The Amendment to the Employment Contract Law (the "Amendment", and the Employment Contract Law referred to as the "Law") has been approved by the law making body of the People’s Republic of China, the standing committee of the National People’s Congress, on December 28, 2012. The Amendment will become effective from July 1, 2013. This is the first amendment to the Law since its effectiveness on January 1, 2008.

The Amendment aims to regulate labor dispatch activities. Labor dispatch is a flexible way of hiring personnel. In a labor dispatch situation, an employer engages a labor dispatch service company and the labor dispatch service company provides the employer with workers needed. These workers are not treated as the employees of the employer; therefore, the employer does not need to pay social security costs or other benefits that it pays to its permanent employees. In addition, since there is no employment relationship between the dispatched workers and the employer, when the dispatched workers are not desired, the employer can simply return them to the labor dispatch service company without going through complicated termination procedures or assuming the severance obligations required under the Law.1 Given the advantages of the labor dispatch, more and more employers are migrating to this method, although perhaps not in the best interests of dispatched workers.

The Amendment made the following changes to the Law:

  1. Increase the threshold of establishing a labor dispatch company

Article 57 of the Law presently states that the registered capital of a labor dispatch company shall be no less than RMB500,000. The Amendment imposes more conditions:

  1. the registered capital shall be no less than RMB 2 million
  2. having fixed business operating addresses and facilities suitable for carrying out business
  3. having labor dispatch management policies which are in compliance with applicable laws and administrative regulations
  4. meeting other requirements as prescribed in applicable laws and administrative regulations
  5. obtaining a license from the labor bureau

The forgoing conditions are not very difficult to meet; therefore, the amendment to Article 57 will only serve to block very small labor dispatch companies from entering into the market. According to the Amendment, any entity that engages in the labor dispatch service before the effectiveness of the Amendment, shall obtain the license and apply for the change of its registration with the Administration for Industry and Commerce within one year after the effectiveness of the Amendment, i.e. June 30, 2014.

  1. Equal right, equal pay as permanent employees

Article 63 of the Law states the principle of "equal pay for equal work", that is, a dispatched worker shall have the right to receive the same remuneration as that received by a permanent employee. The principle of "equal pay for equal work" is that for the same position the dispatched worker shall receive the same amount of remuneration as the permanent employee. Emphasizing the principle "equal pay for equal work" will help to highlight the importance of this principle. The Amendment also regulates the remuneration specified in the labor contract and the labor dispatch service agreement shall also comply with this principle.

  1. Permitted positions for labor dispatch: temporary, auxiliary or substitutive positions

Article 66 of the Law states that the labor dispatch services shall normally be used for temporary, auxiliary, or substitutive positions. The Amendment confirms that hiring workers through labor contracts shall be a standard practice adopted by companies in China and only three types of positions are permitted under the labor dispatch arrangement. Further, the Amendment provides detailed definitions to the three types of positions:

"temporary position" refers to a position with a duration of no more than 6 months;

"auxiliary position" refers to a position that provides auxiliary services to the main or core business of the employer; and

"substitutive position" refers to a position that can be performed by a dispatched employee in place of a permanent employee during the period when that employee is away from work for study, vacation or other reasons.

The Amendment replaced the word "normally" with "only" in this provision for the positions that can use dispatched workers. This limits the labor dispatch positions and should significantly reduce the number of dispatched workers by creating more permanent employees positions, and therefore protecting the interests of dispatched workers and certain types of employees.

In addition, the Amendment added that employers using dispatched workers must ensure that the total number of dispatched workers does not exceed a certain percentage of the total number of the work force of that employer. This percentage will be announced by the labor administrative department of the State Council.

  1. Severe penalties for breaches

Article 92 of the Law incorporates penalties for breaches of the dispatch related provisions as follows:

  1. the breaching labor dispatch service provider shall be ordered to cease the breach.
  2. if the breach is serious, the labor dispatch service provider shall be fined at the rate of not less than RMB1,000 but not more than RMB5,000 per person and have its business license revoked by the administration for industry and commerce.
  3. if any damage is caused to the dispatched workers, the labor dispatch service provider and the employer shall bear joint and several liability.

The Amendments provide more severe penalties for breach of the new rules. Where a labor dispatch service provider conducts the labor dispatch business without license, it may:

  1. be ordered by the labor authority to cease its business activities;
  2. the illegal income will be confiscated; and
  3. it will be fined with a penalty equivalent to 1 to 5 times the amount of illegal income; if there is no income, it will be fined with a penalty of no more than RMB50,000.

Where a labor dispatch service provider or an employer breaches other labor dispatch related requirements, it may:

  1. be ordered by the labor authority to make restitution within certain period of time;
  2. if it fails to provide restitution, it will be fined in a range of RMB5,000 to RMB10,000 for each dispatched worker, and with respect to a labor dispatch service provider, its license may be revoked; and
  3. if any damage is caused to the dispatched workers, the labor dispatch service provider and the employer shall have joint and several liability with regard to the compensation.

For any entity engaging in labor dispatch service without license, not only will its income be confiscated, but a fine equivalent to 1 to 5 times of the income will also be imposed. The fines imposed upon a labor dispatch service provider or an employer for each dispatched worker breaching labor dispatch related requirement will be increased from RMB1,000 -RMB5000 to RMB5,000 -RMB10,000.

  1. Existing labor contract and labor dispatch service agreement

The Amendment offers a transition period for the existing labor contracts and labor dispatch service agreements, which were executed before the issuance of the Amendment (December 28, 2012): existing labor contracts and labor dispatch service agreements may be continued to perform until expiration. That said, the provisions in those existing contracts and agreements, which are not in accordance with the principle of "equal pay for equal work principle", will need to be amended.

The Amendment increases the threshold for engaging in labor dispatch service, and provides higher restrictions for using of dispatched workers. The purpose is to protect the interests of dispatched workers and employees. Companies which hire dispatched workers should pay attention to following issues:

  1. ensure that that labor dispatch company is in compliance with these new qualification requirements
  2. review provisions under existing labor dispatch agreements and labor contracts to ensure that they are in compliance with the principle of "equal pay for equal work"
  3. the employers should review the positions of the dispatched workers to make sure these positions are the three types of positions permitted under the Amendment, i.e. "temporary position", "auxiliary position" or "substitutive position"
  4. although the Amendment defines the "auxiliary position", in reality it is still hard for employers to determine which specific positions will be an "auxiliary position". For example, where the main business of an online retailer is to sell products online, but the position of delivery of the products ordered online to customers is auxiliary services to the sales of products, and therefore is an "auxiliary position", thereby allowing the use of dispatched workers? If the delivery of online ordered products is deemed as the main or core business of the online retailer rather than an auxiliary service, then the online retailer is unlikely to have the right to use dispatched workers for the delivery position. Therefore, before hiring a dispatched worker for an "auxiliary position", it is advised for an employer to consult with an attorney familiar with labor issues and the labor authority to make sure the position can be regarded as "auxiliary position" under the Amendment.