The law on hiring workers in China is set for a shake up with new legislation on agency staff coming into force this summer. Many foreign companies operating in China will be familiar with Foreign Enterprise Service Company (FESCO) and similar agencies, but the days of relying on these bodies to provide an entire workforce are drawing to a close.

The National People's Congress passed an order (the Order) on 28 December 2012 which is due to come into force on 1 July 2013 and will amend the Employment Contract Law. The changes mean that there will be a limit on the circumstances under which employers can use agency workers and a cap on the percentage of the workforce that can be employed through agencies.

It remains to be seen how strictly the new rules will be enforced at a local level. However, the intent behind the Order is to ensure that the majority of Chinese employees are able to rely on a direct contract with their employer, even if that employer is a foreign entity. Once the Order comes into force, employers will be limited to hiring only a set percentage of their workforce through agencies. This percentage will be set at a regional level and draft rules for Guangdong province suggest the cap there will be 30%.

Unofficial estimates suggest that last year as many as 60 million workers in China were employed via agencies, making this a significant shift in the employment relationship for both foreign and Chinese entities.

All foreign companies employing agency staff in China should seek legal advice on the changes to the Employment Contract Law and the equal pay provisions contained in the Order, because failure to comply could prove costly.

Here are some of the key questions your business should consider before 1 July 2013:

How will the legislation impact on my business?

The new legislation will apply to all foreign companies operating through Joint Ventures (JVs) or Wholly Foreign Owned Entities (WFOEs) in China, but the position for firms operating through Representative Offices (ROs) remains unclear at this stage.

All ROs are currently required to employ Chinese staff through an agency, and the Order is silent as to what these latest amendments to the Employment Contract Law mean for them. The Supreme People's Court is reportedly considering a new guiding opinion on workplace disputes which would allow ROs to employ Chinese workers directly. But it seems that, for the moment at least, the Employment Contract Law and the amendments made in the Order will not apply to ROs.

Will employment rights for those who remain as agency workers change?

The new legislation requires employers to offer equal pay for equal work to all remaining agency workers and to bring their terms and conditions into line with full-time employees. In practice, this is likely to lead to some confusion because there is no definition of "equal work" in the Order. However, the purpose of the legislation is clearly to encourage equal treatment of agency workers along similar lines to UK and EU legislation.

Breach of the Order's equal pay provisions can lead to fines of up to 10,000 RMB per worker and the courts can require employers to make up any shortfall in wages caused by the inequality in pay.

The Order also contains provisions requiring any agreements between employers and agencies entered into before 28 December 2012 to be amended to comply with the equal pay requirement for all agency staff.

Which types of worker can still be employed through agencies?

Most workers will need to be moved to direct employment contracts once the Order comes into force, but there will still be provision for agency staff to be used in three limited categories. The only workers who should be hired through agencies are:

  1. Temporary: defined as "a position which will not exceed six months".
  2. Auxiliary: defined as "a non-primary business position aiming to provide services to the primary business positions".
  3. Substitute: defined as "a position where the worker of the employing unit cannot work for a given period due to full-time study, vocation or other reasons and is to be substituted by a dispatched worker".

The definitions under the Order (particularly that of auxiliary worker), are fairly broad and employers may initially have some discretion when it comes to categorising their workforce. However, the cap on the percentage of the workforce that can be employed via agencies is likely to disrupt the status quo and lead to increased use of direct employment contracts with Chinese staff.

What are the penalties if the new legislation is breached?

The penalties for failure to comply with the Order are strict, and for larger employers the cost could spiral depending on the number of workers being employed. As well as having to rectify the pay and terms of any agency workers not given equal pay for equal work, the employer will be liable for a fine of up to 10,000 RMB per worker for any breach of the Order or inaccurate classification of a member of staff as an agency worker. The employer and employment agency will also be jointly and severally liable for any "damage" to an agency worker. This will allow the individual to pursue either party in the event of a workplace accident, personal injury or any other loss suffered through their employment.

What steps should you take to comply and what are the deadlines?

  • Start assessing your workforce now because the Order will come in to force on 1 July 2013. Any jobs that do not fit into one of the three categories outlined above will have to be staffed by full-time workers. Agency staff must not make up any more than the maximum percentage of the workforce specified by the State Council Labour Department for the region. Where possible, employers should look to enter into full-time employment contracts with staff they wish to employ for longer than six months.
  • Make sure you classify agency workers in accordance with the descriptions outlined above. Agency staff kept on for more than six months or wrongly classified as auxiliary or substitute workers may succeed in claiming de facto full-time employee status. This means the employee can claim double salary for the period of work not covered by a written employment contract and pursue their employer for other lost benefits such as holiday pay and minimum wage. It will be for the employer, not the agency, to prove these employees are legitimate agency workers. This is an area where employment disputes are likely to arise.
  • Review your current agreements with employment agencies. While arrangements that pre-date 28 December 2012 will remain lawful (subject to the requirement for agency workers to receive equal pay for equal work), the dispatch terms used must not exceed six months. It may be necessary to renegotiate the terms of these arrangements. It is also essential that companies carry out checks on the employment agency they plan to use. If the agency is unlicensed or does not comply with the requirements set down in the Order (i.e. that it must have a registered capital of 2,000,000 RMB, a fixed place of business and comply with all administrative regulations for operating an employment agency) then the arrangement could be found unlawful and your company could be fined.
  • Check the terms and conditions currently offered to each agency worker and ensure that they are being given equal pay comparable to full-time employees (or if there are no full-time employees then comparable to a full-time employee operating in the same trade in the same region). If there are any disparities, then those workers must be given equal pay and conditions (even if they are to remain as agency workers after 1 July 2013). Otherwise, the employer is likely to face legal action from the workers and fines from the government.