The amendments to PRC Labor Contract Law (“Amendments”) passed by the Standing Committee of the National People’s Congress on December 28, 2012, will become effective as of July 1, 2013. The Amendments impose tighter restrictions on labor dispatching and require employers to hire the majority of their employees directly by entering into labor contracts, rather than through third party labor dispatching arrangements. The intent of the Amendments is to better protect the interests of dispatched employees, and they will have significant impact on employment arrangements of many foreign invested enterprises in China.

Employment Arrangements Under Previous Labor Contract Law

According to the previous PRC Labor Contract Law, which was promulgated five years ago, there are two forms of employment. The most common one is direct employment of staff through labor contracts between the employees and the ultimate employer. The other is labor dispatching under which an employee enters into a labor contract with a labor dispatch agency and is then dispatched to work for the ultimate employer pursuant to a service contract between the labor dispatch agency and the employer.

The distinguishing feature of a labor dispatching arrangement is that there is no labor relationship between the ultimate full-time employer and the employees, even though employees work for the ultimate employer as opposed to the labor dispatch agency. Under PRC laws, a labor relationship is different from other civil relationships and is subject to special rules relating to establishment, termination, dispute resolution and other matters. In fact, the major reason why many foreign invested enterprises prefer to adopt labor dispatching arrangements to hire employees is because they do not want to handle the complicated labor relationship with their employees. Other benefits of labor dispatching arrangements include:

  • Savings in local HR manpower and cost because the labor dispatching agency will handle the payroll, social insurance, income tax return and other employment matters;
  • Reducing the parent company’s cost of hiring because dispatched employees are not deemed as regular employees and therefore are often omitted from company’s global head count.

Restrictions on Labor Dispatching Under Amended Labor Contract Law

While most foreign invested enterprises that adopt labor dispatching arrangements treat their dispatched employees the same as regular employees, labor dispatching has been abused by many Chinese companies as a means of avoiding the employer’s responsibilities under the labor relationship created by labor contracts, such as severance payment, social insurance payment and compensation for work-related injuries.

To tackle the excessive use of labor dispatching arrangements, the Amendments emphasize that hiring employees by entering into a labor contract is the basic form of employment, and a labor dispatching arrangement is a supplementary form which can only be used for “temporary,” “auxiliary ” or “substitute” positions. The Amendments define such terms as follows:

  • “Temporary” means a position with a term of less than six (6) months;
  • “Auxiliary” means a non-core business position that provides services for the core business of the employer;
  • “Substitute” means a position that can be temporarily replaced with a dispatched employee for the period that a regular employee is away from work for vacation, study or for other reasons.

The Amendments further restrict the use of labor dispatching by providing that the number of dispatched employees of a company shall not exceed a certain percentage of its employee head count. While the Ministry of Labor and Social Security has not yet issued its notice specifying of such percentage, it is very likely to be as low as 5% to 10%. However, it is worth to noting that such limitation on the percentage of dispatched employees does not apply to the foreign company’s representative office in China because a representative office is not allowed to hire employees directly in China.

Other Amendments

Higher Thresholds for Labor Dispatch Agencies

The Amendments heighten the requirements for establishing a labor dispatch agency. The new requirements include:

  • Having a minimum registered capital of no less than RMB 2 million (previously only RMB 500,000);
  • Having a proper permanent place of business with facilities to carry out its business;
  • Having a internal dispatch rules that are in compliance with relevant laws and regulations;
  • Having an administrative permit for engaging in the labor dispatching business.

Equal Pay for Equal Work

The Amendments add a “equal pay for equal work” rule which requires the employers to compensate dispatched employees in the same manner as direct-hire employees who hold similar positions.

Tougher Penalties

Compared with the current Labor Contract Law, the Amendments impose tougher penalties on both the labor dispatching agencies and the employers. If an employer or a labor dispatching agency is found to be in violation of the amended Labor Contract Law, and has failed to rectify the violation within the specified time period, it will be fined in the range of RMB 5,000 to RMB 10,000 per dispatched employee (the previous penalty per employee was RMB 1,000 to RMB 5,000). In addition, the business license of the labor dispatching agency may be revoked, and the employer and the labor dispatching agency may be held jointly and severally liable for relevant loss suffered by the dispatched employees with no statutory limit.

Conclusion

How strictly the amended Labor Contact Law will be enforced in practice remains to be seen. While labor dispatching arrangements entered into before December 28, 2012, will not be affected (provided that any provision inconsistent with “equal pay for equal work” rule is revised to comply with the new requirement), foreign invested enterprises that currently rely on labor dispatching must be prepared to going forward adjust their employment strategies in China to ensure compliance with the amended Labor Contract Law.