On December 28, 2012, certain amendments to the China Labor Contract Law were adopted by the National People’s Congress, which will take effect on July 1, 2013. The purpose of these amendments is to tighten the loopholes regarding the use of labor dispatch. 

In China, labor dispatch, also known as labor outsourcing, is a form of employment arrangement where an individual signs an employment agreement with a labor dispatch agency (such as FESCO  -- Foreign Enterprise Human Resources Service Co., Ltd.) and is then dispatched to work in a third company, which is the hosting company or the real employer.  Under the current Labor Contract Law, a dispatched employee shall be assigned to a temporary, ancillary or replaceable position. However, no specific definition is provided to address what constitutes a temporary, ancillary or replaceable position.  As generally known, when the current Labor Contract Law was enacted in 2008, it was to provide more effective and better protection to workers.  For instance, it requires  a written labor contract with any employee and imposes a penalty of double salary for failure to comply therewith.  It allows, for example, a maximum of two consecutive fixed term labor contracts with any individual employee and thereafter, a open-term contract must be signed should the employee desire to keep such employee.  A maximum of 6 months is allowed for probation.  Severance payments are required in most termination situations.  An employment is required to provide a comprehensive insurance package to its employees, including  endowment insurance, medical insurance, unemployment insurance, work-related injury insurance, childbirth insurance and housing funds.  As such, many companies, especially foreign companies, take advantage of the dispatch arrangement to get around their legal obligations that they would otherwise face as an employer under the Labor Contract Law.  According to some statistics, there are as many as 60 million dispatched workers in China, accounting for 20% of all urban employees, and long-term labor dispatch arrangements are seen in a wide variety of positions. Concerned with the widespread “abuse” of the labor dispatch arrangement, the government enacted certain amendments.  Highlights of the amendments include:

  • The amendments emphasize that labor dispatch may be used only for “temporary, ancillary or replaceable” positions.  As defined in the amendments, a “temporary” position means a position that will not exceed six months; an “ancillary” position means a position that is meant to provide a supporting role to the employer’s primary business functions; and a “replaceable” position means one which provides temporary replacement cover for another employee who is away on vacation or on leave. 
  • A dispatched worker is entitled to equal pay for equal work.  In other words, they shall receive the same compensation, including basic salary, bonuses, subsidies and allowances, as received by regular employees.  Article 63 of the Labor Contract Law, as revised, requires employers to implement the same “labor remuneration allocation mechanisms” for dispatched workers as those applied to regular employees in the same positions.
  • The total number of dispatched workers in a hosting company shall not exceed a certain percentage of the total number of workers.  The exact percentage is to be set by the Ministry of Human Resources and Social Security.
  • More severe penalty is imposed for employers attempting to get around the requirements.  Failure to comply could result in fines between RMB5,000 to RMB10,000 per worker.
  • There are also new restrictions for labor dispatching agencies, which are required, among other things, to have registered capital of at least RMB2 million (as opposed to merely RMB500,000 under the current law). 

The amendments includes a grandfather provision, allowing an existing labor dispatch agreement that was executed before December 28, 2012 to remain in force until it expires, provided however, that it must comply with the equal pay for equal work principle mentioned above.  Companies that currently engage dispatched workers are advised to make preparations for an adequate transition in their employment strategies in order to comply with the new amendments.  The most common solution probably would be to convert those some of those dispatched workers to a direct hire.  Representative offices will not be affected by the new amendments, which by law cannot hire employees directly.