Background
Important changes
Takeaway points


On December 28 2012 the Standing Committee of the National People's Congress finally passed an amendment to the Employment Contract Law, under which companies will no longer be allowed to hire staff through staffing agencies (eg, the Foreign Enterprise Service Corporation, the China International Intellectech Corporation and China Start), except under very narrow circumstances. The amendments will take effect on July 1 2013.

Background

Before the original enactment of the law on January 1 2008, many employees had no written employment contracts and thus little legal protection. The original legislative intent of the law was to have as many employees as possible sign direct employment contracts with companies, since this would provide employees with greater legal protection and reduce the risk of abuse of their legal rights.

However, since the law's relevant section on labour dispatch was vaguely worded and included no penalty for the misuse of labour dispatch arrangements, the number of staff hired through labour dispatch arrangements conversely increased in an apparent attempt to reduce payroll costs and employer liabilities (as well as to circumvent headcount restrictions imposed by company headquarters). According to reports in the official Chinese media, the number of staff engaged through labour dispatch arrangements significantly increased to the officially reported figure of 37 million in 2011 (although some unconfirmed reports suggested that the figure could be as high as 60 million). Even if only a fraction of these staff will have to be switched to direct employment or laid off as a result of the new law, this will be a significant undertaking for the economy and the society at large.

Important changes

The newly amended law introduces the following provisions:

  • Companies should hire most employees directly and use labour dispatch only for temporary, auxiliary and substitute job positions. The original law stated only that labour dispatch should "generally" be used for such job positions.
  • The amended law now provides definitions of three crucial terms:
    • A 'temporary' job position is defined as one in which the person is hired for a consecutive period of no more than six months.
    • An 'auxiliary' position is defined as one in which staff engaging in a company's non-core business provide services to those involved in the core business.
    • A 'substitute' position is defined as one in which staff are hired temporarily to replace employees who leave work for a fixed period of time to study or for other reasons.
  • Host companies will be limited to hiring only a certain number or percentage of their workforce through labour dispatch, although the exact threshold will be specified in later regulations issued by the Ministry of Human Resources and Social Security. As an indication, under draft Guangdong rules, no more than 30% of the total workforce may be hired through agencies.
  • Legally hired dispatch staff must be paid the same compensation as directly hired employees in the same position.
  • If host companies violate the provisions governing labour dispatch, they can be fined up to Rmb10,000 (double the previous fine) for each staff member hired through labour dispatch. Under the amended law, hiring dispatched staff outside the allowable scope would now more clearly be subject to this fine.
  • Companies wishing to engage in labour dispatch must now obtain a special licence from the local labour bureau and the capital requirements have been increased fourfold to Rmb2 million. If a company engages in labour dispatch services without such a licence, it risks fines of up to five times the amount of illegally generated income or of Rmb50,000 if no such illegal income has been generated. Previously, potential fines had been much lower.

Takeaway points

Companies should note the following points when determining how these changes may affect their human resources structures in China:

  • Companies should analyse all positions staffed with dispatch staff and may have to offer direct employment contracts to some or all dispatch staff.
  • Companies should check whether the staffing agency is properly licensed; otherwise, the hiring of staff through that agency may be deemed unlawful and the host company may potentially be subject to the above-mentioned fines.
  • There is a risk that dispatch staff may potentially claim de facto employment with the host company if the host company cannot prove that their positions permit dispatch. Certain draft and existing local regulations already provide for this course of action.
  • For temporary positions (which are now limited to six months), companies should renegotiate their service contracts with staffing agencies that traditionally insisted on two-year dispatch terms.
  • Companies should pay attention to local developments in this area, since absolute limits on the use of dispatch staff and potentially other terms and conditions are regulated at the local level.
  • The amended law is silent on representative offices. At present, representative offices are required by law to hire all Chinese staff through a staffing agency and the new restrictions on labour dispatch therefore assumedly will not and cannot apply to representative offices.

It remains to be seen whether the local labour bureaus and the courts will enforce the new rules. Implementing regulations governing the licensing requirements of staffing agencies will need to be drafted, as will regulations placing absolute limits on the use of labour dispatch arrangements. Some of the terms used in the amended Employment Contract Law are vague, and transitional and grandfathering rules also leave room for interpretation. Since the stakes are high for host companies, staffing agencies, millions of employees and all levels of government alike, it is likely that labour dispatch will continue to be a battlefield for some time.

For further information on this topic please contact Andreas Lauffs or Jonathan Isaacs at Baker & McKenzie's Hong Kong office by telephone (+852 2846 1888), fax (+852 2845 0476) or email (andreas.lauffs@bakermckenzie.com or jonathan.isaacs@bakermckenzie.com).