Last year, the PRC Labor Contract Law was amended, providing for stricter control of the use of seconded employees. The amendments became effective on 1 July 2013 (Amended LCL). For details, please see our newsletter of 14 January 2013. However, since the Amended LCL did not expressly specify a limitation on the number of seconded employees, many companies did not take any action, instead waiting for the announcement of detailed regulations by the State Council. On 24 January 2014, the Interim Regulations on Labor Secondment (Interim Regulations) were issued by the Ministry of Human Resources and Social Security. They came into effect on 1 March 2014. The Interim Regulations provide more detailed requirements on the use of seconded employees and put forward a schedule for ratification. It is high time now for companies using seconded employees in China to re-evaluate their employment methods and make adjustments if necessary. The following actions need to be taken into consideration to comply with the Interim Regulations:

  1. Check the percentage of seconded employees in the company

    According to the Interim Regulations, the number of seconded employees used by a company shall not exceed 10% of the total number of employees. The total number of employees includes both the employees directly hired by a company and the seconded employees. If a company uses 10% or more seconded employees, the company will have to adjust its employment method. As to the statutory requirements on the schedule for such adjustment, please refer to item 5 below.

  2. Check if the seconded employees are used in the right work positions  

    The Amended LCL defines the work positions on which seconded employees can be used, i.e. "temporary" positions of no longer than six months, "auxiliary" positions in which supporting services are provided to the core business of the company and  "substituting" positions which are temporarily vacant due to a regular employee's leave (maternity leave, study leave etc.).

    In practice, "temporary" and "substituting" positions are not common in China. Therefore, the scope of "auxiliary" positions becomes key for companies using seconded employees. As required by the Interim Regulations, the scope of "auxiliary" work positions shall be defined by the company following democratic procedures as provided by PRC labor law that involve consulting and negotiating with the employees and announcing the result, i.e. the relevant scope of "auxiliary" positions, to the employees.

    If a company wants to continuously use seconded employees, we recommend carrying out democratic procedures to define the scope of "auxiliary" work positions in the company as soon as possible.

  3. Check if the seconded employees enjoy equal pay for equal work

    According to the Amended LCL, a company shall adopt the same remuneration policy for seconded employees as for employees directly hired by the company who do the same work. The Interim Regulations further explain that when adopting the above policy, in addition to the salaries, the benefits and allowances related to the work position shall also be considered.

    In case any discrimination in this regard has been found, the company may wish to adjust its remuneration policies as soon as possible. Otherwise, labor disputes may be raised by seconded employees.

  4. Check if the HR agency has a Labor Dispatch Operation Permit

    As required by the Amended LCL, starting from 1 July 2013, an HR agency engaging in secondment services shall have a Labor Dispatch Operation Permit. HR agencies involved in the secondment business were supposed to get such a permit during the period from 28 December 2012 until 1 July 2013.

    Based on the Interim Regulations, if a HR agency providing secondment services does not obtain a Labor Dispatch Operation Permit but has signed labor contracts with seconded employees, such HR agency can continue to perform existing contracts until expiration. However, without a Labor Dispatch Operation Permit, the HR agency shall not hire new employees or continue to provide secondment services after the labor contracts of the existing employees have expired.

    Therefore, companies should check if the HR agency that they use for providing secondment services has obtained a Labor Dispatch Operation Permit. If not, companies are well advised not to use such HR agency for newly seconded employees. For the existing seconded employees, the company can continue to use the same agency until the current labor contracts expire. Upon expiration, the company will have to arrange a properly qualified HR agency to hire them.

  5. Statutory time frame for adjustment  

    According to the Interim Regulations, if a company has used 10% or more seconded employees, it shall not use new seconded employees until the company has fulfilled the above requirements stated above. Further, the company shall make a schedule for reaching the target of adjusting the percentage to 10% or below within 2 years, i.e. by 29 February 2016. The schedule should be filed with the relevant labor authority.

    As an exception, labor contracts and secondment agreements that have been signed before the issuance of the Amended LCL, i.e. before 28 December 2012, are allowed to be performed until expiration. The employees holding such contracts do not need to be considered when calculating the percentage of seconded employees.

If a company fails to use its seconded employees in compliance with the Amended LCL and theInterim Regulations, the labor authority can order the company to rectify the issue within a prescribed time limit. If the company still fails to rectify the issue, a penalty from RMB 5,000 to RMB 10,000 may be imposed on the company for each seconded employee. In addition to the administrative liabilities, legally speaking, seconded employees who are on work positions which are not temporary, auxiliary or substituting can raise claims for the confirmation of a factual employment relationship directly with the company. Although the relevant regulations, which originally were part of the draft Interim Regulations for public discussion, were deleted from the final version, however, the labor arbitration commissions or the People's Courts in various locations may still confirm such factual employment relationships. This brings a further legal risk for companies using seconded employees without complying with the above requirements. Please note that the restrictions on the work position on which the seconded employees can be used and the limitation on the percentage of the use of seconded employees do not apply to representative offices of foreign companies and shipping companies using international seamen. However, these entities still need to comply with other requirements such as "equal pay for equal work" and use of HR agencies holding a Labor Dispatch Operation Permit.