This Client Alert is a follow-up to the Alert dated February 25, 2014. It contains the third and final set of compliance tips regarding the Interim Regulation on Labor Dispatch (“Regulation”), which came into effect on March 1, 2014.

This article focuses on the following issues:

  1. Return of Dispatched Employees

According to the Labor Contract Law of the People’s Republic of China (“Labor Contract Law”), enterprises receiving labor dispatch (“Employers”) are allowed to return dispatched employees to the staffing agency in certain circumstances, such as an employee’s material violation of the Employer’s rules and regulations. Based on the existing provisions of the Labor Contract Law, the Regulation contains four specific circumstances in which dispatched employees can be returned. These circumstances are where:

  1. there is a major change of objective circumstance;
  2. a mass lay-off occurs;
  3. the Employer loses its operation capability (e.g., its business license is revoked); or
  4. the dispatching agreement (“Dispatching Agreement”) expires.

However, if any circumstances as outlined in Article 42 of the Labor Contract Law arise (e.g., if a female employee is pregnant), Employers may not return the dispatched employee for reasons (1), (2) or (4) above until the circumstances have ended or have been resolved.

Return of employees based on the four circumstances outlined above already exists in practice, however, the Regulation now makes it a statutory right of the Employer to return dispatched employees in the circumstances specified. This may help Employers avoid unnecessary disputes.

  1. Termination of Labor Contract under Labor Dispatch

Importantly, the Regulation stipulates that if the dispatched employee is returned in any of the four circumstances listed above, the staffing agency cannot terminate the employee unless:

  1. the employee refuses to be dispatched to a new Employer in circumstances where the existing conditions of the labor contract are maintained or improved; or 
  2. the employee proposes to terminate the labor contract when the conditions of the contract are degraded. This circumstance deviates from the current practice under which consent from the employee will suffice for termination. It seems that the Regulation has provided a more restrictive requirement for termination in this situation. While confirmation by local authorities on this issue is expected, the position is yet to be announced.
  1. End of Labor Contract under Labor Dispatch

According to the Regulation, if a staffing agency loses its ability to operate as a business (e.g., its business license is revoked), the labor contract with the dispatched employee will end. This is consistent with the position under the Labor Contract Law, however, the Regulation further provides that, in this situation, the Employer and the staffing agency must negotiate and properly arrange placement for the dispatched employee.

To avoid the burden of employee placement, Employers are encouraged to conduct due diligence regarding the staffing agency’s qualifications, the terms of its business license and financial status before concluding an agreement. Both parties should clearly agree on the placement of the dispatched employees in the above circumstances.

  1. Labor Dispatch and Outsourcing

Given the strict restrictions on labor dispatch, outsourcing can be an effective alternative, however, from March 1, 2014, certain kinds of outsourcing may create a compliance risk. Any outsourcing involving labor dispatch is subject to the provisions of the Regulation. Notwithstanding this, the law does not currently provide a standard for distinguishing between outsourcing and labor dispatch. Therefore, ensuring that outsourcing is not recognized as labor dispatch is a key issue for employers.

The following guidelines can be used to distinguish outsourcing from labor dispatch:

  1. Note with Whom the Contract is Signed.  Normally, in outsourcing arrangements, the contract is signed with a certain service or manufacturing company depending on what is being provided (e.g., with an IT company if certain IT work is outsourced). In labor dispatch arrangements however, the contract is signed with qualified staffing agencies such as FESCO; 
  2. The Parties Involved.  In outsourcing arrangements there are only two parties involved: the company and the service provider. In labor dispatch arrangements however, there are three parties involved: the Employer, the staffing agency and the dispatched employee; and
  3. The Contents of the Contract.  An outsourcing contract focuses on the completion of specific service(s) and will not address employment issues. A contract for labor dispatch however, focuses on the use of the dispatched employee and contains employment-related clauses, such as payment of salary, working conditions, social insurance contributions, etc.

Employers must correctly distinguish outsourcing from labor dispatch. If there is any outsourcing in use that may be recognized as labor dispatch, adjustments should be made as soon as possible.

  1. Legal Liability

Employers conducting unlawful returns or outsourcing will be ordered to make rectification and are subject to a fine up to RMB 10,000 for each dispatched employee. Any loss caused to the dispatched employee is the responsibility of the Employer and the staffing agency jointly and severally.

For unlawful termination and end of labor contracts, reinstatement of employment will be ordered by the relevant authorities. If the employee does not request reinstatement or if reinstatement is not feasible, the staffing agency will be obliged to pay two times the severance pay according to law.