Reinstatement claims after Judicial Interpretation (II)

Where an employment contract is unlawfully terminated, some employers assume that the worst outcome is paying compensation at 2N, overlooking the fact that the employee has another route: reinstatement of the employment relationship. In Shanghai, arbitration and adjudication practice used to examine such claims strictly and generally leant against reinstatement. Judicial Interpretation (II) of the Supreme People's Court on the Application of Law in the Trial of Labor Dispute Cases has since identified the specific situations in which continued performance is difficult. Situations commonly argued in practice include protracted litigation between the employee and the employer that leaves no basis of trust, a senior manager whose unique post has already been filled, and a former post that has been abolished with no alternative available. Has the position of the arbitration and adjudication bodies changed?

Because Judicial Interpretation (II) does not list a breakdown of trust, or the loss of a basis of trust, among the statutory objective circumstances in which performance is impossible, the courts tend to support reinstatement. In (2026) Min 02 Min Zhong No. 872, the court of second instance held that none of the company's arguments amounted to an objective impossibility of performance: that the company and its colleagues had lost trust in Mr Zhou, that his return would make subsequent workforce management difficult, that he was not competent for the post, that his physical and mental condition was poor, and that the post was already fully staffed. The court did not uphold those arguments.

Another example is (2025) Jing 03 Min Zhong No. 18127, where the court of second instance considered whether the employment relationship was objectively impossible to perform. First, the company argued on appeal that Ms Ji had repeatedly reported her superiors and colleagues, so the contract had no basis for performance. The court referred to the gist of the ruling in the People's Court Case Database case "Zhang v. a Fuzhou public transport company (labor contract dispute)": a complaint by an employee against the employer is not a fault-based dismissal under the Labor Contract Law, nor is it a non-fault dismissal in which the employer may decline to renew an open-ended contract for reasons attributable to the employee; where the employee meets the conditions for renewing an open-ended contract under that Law, the employee has a unilateral right of choice and the employer is not entitled to refuse renewal. Since a complaint against the employer is not a ground on which the employer may refuse continued performance, it follows a fortiori that Ms Ji's reports of her colleagues' rule-breaking, made on proper grounds and through proper channels and answered by the relevant department of the company, did not make performance objectively impossible, and the court did not accept this ground of appeal. Second, the company argued that the parties had lost the basis of trust, but it did not prove that Ms Ji fell within any of the circumstances in Article 16 of Judicial Interpretation (II) under which a contract can no longer be performed. The court of first instance had therefore been correct to order continued performance, and the appeal court upheld that judgment.

Arbitration and adjudication bodies in Beijing take the view that, where the employee's former post has been filled by another person, an employer's defence on that ground alone should not be treated as a situation in which the contract "truly cannot be performed". Shanghai holds the same view. In Jing Lao Ren Zhong (2026) Ban Zi No. 5XX, the arbitration commission held that, as to the respondent's argument that the post had been taken over by another person and the basis of trust had broken down, the claimant's post was a composite, general post with considerable substitutability rather than a unique, dedicated post that could not be replaced; the respondent's arrangement of another person to take over the work after the termination was its own management decision and could hardly be a lawful defence that the contract could not be performed, and the respondent had not proved that trust had completely broken down or that continued employment was objectively impossible. Reinstatement was therefore supported. An article published on the WeChat account of China Labor and Personnel Dispute Mediation and Arbitration, entitled "Can an employer refuse reinstatement after unilaterally terminating the relationship and paying compensation?", takes the same view: the claimant's college continued to operate normally, the "general management post" she held still existed and was general and restorable, and it was not a temporary post created for her or one that disappeared when a particular project ended; there was no major change in objective circumstances that made performance impossible, she wished to continue and had not entered into an employment relationship with another employer, and the college raised no other circumstance making performance objectively impossible. Since the basis of the relationship remained, the post was restorable and she had a strong wish to continue, the arbitration commission upheld her claim for continued performance.

In (2025) Jing 03 Min Zhong No. 16113, by contrast, the court of second instance considered whether the contract could continue to be performed. Mr Liu's former post was deputy general manager of the engineering department, a management position with strong irreplaceability and uniqueness. After terminating the contract, the company arranged for others to take over his duties as deputy general manager, and the parties could not agree on a new post. The court of first instance had therefore found that the contract no longer had a basis for continued performance and that the company need not pay wages after the termination; that finding had a factual and legal basis and was upheld.

For the special situations listed in Article 42 of the Labor Contract Law — women in the "three periods" of pregnancy, childbirth and breastfeeding, employees with work-related injuries, and employees within a medical treatment period — arbitration and adjudication bodies still lean towards supporting reinstatement. In (2026) Hu 01 Min Zhong No. 5352, Ms Zhou had worked continuously for Company A for 15 years and was less than five years from the statutory retirement age. Company A terminated her contract on the basis of Article 40(3) of the Labor Contract Law of the People's Republic of China, which was contrary to law and constituted unlawful termination. Company A argued on appeal that her former post had been substantially abolished under a global redundancy programme and that reinstatement was therefore objectively impossible, but it offered no evidence for that argument and the court did not accept it. The court also refused the company's request to vary the judgment so that the relationship would not be reinstated and no wages would be payable for the intervening period.

