Article 27 of Interim Provisions on Labor Dispatch stipulates that “where an employer uses workers in the form of Labor Dispatch under the name of hire of work, outsourcing, etc., the provisions hereof will apply.” The so-called concept of “de facto labor dispatch” is derived from this article. There isn’t a definitive line in distinguishing outsourcing and labor dispatch in practice. Certain local regulations in Shanghai and Jiangsu do provide guidance, but not enough to be conclusive. It is imperative that we append supplemental materials in judicial documents after proper review.

Referencing 28 relevant cases, this article summarizes the key factors surrounding “de facto labor dispatch” by presenting statistics and corresponding analysis.

I. Executive Summary

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  1. The key factor in identifying de facto labor dispatch is direct employment management, based on which all relevant rulings are reached.
  2. That the contractee directly pays or authorizes the contractor to pay remuneration is indicative of high likeliness of “de facto labor dispatch”.
  3. As opposed to payment cycle, descriptions and calculation of contract costs are crucial factors to be considered in court.
  4. With labor dispatch license, a contractor could be construed as providing de facto labor dispatch service. But a contractor without labor dispatch license runs the risk of having “de facto employment relation” with workers.
  5. The cases to date fail to provide insight into if the contractor has to be equipped with a special license for contracting in special industries

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IV. Analysis of Each Key Factor

1. Primary Factor: Labor Management (Referenced in 100% of the cases)

In all of the 28 cases in question, labor management was referenced in distinguishing outsourcing and labor dispatch with no exception. Among these judgements, “de facto labor dispatch” has been concluded in 12 cases, in which the judges determine that the contractee directly managed and controlled the outsourcing workers. The characteristics of these judgments are listed as follows:

  • The form of direct labor management varies. In cases studied, the indicators of direct labor management includes: the number of positions and the right to decline employment are explicitly stipulated in the outsourcing contract; the contractee is responsible for arranging the tasks and working hours in its daily management; the contractee implements its internal policies, takes attendance, remunerates or penalizes the workers accordingly.
  • Standards to determine direct labor management vary from court to court. For instance, in some cases, the contractee was deemed as directly managing workers because of handing out staff manuals, weekly management meetings, or interviews at a location of the contractee’s choosing. However, in other cases, workers wearing working uniforms with contractee’s logo or carrying its staff proxy cards were not deemed as being directly managed by the contractee.
  • Risks could be reduced when “indirect” labor management is explicitly established in the outsourcing contract. For instance, the outsourcing contract by Foshan Institute of Traditional Chinese Medicine (“Foshan Institute”) explicitly states that Foshan Institute merely has the right to “suggest” the number of workers, job responsibilities, attendance, remuneration, dismissal, rewards and disciplinary actions, while the decision-making power and the enforcement for such suggestions rest in the contractor. Therefore, such situations shall be deemed as the true labor dispatch.
  • Actual fulfillment prevails over written contract in cases of not abiding by the contract. For instance, it is agreed that Qifeng Security Company, as the contractor, must appoint one project manager in charge of all managerial duties under the Security Contract with Nanjing Qifeng Electric Company. The court ruled that the workers are actually managed by the contractee rather than the project manager, thus rendering the mechanism as direct labor management.

2. The Payer of the Remuneration (Referenced in 53.6% of the cases)

Payer is deemed one of the deciding parameters in 15 caes out of all 28. Remuneration includes salary, social welfare and other benefits. Rulings on such matter pose the following characteristics:

  • In all of the 28 cases, determination of “de facto labor dispatch” is based on direct payment from the contractee to workers.
  • It is also risky when one or more authorized parties are involved in payroll distribution. The contractee was entrusted to distribute payroll in 15 cases. For instance, Hangzhou Hengzhao Labor Company authorized the contractee, Jinzhao Auto Company to pay the remuneration. There are also situations where the contractor authorizes the contractee to remunerate workers. For instance, in a Jiangsu case, the remuneration had been paid to Chengxiang Service by Shuangqian Company, and the workers obtained salaries in their untouched manner from Chengxiang Service. Both cases were ruled “de facto labor dispatch”.

3. Calculation of Contract Costs (Referenced in 39.3% of the Cases)

11 rulings out of all 28 clearly state that calculation of contract costs is the third most significant factor in determining nature of the contract and share the following characteristics:

  • Rulings tend to be unanimous in labor dispatch being paid based on the number of workers and outsourcing on quantity and quality of work.
  • There is a high risk for cases where labor cost is involved in the payroll structure or calculated per capita. The district court of Hangzhou Jianggan ruled the case in question “deviate from distributing payroll by preset workload, schedule or total project cost, but rather 300 yuan per person per month, thus categorized as labor dispatch.”
  • "De facto labor dispatch" was ruled out in cases where workload, service packaging or service product quantity was set in the contract in question.
  • None of the 28 cases took into account the cycle of payment. Only structure and calculation of payment were considered.

4. Labor Dispatch License (Referenced in 28.6% of the Cases)

Labor dispatch license were discussed in 8 out of all 28 cases as supplement to other factors. Worthy of notice are the following:

  • In 3 cases, the “de facto labor dispatch” has been determined when the contractor was holding a labor dispatch license when the outsourcing contract was concluded.
  • In 4 cases, “de facto labor dispatch” wasn’t established for contractors without a labor dispatch license. For instance, Shenzhen Intermediate People's Court ruled that “Yang Huiying (Contractor) runs an individually-owned business, and doesn’t meet the requirement that the dispatch institution is the corporate juridical person, thus considered outsourcing instead of labor dispatch.
  • In the last ruling, the court ruled out both of de facto labor dispatch relations and outsourcing and determined factual employment relations on the premise that the contractor was without a labor dispatch license.

5. Special Industry License (Referenced in 0% of the cases)

Prior to research, this article was aimed to discuss the supposition that a contractor needs to obtain a special industry license to conduct productive outsourcing. Otherwise it might be disqualified in outsourcing, increasing the risk of “de facto labor dispatch”.

Although the 28 cases span a variety of industries, such as manufacturing, food, tobacco, telecommunications, logistics, retailing, banking, medical institution, film-television industry, etc.. However, there are only two cases involving special industries from the perspective of specific outsourced positions, i.e., financial product sales and promotion in a bank and tobacco leaves selecting and processing in a tobacco company. However, in these two cases, the court didn’t consider a license in special industries the decisive barometer in making a conclusion.

That is to say, based on the available limited cases to date, we are still unable to test and verify the aforementioned supposition that the contractor must obtain a license in special industries so as to avoid being deemed to render “de facto labor dispatch” service.