SECONDMENT/DISPATCH RULES LAW AMENDED
January-February 2013 China Bulletin

The Employment Contract Law (ECL) was revised on December 28, 2012, with effect from July 1, 2013, to restrict employers’ use of secondees, a widespread practice in China, by 1) clarifying that “temporary” means no more than six months, 2) limiting “substitute” secondments to periods of time when another employee is unable to work or is on leave, and 3) defining “auxiliary” to mean not engaged in the employer’s principal business (see June China Bulletin). As revised, the ECL now expressly states that the number of seconded employees an employer uses may not exceed a “certain percentage” of its total labor force. The specific percentage is not stated.

Local jurisdictions, including Guangdong, Chongqing and Shanghai, have also issued regulations or draft regulations to regulate secondment. Local regulations apply to the extent they do not conflict with national regulations.

BACKGROUND OF LOCAL SECONDMENT (LABOR DISPATCH)

Secondment of local employees in the context of China’s employment regime is referred to as “labor dispatch”. The current labor dispatch system originated in seconding local Chinese personnel to foreign enterprises operating in China. Representative offices of foreign companies were (and still are) required to use personnel seconded by authorized labor dispatch agencies. The earliest, and still most well-know, dispatch agency was the Foreign Enterprise Human Recourses Co. (FESCO).

Under a typical labor dispatch arrangement, an individual signed a labor contract with a dispatch agency, such as FESCO, becoming a direct employee of that agency. FESCO and a representative office desiring the individual’s services signed a separate labor dispatch contract under which FESCO dispatched (seconded) the employee to the representative office for a certain term.

Dispatched secondees could be “returned” to the labor dispatch agency at the end of the dispatch term or when no longer needed, subject to conditions agreed by the agency and representative office. To “return” a secondee was tantamount to dismissal from the representative office’s point of view – he/she remained employed by the dispatch agency, but the representative office had no further responsibility for him/her. If a secondee were returned, the agency in theory would seek a new job placement for him/her. In practice, the representative office itself had usually located the individual in the first place, and the agency typically had no other job for him/her. However, a returned secondee remained an employee of the agency, which was obligated by law to provide a salary (at the minimum wage rate) until other employment could be found or, alternatively, pay severance if the individual resigned or could be dismissed.

To cover this obligation, the labor dispatch agencies drafted their standard dispatch contracts to require representative offices compensate their potential costs for returned secondees. In effect, the agencies shifted their costs to the representative offices. In addition to limiting their exposure, it enabled them to charge relatively modest fees for their services. Nominally, the agencies also provided certain additional assistance, such as support in the event of a dispute, but such assistance tended to be quite limited and they seldom interfered with employment management. In practice, the arrangement functioned much like a direct hire with certain administrative functions outsourced to the dispatch agency and a right to return the secondee to the agency under agreed circumstances.

The original labor dispatch system underwent a transformation in response to major reforms of over-staffed state-owned enterprises in the 1990s. The reforms aimed to staunch the enterprises’ economic losses stemming from the “iron rice-bowl” system of guaranteed employment, and they resulted in the enterprises furloughing or laying-off workers large numbers of redundant employees. After 2002, some state-owned enterprises also began to replace employees performing needed functions with dispatched employees. The enterprises in effect were offloading their former responsibilities to their employees to the dispatch agencies and negotiating flexible provisions to “return” dispatched secondees if their staffing needs changed. It was an end-run around the requirements of iron rice-bowl employee system.

Locally owned private companies also began using secondees provided by labor dispatch agencies to better manage their workforce, and foreign-owned companies quickly followed their lead. Unlike foreign representative offices, foreign-owned companies are not required to use dispatched employees, but many came to view the dispatch arrangement as a useful extension in China of the comprehensive labor secondment/outsourcing services provided by international human resources firms in other countries. Such services can substantially increase a company’s efficiency by allowing it to divest itself of complex administrative and employment compliance functions, reduce human resources-related staff, and focus on its core business where its expertise lies.

Labor dispatch agencies adapted and grew their business models to meet these needs. Their numbers increased to over 26,000 by 2005, although not all of them had received formal approval from the relevant labor departments. Foreign-owned enterprises in China came to rely heavily on employees seconded by labor dispatch agencies. For example, in 2005 their numbers reportedly reached 85% of the staff of wholly foreign-owned enterprises in the Suzhou Industrial Park.

