On December 28, 2012, the Standing Committee of the National People’s Congress (“Standing Committee”) promulgated the Decision of the Standing Committee on the Revision of the Labor Contract Law of the People’s Republic of China (“Revision”), which will become effective July 1, 2013. The Revision was formulated and promulgated to address the government’s concerns over the rapid proliferation of labor dispatch enterprises, the expanded scale of labor dispatch, and violations of the rights and interests of labor dispatch workers following the implementation of the Labor Contract Law in 2008.

In China, “labor dispatch” refers to a form of employment where a worker concludes an employment contract with a labor dispatch enterprise and is then dispatched to work in another company (“host company”). China’s Labor Contract Law stipulates that the term of an employment contract between a worker and a labor dispatch enterprise may not be less than two years. Furthermore, host companies may not conclude several short-term labor dispatch agreements by dividing up a consecutive labor service period. These requirements remain unchanged.

Both foreign and domestic companies use dispatch workers. Since PRC law prohibits representative offices (“ROs”) from directly hiring individuals, ROs use labor dispatch enterprises (e.g. FESCO) to indirectly hire workers. A 2010 survey conducted by the All-China Federation of Trade Unions showed that there are as many as 60 million dispatch workers in China, accounting for nearly 20 percent of the domestic workforce. The same survey revealed that dispatch workers are most concentrated in stateowned enterprises and government organizations.

The Revision has generated a significant amount of public interest. When the Revision was first released as a draft amendment in July 2012, Chinese media reported that it received more than 550,000 comments during the one-month public solicitation period, a record for China’s legal system.

Revision’s four amendments are summarized below:

More Requirements to Establish Labor Dispatch Enterprise

Article 57 of the Labor Contract Law previously only required labor dispatch enterprises to be established in accordance with the Company Law of the People’s Republic of China, and have a registered capital of at least RMB 500,000. The Revision amends Article 57 to add additional conditions, such as an “appropriate” fixed place of business, and increases the required minimum registered capital to RMB 2,000,000.

Labor dispatch enterprises must also apply for an administrative license under the revised Labor Contract Law. No entities or individuals may engage in labor dispatch without this license.

Equal Pay for Equal Work Enhanced

According to Article 63 of the Labor Contract Law, dispatch workers have the right to enjoy the same pay as regular employees working in the same capacity. The Revision enhances Article 63 by requiring host companies to implement the same “labor remuneration allocation methods” for dispatch workers as those applicable to regular employees in the same position.

Further, the labor remuneration payable to dispatch workers as stated or agreed in labor contracts concluded between labor dispatch enterprises and host companies must conform to the revised Article 63.

Narrower Scope for Dispatch Labor

Prior to the Revision, Article 66 of the Labor Contract Law loosely provided that labor dispatch “normally” applied to temporary, auxiliary, or substitute positions, which were undefined.

The Revision amends Article 66 to state that labor dispatch employment can “only” be adopted for temporary, auxiliary, or substitute positions. These positions are now defined as follows:

  • Temporary: a position that will not exceed six months;
  • Auxiliary: a non-primary business position that provides service to a primary business position; and
  • Substitute: a position held by a dispatch worker on a substitute basis when the original employee cannot work due to full-time training, leave, or other reasons.

The revised Article 66 also requires host companies to ensure that their dispatch workers do not exceed a certain percentage of the total number of workers. This percentage will be released by the labor administration authority of the State Council (i.e., the Ministry of Human Resources and Social Security).

New and Higher Fines

Article 92 of the Labor Contract Law now includes forfeiture of illegal gains and fines for entities that engage in labor dispatch services without the license of up to five times their illegal gains. In the absence of illegal gains, such entities may incur a fine of no more than RMB 50,000.

The Revision also increases fines for labor dispatch enterprises and host companies that violate the Labor Contract Law and make no correction within the prescribed time to as much as RMB 10,000 per worker, up from 5,000 per worker.

Conclusion

  1. Current Contracts and Agreements: The Revision allows labor contracts and labor dispatch agreements legally concluded before December 28, 2012 to continue until they expire. However, such contracts and agreements must conform with the provisions of the Revision regarding remuneration allocation methods.
  2. ROs: The Revision does not specifically address ROs. It is unclear whether the new statutory dispatch positions apply to ROs as well, or whether ROs must also maintain a certain ratio of dispatch workers to total workers. Since ROs must use dispatch workers by legal necessity rather than choice, the Revision would place a great burden on these organizations if directly applied.