Employee Transfer in China M&A After Labor Dispute Interpretation II

A multinational acquires a manufacturing business in Suzhou. The buyer wants to move employees from the target into an existing group company after closing. Some employees currently work for several affiliates, some are subject to non-competes, and some receive bonus or benefits from a regional entity.

Management treats the transfer as an HR implementation step.

Legally, it can create employment disputes, continuity questions, severance exposure, social-insurance issues and uncertainty about which entity is the employer.

The issue#

The Supreme People's Court's Labor Dispute Interpretation II, effective September 1, 2025, expressly addresses mixed employment among affiliated entities and other recurring labor issues.^[1]

The narrow question is: how should a buyer structure post-M&A employee transfer so that workforce integration does not create unintended termination or mixed-employer liability?

1. Start in diligence#

The buyer should not wait until after closing.

Create an employee map showing:

• contractual employer;
• actual workplace;
• reporting line;
• payroll entity;
• benefits payer;
• social-insurance entity;
• secondment;
• group service.

This reveals mixed employment.

2. Interpretation II addresses affiliated employment#

Interpretation II contains rules for situations where affiliated entities alternately or simultaneously employ an individual and for determining the employment relationship and responsibilities.^[1]

That makes factual control important.

The buyer should identify whether employees have:

• contracts with one entity;
• management from another;
• payroll from another;
• work for several.

3. Share deals and asset deals are different#

In a share acquisition, the employer entity generally remains the same.

An asset acquisition often requires a legal employer change.

This difference should affect:

• severance allocation;
• consent;
• continuity;
• benefit transfer.

4. Do not assume group transfer is automatic#

Moving an employee from target A to affiliate B changes the employer.

A transfer plan should address:

• termination;
• new contract;
• service continuity;
• accrued entitlements;
• compensation;

5. Use a tripartite arrangement where appropriate#

A tripartite agreement can document:

• old employer;
• new employer;
• employee consent;
• effective date;
• recognition of service years;
• compensation allocation;
• confidentiality;
• non-compete.

This reduces ambiguity.

6. Service years matter#

Economic compensation under the Labor Contract Law can depend on years of service.^[2]

If the new employer recognizes historical service, document whether:

• past years count for future severance;
• seller has paid anything;
• buyer assumes future cost.

The SPA should allocate this economic liability.

7. Buyer and seller must allocate severance#

The deal documents should state who bears:

• negotiated termination;
• refusal-to-transfer;
• layoffs;
• accrued leave;
• bonus;
• social insurance.

Otherwise HR decisions become purchase-price disputes.

8. Employee consultation must be timed#

Do not announce before signing if confidentiality is critical.

But do not wait so long that employee implementation threatens closing.

Create a communication plan.

9. Key employees require retention strategy#

Identify:

• plant manager;
• engineers;
• sales;
• regulatory;
• quality.

For each:

• retention bonus;
• equity;
• non-compete;
• confidentiality.

10. Interpretation II changes non-compete analysis#

Article 13 addresses whether an employee actually knew or accessed trade secrets or IP-related confidential information and whether scope is proportionate.^[1]

The buyer should not simply inherit every old non-compete.

Review:

• eligibility;
• information;
• scope;
• compensation.

11. Change of employer can affect non-compete administration#

If an employee moves to a new group company, determine:

• which entity is protected;
• who pays post-employment compensation;
• whether agreement should be novated.

12. Social insurance cannot be waived#

Interpretation II confirms invalidity of agreements to waive social insurance.^[1]

Diligence should identify:

• gaps;
• cash allowances;
• underpayment.

Buyer should price remediation.

13. Fixed-term contracts need calendar review#

Interpretation II addresses consecutive fixed-term contracts and continued employment after expiry.^[1]

The integration team should flag contracts expiring near closing.

Do not combine transfer with a poorly managed expiry.

14. Employee handbooks may not carry over automatically#

If new employer has different rules:

• adopt legally;
• communicate;
• obtain acknowledgment.

Do not discipline employees under rules of old employer without legal analysis.

15. Performance records need continuity#

Transfer can break evidence.

Preserve:

• appraisals;
• warnings;
• attendance;
• disciplinary files.

New employer should know historical issues.

16. Mass integration can trigger collective risk#

A large workforce may resist transfer.

Prepare:

• FAQ;
• town hall;
• negotiation team;
• escalation.

Avoid inconsistent promises.

17. Strikes or work stoppages require crisis plan#

Li's public experience includes strikes and transfer matters.

A buyer should prepare:

• operational continuity;
• communications;
• management authority;
• legal response.

18. Equity incentives need transaction treatment#

Employees may hold:

• options;
• RSUs;
• phantom equity.

Deal documents should define:

• vesting;
• acceleration;
• cancellation;
• replacement.

19. Senior managers may have corporate roles#

A manager may be:

• director;
• legal representative;
• authorized signatory.

Employment transfer does not automatically change corporate office.

Handle both.

20. Case study#

Buyer acquires a 600-person electronics plant.

200 employees perform services for two affiliates.

