Paul, it's not illegal to reside on a tourist visa in any appartment on mainland. But you must register with the corresponding local police station that you live there and doing so you need the appartment owner with you. Working is sure not allowed on L visa, and you'd have to covert it into Z (work permit) under the new employer then. In such cases as yours, that may be quite impossible in the same town and that not only because your previous employer "owns" the local police station, but also because there're some new RESTRICTIONS/REGULATIONS. A Recommendation Letter (not only a Release Letter) is required if you change jobs or shall i say employers. There're scores of foreign teachers that've got issues with these restrictions/regulations on mainland and there're scores of employers that're taking advantage of the situation too.

From the story you're telling us, however, it does look like you have not had the appropriate residency/work permit and your employer has abused you there. If so, this should send a message to many on L visas on mainland how dangerous it can be. Local employers hiring illegally may get away easier than us.

Cheers and beers to packing and leaving, but i've got so much :(