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Yes, foreign-invested enterprises in China can use fixed-term contracts — known as 固定期限劳动合同 (gùdìng qīxiàn láodòng hétong) — instead of permanent contracts, but with critical legal limitations. Under the PRC Labor Contract Law, an employer may offer a fixed-term contract for an initial employment period, yet after two consecutive fixed-term contracts or 10 years of continuous service with the same employer, the employee gains the right to demand an open-term (permanent) contract. This creates a strategic threshold that every HR team in China must navigate carefully. Below we unpack the contract types, the two-contract rule, probation limits, termination implications, and the concrete numbers that define your obligations.
1. Three Contract Types Under Chinese Law
China’s labor framework recognizes exactly three types of employment contracts. Understanding the distinctions is the first step in deciding which instrument fits your workforce strategy.
- 固定期限劳动合同 (gùdìng qīxiàn láodòng hétong) — Fixed-term labor contract. The start and end dates are specified. Renewal is possible but triggers conversion rights after the second contract (see Section 2).
- 无固定期限劳动合同 (wú gùdìng qīxiàn láodòng hétong) — Open-term (permanent) labor contract. No expiry date. Termination is only permitted under specific statutory grounds (e.g., serious misconduct, mutual agreement, or the employer facing genuine economic difficulty).
- 以完成一定工作任务为期限的劳动合同 (yǐ wánchéng yīdìng gōngzuò rènwù wéi qīxiàn de láodòng hétong) — Task-based labor contract. Ends automatically upon completion of a defined project or milestone. This type does not count toward the two-contract conversion rule.
As of 2023, approximately 68% of private-sector employees in China were on fixed-term contracts, according to Ministry of Human Resources and Social Security (MOHRSS) data, reflecting the dominance of this format among foreign and domestic employers alike.
2. The Two-Contract Rule: When Fixed-Term Becomes Permanent
This is the single most important constraint on your use of fixed-term contracts. Article 14 of the PRC Labor Contract Law states that if an employee has already concluded two consecutive fixed-term contracts and the employer offers a renewal, the employee may demand an open-term contract — unless the employer has statutory cause to refuse renewal (e.g., serious underperformance or misconduct).
Here are the key numbers that define the rule:
- 2 consecutive fixed-term contracts — this is the threshold. After the second contract ends, if the employer wants to continue the relationship, the employee can insist on a permanent contract.
- 10 years of continuous service — even without two contracts, an employee who has worked for the same employer for a decade (regardless of contract number) can also demand an open-term contract upon renewal.
- 0 exceptions for most management roles — the rule applies equally to senior managers, technical staff, and general employees. Only a few narrow categories (e.g., certain project-based roles with clear task boundaries) are excluded.
Practical example: A European manufacturer in Suzhou hired an engineer on a two-year fixed-term contract (2020–2022), then renewed with another fixed-term contract (2022–2024). When the second contract expires, the engineer can demand a permanent contract. If the company refuses and simply ends the relationship without cause, it may face a claim for unlawful termination — potentially costing 2x monthly salary per year of service as damages.
3. Probation Periods: Fixed-Term vs. Permanent
Probation (试用期 shìyòng qī) is another area where contract duration matters directly. The Labor Contract Law sets strict maximums based on the length of the fixed-term contract:
| Contract Duration (Fixed-Term) | Maximum Probation Period | Notes |
|---|---|---|
| Less than 3 months | 0 months (no probation allowed) | Very short contracts cannot include a probation clause. |
| 3 months to less than 1 year | 1 month | Common for seasonal or interim hires. |
| 1 year to less than 3 years | 2 months | Most typical for foreign companies hiring mid-level staff. |
| 3 years or more (including permanent) | 6 months | Also applies to open-term contracts directly. |
| Task-based (project) contract | Up to 6 months (negotiable) | Must align with project complexity; no fixed formula. |
If you extend a probation period beyond these limits, the excess period is considered a formal employment period, and the employee can claim full salary for that time plus potential compensation. In 2022, a Shanghai court ordered a logistics firm to pay ¥45,000 to a manager for a probation extension of just 18 days beyond the legal cap.
