The Regulations on Labor Dispatch (Public Opinion Solicitation Draft) (the “Solicitation Draft”) was announced to solicit public opinion by the PRC Ministry of Human Resources and Social Security on August 7, 2013. The major provisions under the Solicitation Draft are as follows:

Definition of Labor Dispatch: the Solicitation Draft specifies the definition of labor dispatch, and further clarifies that where a company outsources business to other employers but maintains direct management over the concerned workforce, it will be deemed as non-outsourcing labor dispatch.

Identification of Ancillary Position in accordance with the Solicitation Draft, whether a position is an ancillary position for dispatched employees will be determined through negotiation with the trade union or employees’ representative congress of the company in compliance with the characteristics of the company’s industry and business. The results of the determination will be publicly displayed within the company under the supervision of the employees and society.

Percentage of Employees with Ancillary Positions: the Solicitation Draft states that companies must strictly limit the number of labor dispatched employees. Ancillary positions may not exceed 10% of the total number of employees. The total number of employees is defined as the number of direct-hired employees plus the number of labor dispatched employees on ancillary positions.

Situations Considered Employment Relationships: the Solicitation Draft states that if the company violates any provisions relating to requirements for ancillary positions, including limits to the number of ancillary employees,, and fails to correct its violation within one month after an imposed fine, the dispatched employees in such positions or exceeding the percentage shall be regarded as direct-hire employees, and the employment relationship shall commence the day after the one-month period mentioned above. The company shall execute employment contracts with such employees accordingly unless the dispatched employees state in written form that they are unwilling to establish employment relationships with the employer

The Solicitation Draft also states that when the company receiving labor services from a dispatched employee with no employment contract with the dispatching agency, an employment relationship with the company will be deemed established, and the employment contract will be entered into retroactively, with the commencement date being the first working day at the company.

Impermissible Circumstances for Termination upon Return: the Solicitation Draft clarifies that when the dispatched employee is returned by the company for any of the three reasons below, the dispatching agency must dispatch the returned employee to another company:

  1. Paragraph 3 Article 40 or Article 41 of the PRC Employment Contract Law applies to the company;
  2. The company is declared bankrupt in accordance with laws, has its business license is revoked, is ordered to close, decides on an early dissolution or has its business term expire;
  3. The company violates any provisions in relation to the requirements of the positions and the acceptable percentage of ancillary positions.

Continue Performing Partial Labor Dispatch Agreement: the Solicitation Draft stipulates that employment contracts and labor dispatch agreements entered before the implementation of the Decision on Modification of PRC Employment Contract Law (the “Decision”), (between Dec 28, 2012 and June 30, 2013) shall be performed to their expiration. The company i may not return dispatched employees due to failure to meet the prescribed requirements, exceeding of the acceptable percentage of ancillary employees, or the dispatching agency’s failure to obtain an administrative license. However, content not in compliant with the “equal work equal pay” principle, must be adjusted accordingly in line with the Decision.

When the company has already hired dispatched employees exceeding the prescribed percentage of ancillary positions before the implementation of the Decision, the company may not hire new dispatched employees in the ancillary positions until it satisfies the percentage requirement.

In addition, before the expiration of an employment contract entered into prior to the implementation of the Decision, the dispatching agency may not terminate the employment contract with dispatched employees due to the lack of a necessary administrative license.

KWM Comments: the Solicitation Draft specifies issues which the Decision did not clarify, including identification of ancillary positions, controls over the proportion of labor dispatched employees, and legal consequence of violating requirements for using dispatched employees. Companies using dispatched employees should pay attention to these issues.