On December 28, 2012, the Standing Committee of the National People’s Congress issued a Decision on Amending the Labor Contract Law of the People’s Republic of China (the “Amendments”), which will come into effect on July 1, 2013. This is the first amendment to the Labor Contract Law since it was issued on January 1, 2008 (“Original Labor Contract Law”).

The Amendments primarily address the labor dispatch system under which labor dispatch companies assign or dispatch their employees to third-party entities (“receiving entities”). Since the introduction of the Original Labor Contract Law, many companies in China, including foreign-invested enterprises, have increased their use of dispatched employees so as to minimize the impact of some of the employee-friendly provisions of the Original Labor Contract Law. This perceived abuse of the labor dispatch system has been addressed in four main ways:

  1. Higher requirements for conducting labor dispatch business

Under the Original Labor Contract Law, the registered capital of a labor dispatch service provider must be no less than RMB500,000. The Amendments have raised the threshold for market entry requiring a labor dispatch company to:

  • have a registered capital of no less than RMB2,000,000;
  • have fixed business premises and facilities that are fit for conducting business;
  • have a management system on labor dispatch that is compliant with the laws and administrative regulations; and
  • meet other conditions stipulated by the laws and administrative regulations.

In addition, the Amendments provide that an administrative license should be obtained for conducting labor dispatch business, and a company can only complete the relevant company registration after obtaining such a license.

  1. Equal pay for equal work

The Original Labor Contract Law already stipulated a principle of “equal pay for equal work” for the compensation to dispatched employees. To further improve the protection of dispatched employees, the Amendments specify that a receiving entity must apply the same compensation distribution method for dispatched employees as for regular employees.

  1. Stricter and clearer restrictions in use of labor dispatch services

The Amendments clarify that use of labor in the form of labor contract is the basic form of labor use, while use of labor in the form of labor dispatch is only a supplemental form. The Original Labor Contract Law provided that labor dispatch “is generally” used for temporary, ancillary or alternative positions. The Amendments emphasize that labor dispatch “can only” be used for such positions and set out narrow definitions of “temporary,” “ancillary” and “alternative” positions. The Amendments also provide that a receiving entity should strictly control the number of dispatched employees not to exceed a certain percentage of the total number of its employees. The percentage will be separately stipulated by the labor administrative department of the State Council.

  1. More severe penalties

The Amendments have increased the penalties that may be imposed on both labor dispatch companies and receiving entities for violation of the Labor Contract Law.

Implementation of the Amendments

  1. Revision of labor contracts and labor dispatch agreements

Labor contracts and labor dispatch agreements entered into before issuance of the Amendments can be performed until their expiration; however, they should be revised according to the Amendments if such contracts and agreements do not comply with the requirement that the same compensation distribution method be applied for dispatched employees and regular employees in the similar positions.

  1. Application for the administrative license for conducting labor dispatch business

A company that conducted labor dispatch business before implementation of the Amendments and wishes to continue conducting such business shall obtain an administrative license and complete company alteration registration within a year from the date of implementation of the Amendments. The specific measures are to be stipulated by the labor administrative department of the State Council and the relevant departments of the State Council.