A poor plan tells all staff to sign new contracts in one week.

Result:

• refusal;
• severance claims;
• uncertainty.

Better:

• classify groups;
• negotiate service recognition;
• transfer by waves;
• align handbook.

21. Diligence checklist#

Review:

• employment contracts;
• payroll;
• social insurance;
• handbook;
• disputes;
• non-competes;
• bonuses;
• secondments.

22. SPA clauses#

Include:

• employee schedule;
• transfer condition;
• cost allocation;
• indemnity;
• retention.

23. Closing conditions#

For critical employees:

• signed transfer agreement;
• resignation/appointment;
• IP assignment confirmation.

24. Post-closing 100-day plan#

Days 1-30: contracts and payroll.

Days 31-60: policies and benefits.

Days 61-100: performance, retention, compliance.

25. Cross-border HR data#

If global HR systems receive employee data, assess Personal Information Protection Law and 2024 cross-border data rules.^[3][4]

Workforce integration often triggers data migration.

26. Do not over-collect#

M&A HR diligence should limit employee personal information to what is necessary.

Sensitive personal information deserves additional controls.^[3]

27. Protected employees#

Before termination or transfer, identify legally protected categories.

Do not apply one plan indiscriminately.

28. Occupational health#

Manufacturing employees exposed to occupational hazards may require specific exit processes.

Interpretation II addresses consequences of missing required pre-departure occupational health examination.^[1]

29. Individual negotiation log#

Maintain:

• offer;
• employee response;
• concessions;
• final agreement.

This prevents inconsistent treatment.

30. Manager scripts#

Managers should not promise:

• guaranteed lifetime service;
• automatic bonus;
• no future layoff.

Use approved scripts.

31. Dispute readiness#

Preserve evidence of:

• employee consent;
• policy adoption;
• compensation.

32. Final rule#

The buyer should answer:

which legal entity will be the employer on day one after integration?

If the answer varies by payroll, manager and contract, the structure is not ready.

Additional implementation detail: employee population segmentation#

A buyer should segment the workforce into at least five groups: automatically continuing employees in a share deal, critical employees requiring retention, employees moving to a new group entity, employees whose roles will be eliminated, and employees with special legal risk such as protected status, long-term sick leave, occupational exposure, ongoing arbitration or senior management roles.

Each group needs a different document set and communication strategy. A blanket transfer letter is inappropriate.

Additional implementation detail: service-continuity drafting#

Where the buyer recognizes historic service years, the transfer agreement should say exactly how prior service affects future statutory economic compensation, annual leave, long-service benefits and internal seniority. If the seller pays compensation for historic service before transfer, document whether service is reset and whether that arrangement is lawful and accepted by the employee.

Do not rely on informal HR spreadsheets. The employee should understand the legal effect.

Additional implementation detail: post-closing audit#

Within thirty days after integration, the buyer should reconcile contract employer, payroll entity, social-insurance entity and reporting line. Any mismatch should be escalated. This is the fastest way to detect mixed-employer risk after a complex transaction.

The buyer should also review non-competes again after role assignment because employees may gain access to new secrets in the combined organization. Conversely, restrictions inherited from the seller may be disproportionate after the role changes.

A successful workforce integration ends with a clean employment architecture, not merely signed offer letters.

Conclusion#

Interpretation II makes mixed employment, non-competes and social insurance central to transaction integration.^[1]

A buyer should design employee transfer during diligence and allocate cost in the SPA.

The key principle is:

workforce integration is part of transaction structure, not post-closing administration.

Operational appendix: implementation controls#

This issue should be managed through a written project tracker rather than informal email. For each legal requirement, assign an owner, evidence file, deadline, decision status and escalation trigger. Management should distinguish legal requirements, commercial preferences and unresolved factual assumptions. That distinction reduces the risk that a business assumption is later treated as a legal conclusion.

The legal file should preserve the facts supporting each decision. If the company relies on an exemption, transfer mechanism, termination basis, ownership position or contractual remedy, retain the documents and analysis showing why. A later dispute or regulatory review often turns on evidence of what the company knew and how it reached the decision.

Before implementation, counsel should conduct a final consistency review across corporate documents, employment records, contracts, data systems and external communications. Many failures occur because separate workstreams use inconsistent dates, entities or descriptions. One master chronology and one controlled document set should be used.

After implementation, schedule a post-completion audit. Confirm that registrations, payments, system access, notices, records and contractual actions were actually completed. Legal projects fail when signed documents do not become operational reality.

Legal sources#

^[1] SPC Interpretation II on Labor Disputes: https://www.court.gov.cn/zixun/xiangqing/472691.html ^[2] Labor Contract Law of the PRC: https://flk.npc.gov.cn/ ^[3] Personal Information Protection Law: https://www.npc.gov.cn/npc/c2/c30834/202108/t20210820_313088.html ^[4] CAC Provisions on Promoting and Regulating Cross-Border Data Flows: https://www.cac.gov.cn/2024-03/22/c_1712776611775634.htm