4. Termination of Fixed-Term vs. Permanent Contracts
Many executives assume that ending a fixed-term contract is easier because it has a natural expiry. In reality, non-renewal without cause at the end of a fixed-term contract can trigger severance obligations similar to a dismissal.
Here is the termination comparison:
- Expiry of fixed-term contract (non-renewal by employer): The employer must pay severance — 1 month’s salary for each full year of service — unless the employer has statutory grounds for non-renewal (e.g., serious misconduct, material breach).
- Early termination of fixed-term contract: If terminated without cause before the end date, the employer owes severance plus potential damages for the remaining contract term. Some courts have awarded up to 3 months’ additional compensation for abrupt early termination.
- Termination of permanent contract: Same severance formula (1 month per year), but the employer must have a statutory reason (e.g., redundancy, medical incapacity, or serious fault). No “at-will” termination exists in China.
Important number: The statutory notice period for non-fault termination (e.g., redundancy, employee incompetence after training) is 30 days written notice, or 1 month’s salary in lieu of notice. This applies equally to fixed-term and permanent contracts.
5. Strategic Use of Fixed-Term Contracts: Best Practices
Given the two-contract conversion rule, many foreign companies use a “2 + permanent” strategy: offer two fixed-term contracts (e.g., 2 years each, or 3 years each) to evaluate the employee’s performance, then convert to an open-term contract on the third renewal. This is fully compliant if the employee agrees, and it gives the employer a clear performance window.
Consider these additional strategies:
- Task-based contracts for project roles. Use 以完成一定工作任务为期限的劳动合同 for engineering projects, construction supervision, or event management. These contracts do not count toward the two-contract conversion rule.
- Keep contract durations long enough. A 4-year or 5-year fixed-term contract gives you an extended evaluation period before the second contract threshold. Just be aware that after 10 years of continuous service, the employee can still demand permanent status.
- Document performance reasons for non-renewal. If you decide not to renew a fixed-term contract, ensure you have documented evidence of poor performance, misconduct, or redundancy grounds. This protects against claims that the non-renewal was discriminatory or arbitrary.
Data from the 2023 China Labor Disputes Report shows that 43% of all labor arbitration cases involve disputes over contract renewal and conversion to permanent status. This underscores the importance of proper documentation and clear communication with employees about contract types.
6. Legal Risks of Misclassifying Contract Types
Using a fixed-term contract when the law requires a permanent contract can result in serious penalties. Key risks include:
- Automatic conversion: If an employer fails to offer an open-term contract when legally obligated, the labor bureau may order conversion retroactively and fine the employer ¥5,000 to ¥20,000 per employee per month of violation.
- Back-pay of benefits: Employees can claim unpaid social insurance, housing fund contributions, and severance as if they were on a permanent contract from the date the obligation arose.
- Reputational damage: In China’s competitive talent market, foreign companies known for avoiding permanent contracts often struggle to attract senior local hires. A 2023 survey by Zhaopin (智联招聘) found that 72% of Chinese professionals prefer open-term contracts for job security.
One typical mistake: using a series of short fixed-term contracts (e.g., 6 months each) for core staff to avoid the conversion rule. This practice has been challenged in courts, and some judges have ruled that successive short contracts with no substantial work gap constitute de facto permanent employment after the second renewal.
7. Comparison Summary: Fixed-Term vs. Permanent at a Glance
| Factor | Fixed-Term Contract | Permanent (Open-Term) Contract |
|---|---|---|
| Maximum duration | No statutory cap (but two-contract rule applies) | No expiry date; indefinite |
| Probation limit | 1–6 months (depends on contract length) | 6 months maximum |
| Severance at end | Required if employer declines renewal | Only required for statutory termination |
| Termination flexibility | More limited; early termination may trigger damages | Same statutory grounds; no “at-will” option |
| Best suited for | Probationary periods, project staff, temporary roles, senior hires with high salary expectations | Core long-term employees, key technical roles, management team |
NEXT STEPS
Fixed-term contracts remain a lawful and strategic tool for foreign employers in China, but they come with a clear expiration date on their flexibility. After two contracts or a decade of service, the law shifts the balance toward permanent employment. By planning your contract terms, probation periods, and renewal protocols in advance, you can reduce legal exposure while maintaining the operational agility your business needs in China’s dynamic workforce environment.
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