Just over one year ago, on January 26, 2014, the Chinese Government issued Provisional Rules regarding Labor Dispatch.  This is the second China-wide rule focusing on temporary or “dispatch” labor.  The Provisional Rules clarify and improve upon China’s July 1, 2013 revisions (the New Revisions) to the 2008 Labor Contract Law.  These important changes, and related local rules governing dispatch labor, restored dispatch labor to its original use as a limited supplement to contracted labor.

The Dispatch Labor Model

A dispatch labor arrangement arises when an enterprise (the labor user) wishes to use a dispatch, or temporary, worker (the dispatched worker) without a long-term obligation.  An intermediary provider (a dispatch agency) enters into a labor contract with the dispatched worker and directs him or her to the labor user.  The employment relationship, however, remains solely between the dispatch agency and the dispatched worker. 

Background to the Changes

Before the People’s Republic of China’s Labor Contract Law came into effect in 2008, the labor dispatch model was used in limited situations.  For example, representative offices of foreign companies, which generally are not treated as independent legal entities in China, would have to engage a dispatch agency to benefit from the labor of Chinese citizens.  Another example was enterprises that engaged dispatched workers based on seasonal business demands to supplement their contract labor force.

Dispatch labor boomed after the Labor Contract Law came into effect in 2008.  According to the China Trade Union’s 2010 research report, there are currently more than 60 million dispatched workers in China.  The model attracted the attention of the China authorities not just because of the high number of dispatched workers, but also because of its adoption by a broad range of enterprises, including state-owned, foreign-invested and domestic-invested enterprises.  In addition, dispatch labor formed a significant proportion of the workforce in almost all industry sectors, including manufacturing, service outsourcing and research and development, and across all types of employment, regardless of the length of employment or level of the role. 

Companies were criticized for harming employees’ interests by using dispatch labor to save money on salaries and benefits.  As a result, there were calls for stricter rules limiting the application of the dispatch labor model.

Many enterprises using dispatch labor were challenged for using dispatched workers in positions that might be outside those protected by law.  Article 66 of the 2008 Labor Contract Law stated “Labor dispatch services are normally used for positions that are temporary, auxiliary or substitutive.”  The word “normally” appears to have been purposefully inserted by China’s law-making body to allow for flexibility, but the degree of flexibility was unclear.  The ability of companies to use dispatch labor outside the three listed categories was therefore a very controversial issue.

Some breaches were clear-cut.  Common abuses included

  • Using dispatched workers for labor that clearly was not “temporary”, e.g., using dispatched workers for the same positions for more than 10 years.
  • Using dispatched workers in a way that clearly was not “auxiliary” , e.g.,  using dispatch labor for more than 80 per cent of a domestic company’s China workforce. 

The New Revisions

The New Revisions attempted to address complaints about the ambiguity of “temporary, auxiliary, or substitutive”.  The word “normally” has been deleted from Article 66 of the Labor Contract Law, clearly making the three categories an exclusive list of permitted dispatch labor roles.  The three categories have also been more precisely defined by the New Revisions.

  • “Temporary” now refers to a position that lasts less than six months. 
  • “Auxiliary” refers to non-core business positions. 
  • “Substitutive” refers to an employee working in place of a permanent employee who is absent for reasons such as leave, training or education.

In addition, the New Revisions emphasize that the dispatch model must only be a supplement to a direct-hire workforce.  The New Revisions explain that the total number of dispatched employees working at a company must be no more than a certain percentage, although that percentage was not specified. 

There were obviously still gaps in the New Revisions and they were not sufficient to eliminate abuse of the dispatch model.  On January 26, 2014, the government issued the Provisional Rules in attempt to close all the doors that could allow abuse of the dispatch labor model. 

The Provisional Rules

The Provisional Rules contain two critical clauses designed to limit the use of dispatch labor: 

  1. Companies must consult with trade unions or all employees before characterizing a role as “auxiliary.” 
  2. The use of dispatched workers is restricted to 10 percent of the company’s total China workforce. 

Moving Forward

In the past six years, the use of dispatch labor has been on a roller coaster.  It started to climb in 2008, reached its peak in 2010 and started its descent to previous levels in 2013.  It is now back on solid ground.  The new rules restrict the use of dispatch labor to supplemental roles that are truly temporary, auxiliary and substitutive, and comprise no more than ten percent of a workforce. 

Some companies have, unfortunately, found conforming with the new rules to be expensive and disruptive but, with a carefully managed program of transition in place, that doesn’t have to be the situation for all.  Companies that have not yet started transitioning their workforce from dispatched to contracted labor should do so urgently to avoid enforcement challenges and limit exposure.