According to the PRC Labour Contract Law which was amended and came into effect on 1 July 2013, an employer can only use seconded employees for work positions which are temporary, auxiliary or substituting in nature. To implement the above new policies, the PRC government gave enterprises some time to adjust their employment arrangements. According to the Interim Regulations on Labour Dispatch which came into effect on 1 March 2014 (“Interim Regulations”), enterprises must meet the statutory requirements on the use of seconded employees within two years after the Interim Regulations have become effective, i.e. at the latest by 29 February 2016 (“ Deadline”).

1. What are the statutory requirements after the Deadline?

  1. Enterprises may only use seconded employees on “temporary”, “auxiliary” or “substituting” positions.

As defined by the Interim Regulations, a “temporary” position refers to a position that exists for less than six months. An “auxiliary” position refers to a work position providing services to core business positions. A “substituting” position refers to a position that may be held by another employee on a substituting basis for a certain period of time when the employee originally working on such position is unable to work due to full-time training, vacation or for any other reason. It is easy to define the work positions which are temporary or substituting. But when defining the scope of “auxiliary” work positions, as required by law, the enterprises must first consult and negotiate with the employees and then announce the result to the employees.  

  1. Enterprises must keep the number of seconded employees lower than 10%.

According to the Interim Regulations, the number of seconded employees used by enterprises shall not exceed 10% of the total number of employees. Such seconded employees refer to all employees who are on the work positions which are temporary, auxiliary or substituting. Such total number of employees includes both the seconded employees and the employees directly hired by the enterprise. 

However, as an exception, employment contracts and secondment agreements that have been signed by seconded employees before the issuance of the amended PRC Labour Contract Law, i.e. before 28 December 2012, are allowed to be performed until expiration. Therefore, employees holding such contracts do not need to be considered when calculating the percentage of seconded employees.    

2. What are the legal risks if enterprises fail to fulfill the statutory requirements after the Deadline?

  1. Administrative penalties

If an enterprise fails to use seconded employees in compliance with the law, the labour administrative authorities may, according to the PRC Labour Contract Law, order the enterprise to make rectification within a prescribed time limit. If the enterprise fails to do so, a penalty from RMB 5,000 to RMB 10,000 may be imposed on the enterprise for each seconded employee.

  1. Compensatory liabilities 

If an enterprise fails to define “auxiliary” work positions in accordance with the law, the enterprise may be deemed as having established a de facto employment relationship with the seconded employee whom it uses for that work position. In case such seconded employee suffers damages due to the enterprise’s breach of the law, the enterprise will be liable for compensating the damages.

Different local governments currently show different attitudes towards claims of seconded employee in connection with the confirmation of a de facto employment relationship in case an enterprise uses seconded employees in breach of the law. For example in Shanghai, the labour arbitration commission or the People’s Court will not accept a dispute raised by a seconded employee claiming for a de facto employment relationship with an enterprise which did not comply with the requirement of the law. However, in e.g. Shantou Special Economic Zone of Guangdong Province, according to the Employee Rights Protection Regulations taking effect on 1 October 2015, an enterprise shall be deemed as having established an employment relationship with a seconded employee if the enterprise uses the seconded employee not in compliance with the law. Therefore, the above mentioned legal risks very at different locations.

3. What are the challenges after the Deadline?

In the past two years, in order to meet the statutory requirements on the use of seconded employees, some enterprises changed their way of use of the seconded employees to “outsourcing business”. I.e. instead of hiring seconded employees from HR agencies, the enterprises outsource the business originally conducted by the seconded employees to a service company who assigns its employees to handle such business for the enterprise. For such enterprises, the challenge is whether such business mode is actually outsourcing business or just circumventing the use of seconded employees by signing outsourcing service contracts, i.e. so-called “de facto labour dispatch”, which is expressly prohibited by the Internal Regulations. After the Deadline, if the business mode of “outsourcing business” is regarded as a “de facto labour dispatch” by the labour administrative authorities, the enterprise may still have to bear legal liabilities as mentioned in the above Item 2.    

Conclusion

After the Deadline, the labour administrative authorities are expected to organise intensified inspection on enterprises with regard to the fulfillment of the statutory requirements on labour dispatch. Enterprises which still have 10% or more seconded employees or use seconded employees not in full compliance with the law are well advised to make an adjustment as soon as possible. Enterprises which have changed their business mode to outsourcing business may wish to double check to ensure that it does not fulfill the criteria of “de facto labour dispatch”.