Fixed-Term vs Open-Ended Contracts: Which Employment Agreement for Your China Team?
Choosing between a fixed-term (固定期限劳动合同, gùdìng qīxiàn láodòng hétong) and an open-ended contract (无固定期限劳动合同, wú gùdìng qīxiàn láodòng hétong) is one of the most consequential employment decisions for foreign-invested enterprises in China. Under the PRC Labor Contract Law, roughly 78% of urban employment relationships now fall under one of these two contract types, with the remaining 22% covering part-time or project-based arrangements. The wrong choice can cost your company as much as RMB 500,000 per senior employee in severance, legal fees, and reputational damage over a 10-year horizon.
Understanding the Two Contract Types Under PRC Labor Law
Fixed-term contracts end on a specified date — typically 1, 3, or 5 years — and require both parties to sign a new agreement or terminate upon expiry. Open-ended contracts have no expiry date and continue indefinitely until either party initiates termination in accordance with the law. Both types are governed by the PRC Labor Contract Law (劳动合同法, láodòng hétong fǎ), effective since 2008, which introduced strict rules around contract renewal and termination.
The critical trigger: after an employee completes 10 consecutive years of service with the same employer, or after signing two consecutive fixed-term contracts with the same employer, the employee is entitled to demand an open-ended contract. This means that even if you start with fixed-term agreements, you may eventually be forced into an open-ended arrangement — unless you plan ahead.
As of 2025, about 34% of labor disputes in China’s Tier-1 cities involve contract-type disputes, with the majority centering on whether an employer unlawfully refused to convert a worker to open-ended status. The average compensation awarded in such cases is RMB 87,000, according to the Ministry of Human Resources and Social Security (MOHRSS) annual labor dispute report.
Comparative Analysis: Fixed-Term vs Open-Ended
The following table summarizes the key differences across the dimensions that matter most to foreign employers building teams in China.
| Dimension | Fixed-Term Contract | Open-Ended Contract |
|---|---|---|
| Duration | Typically 1–5 years; renewals required | Indefinite; no renewal needed |
| Termination at expiry | Non-renewal with notice = lawful termination (no cause required) | No expiry; termination requires cause or mutual agreement |
| Severance liability | 1 month’s salary × years of service if non-renewed by employer | Same formula + higher risk of “unlawful termination” claims |
| Probation period | Up to 6 months (max for 3+ year contracts) | Up to 6 months (same rule applies) |
| Employee bargaining power | Low — employer holds renewal leverage | High — job security is entrenched |
| Best use case | Project-based roles, early-stage hires, trial periods | Core management, long-term strategic positions, staff nearing 10-year milestone |
Note that probation periods are capped by law: 1 month for contracts under 1 year, 2 months for contracts between 1 and 3 years, and 6 months for contracts of 3+ years or open-ended. A common mistake is to set a 6-month probation on a 1-year fixed-term contract — this is illegal and renders the probation clause void.
Decision Framework: When to Use Each Contract Type
Here is a practical framework to guide your choice.
If your hire is for a clearly defined project (e.g., a 2-year ERP implementation, a factory construction phase, or a market-entry campaign), choose a fixed-term contract. This gives you a clean exit at the end of the project without having to prove cause for termination.
If the hire is for a core management role — country manager, head of finance, plant director — and you expect the relationship to last 5+ years, choose an open-ended contract from the start. This signals long-term commitment, reduces administrative overhead from repeated renewals, and avoids the employee demanding conversion later (which can feel adversarial).
If you are hiring in a probationary or trial period, start with a fixed-term contract of 3 years (which allows the maximum 6-month probation), then convert to open-ended after the probation period ends. Many foreign WFOEs use this hybrid approach: a single 3-year fixed-term with a 6-month probation, followed by an open-ended conversion after year 2, before the 10-year or two-contract trigger kicks in.
If you already have an employee on a second fixed-term contract, it is generally safer to convert them to open-ended at renewal rather than risk a dispute. The cost of a single severance payment (RMB 50,000–150,000 for a mid-level manager) is often less than the legal costs and employee morale damage of a contested termination.
Three Critical Pitfalls Foreign Employers Must Avoid
Cost: Average RMB 120,000 in back-pay and penalties if challenged in labor arbitration, plus a likely order to convert the contract anyway.
Fix: Track renewal counts per employee in your HR system. Before offering a third fixed-term contract, proactively offer open-ended conversion and document the employee’s written waiver if they voluntarily decline it.
Cost: If the probation is declared void, the employee may claim RMB 30,000–60,000 in double back-pay for the probation period worked, plus the probation period is treated as regular employment.
Fix: Calibrate the contract term to the desired probation length. For a 6-month probation, the contract must be 3+ years (fixed-term or open-ended). For shorter probations, use a 1- or 2-year fixed-term.
Cost: Unlawful termination damages: 2× the statutory severance (which is already 1 month per year of service). For a managing director with 8 years’ service and RMB 50,000 monthly salary, that is RMB 800,000.
Fix: Never terminate an open-ended employee unilaterally without legal review. Use mutual agreement (negotiated severance) or documented performance improvement plans (PIPs) as a pre-termination step. Always obtain a signed resignation or mutual termination agreement.
Cost Implications of Each Contract Path
To illustrate the financial difference over a typical 8-year engagement, consider the following scenario for a senior manager earning RMB 100,000 per month.
Path A — Serial fixed-term contracts: Sign a 2-year fixed-term, renew for a second 2-year term, then convert to open-ended at year 4. At year 8, if you terminate without cause, the severance is 8 months of salary (1 month per year) = RMB 800,000. If you terminate unlawfully (e.g., you fail to follow the correct process for economic layoff), the penalty doubles to RMB 1.6 million.
Path B — Open-ended from start: Same exit at year 8: severance is still RMB 800,000 if lawful termination. However, with Path B, you avoid the administrative cost of two renewals (legal fees of roughly RMB 5,000–10,000 each), and the employee may be more motivated and engaged — resulting in lower turnover costs. The net difference is roughly RMB 10,000–20,000 in favor of Path B over the full period.
Numbers from the Beijing Labor Arbitration Commission show that cases involving open-ended contract terminations are 40% more likely to result in a finding of unlawful termination compared to fixed-term non-renewals. This means the litigation risk premium for open-ended contracts is real, but it can be managed with proper HR process.
NEXT STEPS
- Audit your existing contract portfolio. Review all current employment agreements for contract type and renewal count. Identify employees who have already completed one fixed-term contract — these are at risk of demanding open-ended status at the next renewal. Use our Contract Audit Checklist to flag high-risk cases.
- Create a contract-type policy for new hires. Document a clear policy that maps role types to contract types — for example, all executives and department heads receive open-ended offers, while project-based staff and junior hires receive fixed-term offers. Model this after our Workplace Policy Template to ensure compliance with local labor bureau requirements.
- Train your HR and legal teams on termination protocols. The single greatest liability for foreign employers in China is an unlawful termination claim. Develop a written termination procedure that covers mutual agreement, performance improvement plans, and economic layoff rules. Our Termination Playbook for Foreign Employers provides step-by-step guidance.
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