Ongoing economic and health system reforms in China have transformed nurse employment in Chinese hospitals. Employment of 'bianzhi' nurses, a type of position with state-guaranteed lifetime employment that has been customary since 1949, is decreasing while there is an increase in the contract-based nurse employment with limited job security and reduced benefits. The consequences of inequities between the two types of nurses in terms of wages and job-related benefits are unknown. This study examined current rates of contract-based nurse employment and the effects of the new nurse contract employment strategy on nurse and patient outcomes in Chinese hospitals. This cross-sectional study used geographically representative survey data collected from 2008 to 2010 from 181 hospitals in six provinces, two municipalities, and one autonomous region in China. Logistic regression models were used to estimate the association between contract-based nurse utilization, dissatisfaction among contract-based nurses, nurse intentions to leave their positions, and patient satisfaction, controlling for nurse, patient, and hospital characteristics. Hospital-level utilization of contract-based nurses varies greatly from 0 to 91%, with an average of 51%. Contract-based nurses were significantly more dissatisfied with their remuneration and benefits than 'bianzhi' nurses who have more job security (P <0.01). Contract-based nurses who were dissatisfied with their salary and benefits were more likely to intend to leave their current positions (P <0.01). Hospitals with high levels of dissatisfaction with salary and benefits among contract-based nurses were rated lower and less likely to be recommended by patients (P < 0.05). Our results suggest a high utilization of contract-based nurses in Chinese hospitals, and that the inequities in benefits between contract-based nurses and 'bianzhi' nurses may adversely affect both nurse and patient satisfaction in hospitals. Our study provides empirical support for the 'equal pay for equal work' policy emphasized by the China Ministry of Health's recent regulations, and calls for efforts in Chinese hospitals to eliminate the disparities between 'bianzhi' and contract-based nurses.