Since the amendment of the Employment Contract Law in late 2012, together with the release of a series of administrative statutes and divisional regulations, the labor dispatch method seems to become gradually less used.  Worries about the labor dispatch system have spread throughout the whole labor market, which also makes it difficult to determine whether to adopt the method or discard it.  Recently, the Shanghai Administration of Human Resources and Social Security and Shanghai High People’s Court jointly issued Meeting Minutes regarding Applicable Laws on Labor Dispatch (the “Minutes”).  The Minutes provide interpretation regarding the legal consequences of infringement of laws on labor dispatch, the circumstances for sending a dispatched employee back, outsourcing and other problems.  For those employers trapped in such dilemmas, the Minutes are widely considered as a shot in the arm.  Will labor dispatch quickly fade away in a short period due to legal limitations successively released? Will companies assume huge liabilities due to current noncompliance with labor dispatch regulations? The answers may not be  a simple “yes” or “no” based on our following analysis and comments.

1. Legal Consequences for Infringement of Laws on Labor Dispatch

The Minutes state that the provisions on “temporary, auxiliary or alternative positions” and the percentage of dispatched employees in the Decision of the Standing Committee of the National People’s Congress on the Revision of the Employment Contract Law of the People’s Republic of China (the “Decision of Revision”) and the Interim Provisions on Labor Dispatch by Ministry of Human Resources and Social Security (the “Interim Provisions”) are management regulations.  The breach of such related provisions only shall not affect the validity of the labor dispatch agreement and the employment contract; however the competent Administration of Human Resource and Social Insurance (“AHRSI”) will request that the relevant company makes corrections within a certain period.

KWM Comments: The Minutes definitely qualify the provisions on “temporary, auxiliary or alternative positions” and the percentage of dispatched employees as “administrative regulations”, rather than “mandatory regulations”.  This qualification means the validity of “private agreements” such as dispatch agreements and employment contracts will not be automatically null and void for infringing the “administrative regulations”. Companies will only be subject to administrative liabilities, rather than more serious consequences generated by the invalidity of a dispatch agreement.

2.  Sending Back a Dispatched Employee

The Minutes stipulate that Article 12 of the Interim Provisions only lists some of the circumstances under which a dispatched employee can be legally sent back.  Furthermore, the Minutes list other circumstances which are not mentioned in the Interim Provisions: for instance, the dispatched employee can be sent back in accordance with an agreement reached among the three parties in advance or afterwards or if it is for the purpose of rectification due to a previous infringement of laws or regulations.

KWM Comments: The Minutes specify that circumstances under which a dispatched employee can be sent back listed in the Interim Provisions are illustrative rather than exhaustive.  This new regulation changes the former practical understanding that parties could not agree on return circumstances which were not stipulated in the relevant regulations. This will be more helpful in the drafting and revision of labor dispatch agreements concerning the sending back of dispatched employees.

3. Distinction between Labor Dispatch and Outsourcing

Now that there is a widespread belief that the regulating of labor dispatch has become relatively intense, it is likely that the distinction between labor dispatch and outsourcing will be more restrictively interpreted. The Minutes stipulate that various factors (such as the application of internal rules and regulations and the extent of command and management by companies) should be taken into account when distinguishing between labor dispatch and outsourcing.  The contract-issuing company and the service providing company may stipulate the limits of management by either party by agreement.  Where an outsourcing agreement is still in effect, if the contract-issuing company exerts partially direct management rights over the employees of the service providing company which does not substantially change the relationship thereof, such arrangement shall not be deemed to be the establishment of a labor dispatch relationship or an employment relationship between the contract-issuing company and those employees of the service providing company; however such an arrangement will need to be rectified .

KWM Comments: This provision further emphasizes the importance of management power when distinguishing between labor dispatch and outsourcing.  Where the contract-issuing company partially surpasses its management power, but does not materially change the nature of the legal relationship, it should not simply be deemed to have established a  labor dispatch relationship or an employment relationship between the contract-issuing company and the employees of the service providing company.  Obviously, such an interpretation brings more flexibility to the distinction between labor dispatch and outsourcing.