the company, and the company itself admitted that it had shown the handbook to the employee and then taken it back. The evidence was therefore insufficient to show that the employee had received the handbook. Where the handbook was never delivered, it was unreasonable to substitute its automatic renewal provision for the employer's obligation to sign a written contract. The handbook did not establish that the parties had agreed on automatic renewal, and because the company had not signed a written contract it had to pay the difference in double wages.
II. Is an automatic extension clause in the employment contract itself valid? Practice differs. Take a clause providing that "the contract shall be automatically extended until the parties sign a new employment contract or Party A formally notifies Party B of termination". One view is that such a clause deprives the employee of lawful rights and exempts the company from statutory liability, in breach of mandatory rules, and is therefore invalid. Another view is that the clause is the product of voluntary and equal negotiation, does not breach mandatory law and binds both parties. Where the employee cannot show that he or she objected to renewal after the contract expired, the parties are treated as having renewed the contract, and a claim for a difference in double wages for the period after expiry has no basis.
III. Minton's suggestions
The judicial approach in Shanghai tends to hold that an automatic renewal clause does not, merely because it is a standard clause, make the company liable for double wages: such clauses give expression to the autonomy of the employer and the employee, do not breach the mandatory provisions of the Labor Contract Law and related laws, and are valid. See, for example, the civil judgments in (2019) Hu 02 Min Zhong No. 4216, (2010) Pu Min Yi (Min) Chu Zi No. 29416 and (2018) Hu 02 Min Zhong No. 10793. The approach taken in Beijing, Jiangsu, Zhejiang, Jilin and elsewhere also tends towards no liability to pay.
It should be noted that from 1 January 2025 this Municipality has required an open-ended contract to be concluded after two fixed-term contracts. An automatic renewal after the first contract expires, followed by the expiry of the renewed contract, will therefore itself satisfy the conditions for an open-ended contract, and employers should use automatic renewal clauses with care. Where the first contract expires and the employer does not wish to keep the employee, it should notify the employee of termination in writing in good time and pay economic compensation, or agree with the employee to extend the contract; an extension of more than one year counts as a second fixed-term contract, after which the conditions for an open-ended contract are met. Where the employer has no objection to renewal, it may, as the contract nears expiry, issue a letter of intent to renew or a confirmation of renewal for the employee to sign, so as to discharge its duty to consult and to keep a record. It may also agree to conclude a further fixed-term contract. Termination, extension, renewal or negotiation: any one of these four will prevent the risk of paying double wages.