On December 28, 2012, the Standing Committee of the National People's Congress (NPC) passed an amendment to the PRC Labor Contract Law ("Amendment"), which will be effective as of July 1, 2013. The Amendment requires local and foreign companies to hire the majority of their employees through direct employment arrangements, rather than through third party labor dispatch agencies such as FESCO and CIIC. The new regulation is expected to significantly increase the number of employees and related labor costs for many multinational companies in China.

The NPC has authorized the Ministry of Human Resources and Social Security ("MOHR") to make detailed rules to implement the Amendment prior to July 1, 2013.

In response to concerns raised by multinational corporations, the China Association of Foreign Investment Enterprises (CAFEI), a semi-governmental association under the aegis of MOFCOM, recently formed a legal task force to voice the concerns of its foreign constituents to the relevant authorities. SNR Denton was invited by CAFEI to participate in closed-door discussions with MOHR and the All China Federation of Trade Unions ("ACFTU"), one of the key proponents of the Amendment. Sarah Zeng, a partner in SNR Denton's Beijing office, has been selected to head the legal task force.

Overview of Labor Dispatch

In a typical labor dispatch arrangement, a third party labor dispatch agency enters into service a service contract with the employer and a separate employment contract with the employee. Based on the terms of these agreements, the labor dispatch agency then dispatches (or "seconds") the employee to work for the employer.

The main benefits of this type of arrangement to employers is as follows:

  1. Employees hired through dispatched agencies typically receive lower wages than directly hired employees, which can reduce the cost of hiring;
  2. It is at least theoretically easier for employers to terminate a dispatched employee compared to a direct employee, if the contract with the dispatched agency allows the employer to return the employee to them when certain conditions are met;
  3. The dispatched employees are not deemed as permanent employees, and therefore are often omitted from company's global head count.

According to a report issued by the ACFTU, 60 million people, roughly equivalent to 20% of China's total workforce, are dispatched workers. The widespread use of labor dispatch has given rise to the increasing abuse of dispatched employees' rights. Many employers use dispatched labor to avoid responsibilities associated with formal labor contracts such as severance compensation, social security payments and workplace injuries. In many cases, dispatched workers are also paid significantly less than contract workers for the same work.

The Amendment aims to curtail the excessive use of the labor dispatch arrangement and to establish regulations that protect the interests of dispatched workers.

Ratio of Direct Hires to Dispatch Hires

The Amendment provides that the number of dispatched employees in a company should not exceed a certain percentage of the total number of employees in the company.1 The specific percentage will be set by MOHR, likely before the Amendment takes effect on July 1, 2013. Based on unofficial comments from officials who are closely involved in the legislative process, the percentage is very likely to be as low as 5% to 10%, which, if true, would require employers to either terminate the dispatched workers that are in excess of the percentage, or convert them into directly hired employees. This is expected to significantly increase the nominal head count as well as labor cost of many multinational companies which heavily rely on dispatched labor. Assuming the new rule will be effective on July 1, 2013, it is virtually impossible for those companies to comply with the new rule within such a short timeline.

"Temporary, Auxiliary or Substitute Positions"

Prior to the Amendment, PRC labor law provided that the labor dispatch arrangement "generally" applied to "temporary, auxiliary or substitute positions." The ambiguity of the word "generally" was broadly interpreted by employers as a means to hire dispatched employees on a permanent basis. The Amendment has removed this apparent "loophole" and replaced it with an express requirement for labor dispatch arrangement to be used "only" for temporary, auxiliary or substitute positions.

The Amendment also introduces definitions for the terms "temporary, auxiliary or substitute positions" as follows:

  • A temporary position is a position with a term of no longer than six months;
  • An auxiliary position is a position that serves the main or core business of the company;
  • A substitute position is a position that can be temporarily filled by a dispatched employee for the period that the permanent employee is away from work for travel, study or other reasons.

While the definition of temporary and substitute positions are relatively unambiguous, the reference to the "main" or "core" business of a company is still rather ambiguous and can be open to further interpretation.

"Equal Pay for Equal Work"

Starting from July 1, 2013, employers will be required to compensate dispatched employees in the same manner as direct hires to the extent that the dispatched employees are performing work which is identical or similar to that performed by direct hires. If a dispatched employee is performing a function for which there is no same or similar position in the company, the compensation of the dispatched employee is required to be determined with reference to the same or similar positions in the employer's locality.

Despite the Amendment's attempts to make the "equal pay for equal work" principle easier to implement, issues remain to be clarified. One of the key issues is how to define "equal pay" and, in particular, whether an employee's compensation merely refers to his/her base salary, or if it includes bonuses, subsidies, allowances and, most importantly, benefits (such as social insurance, medical care and housing).

Some cities have attempted to provide further guidance on this issue by introducing rules that explicitly require local employers to apply the same salary as well as benefits policy to dispatched employees who perform the same work as directly hired employees. These types of local guidelines have already been implemented in Jiangsu, Yunnan, Chongqing and Tianjin.

Penalties

Starting from July 1, 2013, an employer who is found in breach of the Amendment will be required to rectify breaches within a fixed period of time set forth by the relevant labor regulator. Failure to cure a breach within the specified time may result in penalties, including a fine in the range of RMB5,000 to RMB10,000 per dispatched employee (the previous penalty per employee was RMB1,000 to RMB5,000). Employers should also be aware that both labor dispatch companies and employers are statutorily liable, on a joint and several basis, for relevant losses suffered by the dispatched employees.

Conclusion

In light of the broad reform in the labor dispatch area, companies that currently employ dispatched workers are strongly advised to monitor developments in this area, review their labor dispatch arrangements and consider what changes may be necessary to ensure compliance with the Amendment.

In light of the broad reform in the labor dispatch area, companies that currently employ dispatched workers are strongly advised to monitor developments in this area, review their labor dispatch arrangements and consider what changes may be necessary to ensure compliance with the Amendment.