The widespread use of dipatched secondees by both local and foreign-invested companies caused widespread concern. The drafters of the original ECL (effective January 1, 2008) included a section addressing labor dispatch in Articles 57 to 67. They recognized dispatch arrangements as legitimate, but limited their use to “auxiliary, temporary and substitute” positions. However, they set no limit on the percentage or number of dispatched secondees, and many employers, with the support of the dispatch agencies, took the 2008 ECL as a green light to expand their use, and the number of dispatched secondees began to grow rapidly.

By 2011, according to a report released by the all-China Federation of Trade Unions, labor dispatch agencies provided an estimated 60 million employees to businesses and organizations in China. The benefits of using dispatched/seconded employees included cost-savings (seconded employees are typically paid less, sometimes substantially less, than directly hired employees for the same work), greater ease in terminating the employment relationship (China is not an at-will employment jurisdiction), and meeting certain corporate goals, such as keeping headcount low. However, given provisions in Chinese law requiring equal pay for equal work and prohibiting lay-offs except on limited statutory grounds (e.g., “for-cause” terminations), the widespread use of dispatch arrangements was widely viewed as an end-run around China’s labor protection regime.

Abuses were in fact reported in the press such as the “voluntary resignation” of 7,000 employees at Huawei, many of whom were reportedly rehired as dispatched secondees. Huawei was not alone. Similar maneuvers by other employers around the same time reportedly led to replacement of large numbers of regular employees with dispatched secondees. This increasing use of dispatched secondees was criticized not only for taking advantage of working personnel, but also as politically destabilizing.

NEW REVISIONS TO ECL

In view of these issues, the Standing Committee of the National People’s Congress amended the ECL, effective July 1, 2013, including key revisions regarding labor dispatch:

  1. The Committee added an express statement that dispatched employees are intended to be a supplementary form of employment. The fundamental form of employment is direct hire.
  2. They deleted the qualifier “generally” from “labor dispatch services shall generally be used for temporary, auxiliary or substitute positions” in Article 66 and added definitions of these terms:
    ◦   “Temporary” positions are limited to no more than six months duration.
    ◦   “Auxiliary” positions are limited to personnel in non-core positions who provide services to personnel in core positions.
    ◦   “Substitute” positions are limited to personnel hired to replace employees who leave work temporarily for a fixed period for study, leave or other reasons.
  3. They limited an enterprise to using no more than a certain percentage of employees seconded by labor dispatch agencies. The Ministry of Human Resources and Social Security (MOHRSS) will specify the percentage by regulation in the future. As possible guidance, local regulations in Guangdong currently limit dispatched employees to no more than 30 percent of an employer’s total workforce.
  4. The amendments clarify that the principle of “equal pay for equal work” requires that dispatched employees and directly hired employees doing the same job should receive the same pay. If no comparable is available within the enterprise, reference must be made to the same or similar positions in the locality where the enterprise is located.
  5. The Committee doubled the maximum fine that may be imposed on an employer who violates rules regarding dispatched labor to RMB 10,000 per employee.
  6. Labor dispatch agencies must be licensed by the local labor authority and their minimum required registered capital was quadrupled to RMB 2 million. Fines for an agency that does not have a license were increased substantially to five times the amount of illegal income derived from its activities or RMB 50,000, if such income cannot be determined.

STEPS FOR EMPLOYERS IN CHINA

Foreign companies operating through subsidiaries in China should of course adapt their practices by July 1, 2013, to comply with the revised rules set out in the ECL in order to reduce exposure to potential fines and liabilities. Costs for secondees are likely to rise as labor dispatch agencies meet the stricter regulatory and higher capitalization requirements of the revised ECL, and as the principle of “equal pay for equal work” is more strictly implemented. Employers are likely to find it necessary to offer local secondees compensation and benefits comparable to direct hires in similar positions.

In addition, employers should confirm that labor dispatch agencies providing them with dispatched secondees are properly licensed. If they are not, the employer risks being penalized for using employees without signing a labor contract. Such nominal secondees may also attempt to assert rights and claim benefits as de facto employees.

It should be noted that representative offices, the original users of dispatched secondees, are not expressly included in the ECL amendments. As a practical matter, they will not be able to comply with requirements such as limiting the number of seconded employees to a certain percentage, since they are not permitted to hire directly. Future regulations should address this and other issues left open by the ECL revisions.

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