After reinstatement, disputes often arise again over job reassignment and pay. In (2023) Jing Min Shen No. 5972, a second dispute over a wage difference arose after reinstatement. Mr Sui was an employee of Company Z under a contract running from 23 May 2019 to 31 May 2021, which provided for monthly wages of RMB 50,000, paid as 60 per cent basic salary, 20 per cent performance pay and 20 per cent year-end pay. Company Z sent a termination notice on 27 September 2019. In separate proceedings the termination was found to be unlawful and the court ordered the parties to continue performing the contract. Mr Sui then sued again, seeking among other things the wage difference for the period from 27 September 2019 to 19 June 2020 calculated at RMB 50,000 a month. The courts of first and second instance determined at their discretion a wage difference of RMB 30,000 a month. Mr Sui applied to the High People's Court for a retrial. The High Court held that, on the evidence in the case and given that Mr Sui had not attended work or provided normal labor to Company Z during that period, the lower courts had fixed the wage loss for 28 September 2019 to 19 June 2020 at the monthly basic salary of RMB 30,000, which was within a reasonable range and not inappropriate. His claim to calculate the loss at RMB 50,000 a month lacked a factual and legal basis, and the lower courts had been right to reject it.

In summary, judicial practice on whether to support reinstatement has shifted, and the relationship between the parties readily produces a "second dispute" after reinstatement. Minton's note is therefore this. Employers should terminate employment contracts with caution: where termination is genuinely necessary, they may first seek agreement, and if no agreement is reached they should confirm that the misconduct reaches the required degree of seriousness, that the evidence is sufficient, that the employee handbook was adopted through the statutory process, and that the contract contains a corresponding termination clause, before terminating. Employees should take account of their future re-employment and of the time and cost that arbitration and litigation involve, avoid unnecessary litigation, and shape their claims to their own circumstances rather than insisting on reinstatement.

The relevant provisions are set out below.

1. Article 48 of the Labor Contract Law: where an employer terminates or ends an employment contract in violation of this Law and the employee requests continued performance of the contract, the employer shall continue to perform it; where the employee does not request continued performance or the contract can no longer be performed, the employer shall pay compensation in accordance with Article 87 of this Law.

2. Article 16 of the Judicial Interpretation (II) of the Supreme People's Court on the Application of Law in the Trial of Labor Dispute Cases: after an employer unlawfully terminates or ends an employment contract, a people's court may find that the contract "can no longer be performed" within the meaning of Article 48 of the Labor Contract Law in any of the following circumstances:

(1) the contract expires during arbitration or litigation and there is no circumstance in which it should be renewed or extended in accordance with the law;

(2) the employee has begun to receive basic old-age insurance benefits in accordance with the law;

(3) the employer has been declared bankrupt;

(4) the employer has been dissolved, except where the dissolution is required for a merger or division;

(5) the employee has established an employment relationship with another employer that seriously affects the performance of the employer's work tasks, or, after being asked by the employer to do so, does not terminate the employment contract with the other employer;

(6) other circumstances in which the employment contract is objectively impossible to perform.

3. Article 76 of the Questions and Answers (I) of the Beijing High People's Court and the Beijing Labor and Personnel Dispute Arbitration Commission on the Trial of Labor Dispute Cases: after an employer unlawfully terminates or ends an employment contract and the employee requests continued performance, in which circumstances may it be found that the contract "truly cannot be performed"?

The main circumstances in which a contract truly cannot be performed are as follows:

(1) the employer has been declared bankrupt in accordance with the law, has had its business licence revoked, has been ordered to close or has been dissolved, or the employer has decided to dissolve early;

(2) the employee reaches the statutory retirement age during arbitration or litigation;

(3) the contract ends on expiry during arbitration or litigation and there is no circumstance under Article 14 of the Labor Contract Law in which an open-ended employment contract should be concluded;

(4) the employee's former post was highly irreplaceable and unique for the normal conduct of the employer's business, such as general manager or head of finance, that post has been filled by another person, and the parties cannot agree on a new post;

(5) the employee has joined a new employer;

(6) during arbitration or litigation the employer served a notice to return to work requiring the employee to resume work, and the employee refused;

(7) other circumstances in which the conditions for continued performance of the contract are clearly absent.

Where the employee's former post has been filled by another person, an employer's defence based on that ground alone should not be treated as a circumstance in which the contract "truly cannot be performed".

4. Article 2 of the Notice of the Shanghai High People's Court on Issuing the Several Opinions on Implementing the Principle of Balancing Adjudication and Enforcement: where an employee claims reinstatement of the employment relationship, the case is handled as follows according to the circumstances:

(1) if review shows that the contract objectively can no longer be performed, for example because the former post no longer exists, the court may directly award compensation rather than order reinstatement;

(2) if the contract can objectively be performed but the employer refuses to perform it, the judge may ask the employee whether he or she is willing to vary the claim and resolve the dispute by terminating the contract and obtaining compensation. If the employee insists on the original claim, the judge should explain the risk that reinstatement may not be enforceable and ask whether, if reinstatement cannot be enforced, the employee is willing to add a claim requiring the employer to pay wages directly. If the employee still insists, the court may order reinstatement after explaining the risk and recording that explanation in the transcript;

(3) where an employee applies to enforce a reinstatement judgment, the case-filing division may generally accept the application. The enforcement division may prompt the employer to perform the reinstatement judgment voluntarily, for example by strengthening coordination with the labor inspection authorities or applying judicial compulsory measures to the employer's legal representative. Where enforcement is genuinely difficult, the court may, by way of explanation, guide the employee to bring a separate action to terminate the contract and obtain compensation, or to claim wages from the employer.