On 28 December 2012, the Standing Committee of the National People's Congress issued the Decision  on Amending the People's Republic of China Labor Contract Law (全国人民代表大会常务委员会关于修改 《中华人民共和国劳动合同法》的决定), effective 1 July 2013 ("Amendments"), which primarily served to tighten the use and proliferation of labor dispatch  arrangements. The practical effect of the Amendments is that it will be difficult to outsource all  or even the bulk of human resource functions to third party dispatch agencies.

On 23 January 2014, the Ministry of Human Resources and Social Security of the People's Republic of  China issued the Interim Provisions on Labor Dispatch (劳务派 遣暂行规定), effective from 1 March 2014 ("Interim Provisions"). The Interim Provisions provide much needed clarity to the Amendments' requirements on  labor dispatch. Following the implementation of the Interim Provisions, all companies will need to  evaluate their workforce arrangements to ensure any use of labor dispatch is in line with the  current legal requirements.

Overview of Labor Dispatch

  1. Restrictions on dispatched employees
    1. Dispatched employee positions

A dispatched employee may only be used for positions that are temporary, auxiliary or substitute in  nature. These positions are further clarified as follows:

  1. Temporary: means positions that are no longer than six months.
  2. Auxiliary: means supporting positions that serve those positions core to the business.
  3. Substitute: means positions that cover permanent staff during a certain period of time  of absence, such as for full time- study and vacation leave or other reasons.
  1. Auxiliary positions

Under the Interim Provisions, a company which proposes a definition for its auxiliary position must

  1. raise this proposed definition to its employees’ representatives’ congress or to all of  its employees for discussion;
  2. engage in consultations on the basis of equality with its trade union or employees’  representatives; and
  3. set out on public display its final decision.
  1. If the company is in violation of the above provision, the human resources and social  security administrative authorities will issue a warning and order the employer to rectify; where a  dispatched employee suffers any losses, the employer will be liable for compensating such employee  for such losses.

It is unclear the extent of the employee bodies' authority to shape a company's definition of  auxiliary.  Based on a strict reading of the Interim Provisions, the company's decision to define  its auxiliary position must undergo a discussion and consultation with, but does not require any  approval from, the employees, employees' representative congress or trade union. As such, it would  appear that a company may ultimately have discretion on this matter.

  1. Percentage of total workforce

The number of dispatched workers (including those in temporary, substitute, and auxiliary  positions) may not exceed 10% per cent of a company's overall  work force. Further, the overall work force means the sum of the number of employees entering into labor contracts with a company and the number of  dispatched workers. For some companies in China which have traditionally relied heavily on  dispatched worker to fulfill their operational needs, this restriction would require significant  restructuring. Fortunately, the Interim Provisions provide a transitional period for companies  currently engaging dispatched workers to adjust their work arrangements to comply with the new  legal regime. (See section 3.1 below.)

  1. Exception to the restrictions  

Representative offices are still required to obtain employees through a dispatch agency. Therefore, the above restrictions on using dispatched workers, including those restricting the positions in  which dispatched employees and the percentage of total workforce of dispatched employees, are not  applicable to resident representative offices of foreign enterprises, representative offices in  China of foreign financial institutions, and international ocean seamen used by employers in the  form of labor dispatch.

  1. Issues for employers currently using dispatched employees over 10% of their overall  labor force
  1. Transition plan

The Interim Provisions set out the following transition plan for a company currently using  dispatched workers comprising over 10 per cent of its overall labor force:

  1. The company must develop an adjustment plan for its employees (调整 用工方案) to ensure  compliance with the Interim Provisions within two years from the Interim Provisions' effective date (i.e., before 1  July 2015), and such plan must be filed with the local human resources and social security  administrative authorities.
  2. A labor dispatch agreement which was concluded prior to the promulgation of the  Amendments (i.e., 28 December 2012) and expires after two years from the Interim Provisions  effective date (i.e., after 1 July 2015) will continue to be valid until its expiration.
  1. Labor contract between the dispatch agency and the dispatched workers
  1. Fixed term labor contract

The Interim Provisions restate the requirement that the dispatch agency and the dispatched workers  must enter into a fixed term labor contract with a term over two years.

If a dispatched worker is entitled to a fixed term  labor contract with a dispatch agency, and  where a company requires a dispatched worker to fill a substitute or temporary position for a  period of less than two years, it is unclear whether the dispatch agency or the company will bear  the costs and liabilities for the remainder of the dispatched worker's labor contract period.  This  will need to be negotiated between the company and the dispatch agency, though the dispatch agency  would likely require compensation to cover the expenses of maintaining an employee during his/her  employment period, even when such employee is not dispatched.

