On January 24, the Ministry of Human Resources and Social Security issued the Provisional Regulations on Labor Dispatch (“Labor Dispatch Regulations”), which will take effect on March 1, 2014. Three days later, it issued a circular providing guidance to lower-level labor authorities on

implementation of the new regulations. The Labor Dispatch Regulations clarify some important issues on the use of dispatched workers, but also leave some issues of concern still unclarified. (The term “dispatched workers” is similar to temp workers, agency workers or contingency workers as used in other countries.)

  • Dispatched Workers Capped at 10 percent of Total Workforce

The Labor Dispatch Regulations specify that dispatched workers may not make up more than 10 percent of an employing unit’s workforce. When calculating this ratio, the number of dispatched workers should be divided by the total number of directly employed employees and dispatched workers at the employing unit.

Companies that use dispatched workers exceeding this maximum ratio are allowed a two-year grace period expiring February 28, 2016, but they must file a report on how they plan to reduce their use of dispatched workers with the local labor authorities. Before reducing its use of dispatched workers to the 10 percent ratio or below, a host company is not allowed to hire any new dispatched worker. If a dispatched worker’s employment contract (signed with a staffing agency) and the labor dispatch agreement between the staffing agency and the host company was signed prior to December 28, 2012 (the promulgation date of the new Employment Contract Law or “ECL”), such contracts/agreements may continue to be performed in accordance with their terms until expiration, even beyond February 28, 2016.

  • Employee Consultation Required to Determine “Auxiliary Positions”

Labor dispatch is only permitted to be used in positions that are temporary, auxiliary or substitute in nature. An “auxiliary position” is defined in the ECL as a non-core position that provides services to the company’s main business. However, the ECL was not clear about how to determine what constitutes a company’s main business and non-core business.

The Labor Dispatch Regulations now stipulate that a company can determine which positions are auxiliary through employee consultation procedures in accordance with Article 4 of the ECL. Art.4 procedures require consultations with all employees or an employee representative council as well as the union (if there is one), but the company does not need to reach an agreement with employees. This effectively means that management within reason has discretion in determining for which positions dispatched workers may be hired, subject to complying with certain consultation formalities and the overall 10 percent cap. If a company fails to go through the consultation procedures, the labor authorities may order rectification and give a warning, and if there are any damages caused to any dispatched worker, the company is also required to pay compensation.

  • Additional Grounds for Return of Dispatched Worker

In addition to the situations specified in the ECL where a host company may return a dispatched worker to the staffing agency, the Labor Dispatch Regulations clarify that a host company may also return a dispatched worker to the staffing agency when: (i) the host company undergoes a major change of objective circumstances or conducts a mass layoff, (ii) the host company goes bankrupt, dissolves, has its business license revoked, or is ordered to shut down, etc., or (iii) the labor dispatch agreement between the staffing agency and the host company expires. During the time when the returned worker does not have work to do, the staffing agency only needs to pay the returned worker the local minimum wage.

However, the host company is not allowed to unilaterally return a dispatched worker who is protected from unilateral termination by law (e.g., the employee is still in the statutory medical treatment period, or is pregnant or in her nursing period, etc.).

  • Equal Pay for Equal Work

The Labor Dispatch Regulations simply state that there should be no discrimination against dispatched workers in relation to any benefits related to a job position, but do not provide further guidance as to the exact scope of this requirement or how it should be interpreted / implemented.

  • Applicability of Open-Term Contract Entitlement to Dispatched Workers Still Unclear

The Labor Dispatch Regulations remain silent on the issue whether the open-term contract rules also apply to dispatched workers. Normal employees are entitled to an open-term contract after completing two fixed-term contracts with the same employer or after serving 10 years with the same employer. It is not clear whether a dispatched worker in these situations would be entitled to an open-term employment contract with the agency, as well as an open-term dispatch term with the host company. Open-term contracts provide job security potentially up to retirement.

This issue is now left to the courts to decide, which may lead to different interpretations locally.

  • Employee Right to Claim De Facto Employment Still Unclear

A provision in the original draft regulations stated that dispatched workers hired outside the allowable scope could claim for de factoemployment with the host entity, but this provision has been left out of the final Labor Dispatch Regulations. Dispatched workers now have no clear legal basis to raise such a claim. However, they can submit complaints to the local labor bureau, which can order rectification and then impose a fine if the violation is not rectified within the deadline specified by the labor bureau.

Employees may still try to make de facto claims in court, which again may lead to different practices locally.

  • No Clear Definition of “Outsourcing”

Given the strict rules on labor dispatch, many companies are changing their hiring methods from labor dispatch to outsourcing. However, there remains no clear definition of “outsourcing” under PRC law (a provision in the draft regulations on this issue was left out of the final version), and this would remain an issue to be determined by the courts based on both employment law and contract/civil law principles.