LABOR DISPATCH/SECONDMENT NEWS
July 2014 China Bulletin

The Ministry of Human Resources and Social Security (MOHRSS) issued the Regulations on Labor Dispatch, effective from March 1, 2014 (Dispatch Regulations), providing helpful clarifications to the 2012 revisions to the Employment Contract Law (ECL) (see Secondment/Dispatch Rules Amended, Jan.-Feb. 2013 China Bulletin). These regulations were motivated in substantial part by a perception that labor dispatch arrangements, popular with employers, are an end-run around the employee protections in China’s labor laws. When fully implemented, the Dispatch Regulations will severely curtail the use of dispatch arrangements, limiting them to no more than 10% of a company’s workforce. Employers that currently exceed this limit must reduce their secondees to 10% within two years of the effective date of the regulation, i.e. by March 1, 2016. Several local authorities have issued detailed measures – Beijing municipality, which led the way, requires employers to submit a plan by August 31, 2014 to meet the March 1, 2016 deadline.

“Labor Dispatch” refers to an arrangement where a labor dispatch agency in China, such as FESCO or CIIC, hires local employeesand then seconds them to a host company (Employer) wishing to use the secondees services under the terms of a Labor Dispatch Contract. The dispatched secondees function much like regular employees, except that they remain formally employed by the agency. The Employer pays a dispatch fee to the agency, and, in the past, could return secondees to the agency as the Employer’s business needs changed. Please refer to Secondment/Dispatch Rules Amended, Jan.-Feb. 2013 China Bulletin for background.

The Dispatch Regulations clarify labor dispatch articles in the 2008 ECL and revisions to those articles in 2012. In addition to mandating a 10% cap on dispatched secondees, key clarifications in the Dispatch Regulations include the following:

  1. They further define “temporary, auxiliary and substitute” positions. Auxiliary positions have proven the most difficult to capture in words. Article 3 of the Dispatch Regulations resolves the problem by requiring employers to identify them through consultation with all the employees and their representatives or the trade union, essentially the same procedure as the so-called “democratic” process for issuing employee rules that is set out in Article 4 of the ECL.
  2. They specify the minimum contents of a labor dispatch contract and clarify allocation of responsibilities between the “employer” (company using dispatched secondees) and labor dispatch agency. For example, Article 8 requires the agency to pay labor remuneration and benefits required by law, while Article 9 also requires the employer to pay such benefits. In practice, the dispatch contract provided by the agency typically shifts the costs of all benefits to the employer.
  3. Article 12 of the Dispatch Regulations sets out circumstances under which an employer may return a secondee to the labor dispatch agency, but lists only certain circumstances provided for under the labor law, as well as bankruptcy or dissolution of the employer. Notably absent is a right to return an employee at will, thus eliminating an important advantage of a labor dispatch arrangement. Curiously, Article 12 does not include dismissal for cause (Article 39 of the ECL) or incompetency or non-work related injuries or ills (paragraphs 1 and 2 of Article 40 of the ECL), although it does include a substantial change in objective situation (paragraph 3 of Article 40). Presumably an employee may be dismissed for cause in any case and non-work-related injuries must be dealt with in the labor dispatch contract.
  4. Article 12 of the Dispatch Regulations do permit return of an employee if the Labor Dispatch Contract expires and is not renewed, but this exception is quite limited. Notably it does not apply to termination of the Labor Dispatch Contract, and would only be available on expiration if the employer no longer wishes to use any secondees dispatched by the agency.
  5. Article 13 expressly prohibits return of a secondee falling under Article 42 of the ECL, i.e., suffering from a work-related injury or disease, a pregnant employee or an employee who has worked for the employer for 15 years or is within 5 years of retirement.
  6. Provisions in the draft Dispatch Regulations would have confirmed that a de facto employment relationship between an employer and secondee if the employer did not comply with Dispatch Regulations, e.g., exceed the 10% limit or returned secondees improperly. The consequences of such relationship would be substantial – if no employment contract is signed, the secondee could claim double wages for each month of work after the first (Article 82 of the ECL), and if the arrangement continued more than one year, the employer would be deemed to have entered into an open term (iron-rice bowl-type) contract (Article 14 of the ECL) with the secondee. Those provisions were deleted from the final version, and the penalty for noncompliance appears to be limited to an order from the local counterpart of MOHRSS, and a fine up to RMB 10,00o per employee for failure to comply. However, failure to have an effective contract in place for more than a year will still create an open term contract, which cannot be terminated by entering into a subsequent Labor Dispatch Contract.
  7. In most cities, other than Shanghai, a directly hired employee must be offered an open term contract (i.e., an “iron rice bowl-type contract without a fixed term that cannot be terminated except under circumstances specified by statute) at the expiration his/her second fixed term. Article 5 of the Dispatch Regulations, like Article 58 of the ECL, does not address this issue but merely requires the dispatch agency to enter into an underlying contract with a proposed secondee of at least two years’ duration. It is not clear if the secondee must be offered an open term contract at the end of his/her second term with the agency or the employer or not offered one.
  8. Representative offices of foreign companies in China are expressly exempted from the 10% limitation.

While there is little doubt that dispatch arrangements have been abused, e.g., paying dispatched secondees less than long-term staff, they also serve a very useful function. They enable companies with expertise in research, production or distribution to offload their HR functions and responsibilities, which they may have little interest or skill in handling, and focus on their core competency where they can deliver the greatest value to their customers, their shareholders and society as a whole. Rather than confining requirements on companies to equal pay, safe working conditions and similar issues, the drafters of the Dispatch Regulations and ECL revisions seem intent to prevent employers employers from offloading responsibility for HR on experts in the field and third party providers such as insurance companies.

Because of the resulting inefficiencies, employers will doubtless look for other solutions in order to be competitive. If dispatch arrangements are not available, then outsourcing may be an option. In an outsourcing arrangement, the supplier provides services for a fee rather than seconding employees. Outsourcing poses challenges, however, such as maintaining confidentiality, quality control and employee morale. Further, it may be difficult to attract desirable employees, such as qualified professionals and experts in the filed, if they realize they will be sent to work for a third party service provider offsite. And certain jobs simply have to be performed on site.

We will continue to monitor this area and report developments.

Questions? Please contact Allan Marson at china.desk@ishimarulaw.com or +1 408-738-0592 #719 for a complimentary consultation.