  1. Continued performance of the labor contract

The Amendments set out more definitive  eligibility requirements on a dispatch agency, one of which is that a license is required to operate as a dispatch agency. The Interim Provisions further set out  that if the term of validity of the administrative license is not extended at the expiration, or  the License to Operate Labor Dispatch (劳务派遣经营许可证) is cancelled or revoked, the labor contract between a dispatch agency and a dispatched worker will  continue to be valid until its expiration. The parties are also entitled to terminate the labor  contract where they reach a consensus through consultations.

  1. Work-related injury and occupational diseases
  1. Obligations of dispatch agencies and employers related to work-related injury

The Interim Provisions set out obligations on both the dispatch agency and the company in the event  a dispatched worker is injured due to his/her work.  The dispatch agency is responsible for  applying for identification of the work-related injury, and the company must assist with the investigation and the verification of such identification. The dispatch agency is also responsible for undertaking the work- related injury insurance matters; however, it may reach an agreement with the company on an arrangement of compensation on these matters.

  1. Dispatch agency and compa ny obligations for occupational diseases

The Interim Provisions set out obligations of the dispatch agency and the company where the  dispatched worker applies for diagnosis and certification of an occupational disease. The  company must handle the diagnosis and certification, and provide relevant documents. The dispatch agency is  obligated to provide other documents as needed.

  1. Return of a dispatched employee

The Interim Provisions provide a company with more flexibility to return a dispatched worker to the  dispatch agency, except under limited instances such as where the individual is pregnant, nursing,  on medical leave, or has been employed for a number of years and is near a statutory retirement  age.

  1. Under the Interim Provisions, a company may return a dispatch worker where:
    1. there is a material change in certain objective circumstances as set out in the Labor  Contract Law;
    2. the company is declared bankrupt in accordance with the law, has its business licence  revoked, is ordered to shut down or is closed down, decides to enter into dissolution, or its  operating term expires; and
    3. the term of the labor dispatch agreement has expired.

Upon such return, the dispatch agency would be obligated to provide the dispatched worker with a  new assignment or a minimum wage salary.

These aforementioned circumstances are in addition to a company's rights under the Labor Contract  Law to return a dispatched worker. The essential difference is that a return under the Labor Contract Law would then entitle the dispatch agency to terminate the underlying labor contract with the worker rather than provide a  new assignment or minimum wage salary.

If a company returns a dispatched worker to a dispatch agency for any other reasons not permitted  in the Interim Provisions or the Labor Contract Law, such worker may be entitled to severance,  economic compensation or possible reinstatement with the company.

  1. Penalty for unlawful return

The penalties under the Interim Provisions for unlawful return of a dispatched worker are identical  to penalty provisions set out in the Labor Contract Law. Thus, if a company unlawfully returns a  dispatched worker, the company will be ordered by the relevant labor administrative department to  rectify within a prescribed time period, and be given a fine of not less than RMB 5000 but not more  than RMB 10,000 per dispatched worker involved if no correction is made by the prescribed deadline.  Further, the company and the dispatch agency will assume joint and several liabilities to  compensate the damage, if any, caused by the company to the dispatched worker.

  1. Rescission and termination of labor contracts and the economic compensation

The Interim Provisions restate the general provisions on rescission and termination of labor  contracts and the corresponding economic compensation under  the Labor Contract Law, and set out  the rescission  of the labor contract after the dispatched worker has been returned under Item 6.1  above.

A new development under the Interim Provisions is that the dispatch agency must pay economic  compensation to the dispatched worker where the labor contract is terminated because the dispatch  agency offers terms which are less favorable than the existing terms after the dispatched worker is  returned, and the worker refuses to agree to such terms. In practice, however, the dispatch agency  may likely seek an agreement with the company for reimbursement for such payments.

  1. Social welfare insurance for cross-locality placements

The Interim Provisions provide some additional guidance on social welfare insurance issues where a  worker is dispatched to work outside the area in which the dispatch agency is located. According to  the Interim Provisions, social welfare insurance payments will be based on the company's location  and in accordance with its local regulations, by the branch of the dispatch agency in the area the  company located in, if any, or by the company on behalf of the dispatch agency if there is no  branch of the dispatch agency in such area.

  1. Contracting and outsourcing

The Interim Provisions emphasizes that if contracting, outsourcing and similar arrangements use  workers in the form of a labor dispatch, the Interim Provisions will be applicable to such  arrangements.

This additional provision is vague and may have far- reaching consequences, especially for  companies in the service industries. For instance, if a company sends its employee to a client on a  secondment, it is unclear if the secondment be deemed a dispatch under the Interim Provisions,  despite the contractual terms between the parties to the secondment.