China took steps to standardize labor dispatch with the issuance of the draft Labor Dispatch Regulations (the Draft Regulations) on August 7, 2013. These regulations, if implemented, would significantly restrict the use of dispatched employees by companies.
The Draft Regulations were issued by the Ministry of Human Resources and Social Security (MOHRSS) and are intended to implement provisions regarding labor dispatch in the recently amended Labor Contract Law (LCL). The MOHRSS is soliciting comments on the Draft Regulations until September 7, 2013.
The key points of the Draft Regulations are as follows:
Definition of Labor Dispatch
The Draft Regulations defines labor dispatch as a type of business when an employer seconds employees to a host entity that directly manages the dispatched employees.
If a host entity engages a vendor to provide a service through the vendor’s employees, the arrangement would be deemed labor dispatch if the host entity directly manages the vendor’s employees. Thus, under the Draft Regulations, the key factor to distinguish outsourcing and labor dispatch is whether the service provider or the host entity manages the work of the employees.
The Draft Regulations further provide that assignments of employees to engage in work for affiliates, overseas assignments, and assignment of domestic workers are not considered labor dispatch.
Determination of Auxiliary Positions and Cap on Auxiliary Positions
The LCL limits labor dispatch to temporary, auxiliary and substitute positions (Qualified Positions). The LCL defines an auxiliary position as a position that is not engaged in the principal business of the employer. The Draft Regulations details how auxiliary positions are determined.
If a host entity wants to use dispatch employees for auxiliary positions, the Draft Regulations require the host entity to prepare a list of proposed auxiliary positions. The host entity must then discuss the list of proposed positions with the host entity’s labor union or employee representative congress. Finally, the host entity must publicize the list of auxiliary positions to all employees.
The LCL provides that a limit on the number of dispatched employees that a host entity may use will be announced. The Draft Regulations implement this requirement, however only in respect to auxiliary positions. The Draft Regulations state that the cap on auxiliary workers is 10% of the combined number of dispatched employees in auxiliary positions and directly‐employed employees of the host entity. The number of dispatched employees in temporary or substitute positions is not included in the calculation.
Labor Agency and Host Entity Obligations for Dispatched Employee Labor Contracts
The Draft Regulations provide that dispatched employees and labor agencies may enter into open‐term labor contracts. The Draft Regulations, however, are silent whether labor agencies must comply with the LCL requirement to provide open‐term labor contracts after dispatched employees have completed two fixed‐term labor contracts.
The Draft Regulations state that a labor agency may subject a dispatched employee to only one probation period. Thus, in practice, a dispatched employee who is dispatched to a second host entity may not be made subject to a probation period at the second host entity.
In addition, the Draft Regulations emphasize the host entity’s obligation to verify that dispatched employees have signed labor contracts with labor agencies. The host entity will be deemed as the direct employer of dispatched employees who do not sign labor contracts with their labor agencies.
Conditions for Return and Termination of Dispatched Employees
The LCL provides situations (e.g., employee gross misconduct, incompetence, or exhaustion of medical treatment period) when a host entity may return a dispatched employee to a labor agency and the labor agency can terminate the dispatched employee.
The Draft Regulations expand upon the LCL provisions to clarify the grounds when a dispatched employee may be returned to a labor agency by the host entity but not terminated by the labor agency. These grounds include:
The dispatched employee is returned based on Articles 40(3) or 41 of the LCL (i.e., change in “objective circumstances” and mass layoffs, respectively);
The dispatched employee is returned due to conditions affecting the host entity generally corresponding to Articles 44(4) or 44(5) of the LCL (i.e., bankruptcy, revocation of business license, being ordered to close down the business, liquidation, or expiration of the labor dispatch service agreement);
The dispatched employee is returned because (i) the dispatched employee is not working in a Qualified Position, or (ii) the dispatched employee has an auxiliary position and the host entity has exceeded the 10% cap of dispatched employees in auxiliary positions.
If a dispatched employee is returned under any of these grounds, the labor agency must reassign the employee to another host entity. The labor agency must pay the dispatched employee at least the local minimum wage when the employee is not dispatched.
The Draft Regulations further provide that a labor agency is entitled to terminate the labor contract of a returned dispatched employee if the labor agency maintains or improves the terms of a dispatched employee’s labor contract and the dispatched employee refuses a re‐assignment.
Labor Standard Requirements for Employees Dispatched to Other Jurisdictions
Labor standards (e.g., minimum wage) for dispatched employees must comply with the standards where the host entity is registered. This principle also applies to an employee who is assigned to a host entity that is located in a different province or city than where the labor agency is registered. However, a labor agency and a dispatched employee may agree to use the standards applicable in the jurisdiction where the labor agency is registered if those standards are higher.
In regards to social insurance contributions for employees dispatched to work in other provinces or cities, the Draft Regulations provide that if the labor agency has a branch or subsidiary in the jurisdiction where the host entity is located, the branch or subsidiary must make social insurance contributions for the dispatched employees in the host entity’s location. If the labor agency has no branch or subsidiary in the host entity’s location, social insurance contributions for dispatched employees must still be made where the labor agency is registered, and the labor agency may not entrust third parties to make social insurance contributions for the dispatched employees.
Legal Sanctions for Violations
If a host entity uses dispatched employees in positions that are not Qualified Positions, or when the 10% cap on auxiliary positions is exceeded, the host entity may be ordered by the labor bureau to make a “correction” within a stipulated period. The correction is understood to be either hiring the dispatched employees directly or returning them to the labor agency. The Draft Regulations provide that if the dispatched employees state in writing that they are unwilling to be direct employees of the host entity, the only means of a host entity making a correction would be to return the dispatched employees.
If the host entity fails to make a correction within the stipulated period, the host entity may be subject to a fine. If the host entity fails to make a correction within one month after a fine is imposed, the dispatched employees will be deemed to be direct hires. The employment relationship between the host entity and the dispatched employees will be deemed to have been established one month after the host entity was fined. The Draft Regulations are silent on the contract term of employees deemed to be direct hires of a host entity.
Adjustment of Transitional Provisions
According to the LCL, labor contracts for dispatched employees and labor dispatch agreements entered into before December 28, 2012 are generally grandfathered from LCL requirements until the expiration of the contracts. The Draft Regulations extend such treatment to labor contracts and labor dispatch agreements entered into before July 1, 2013.
Applicability to Representative Offices
The Draft Regulations clarify that representative offices of foreign companies, foreign financial institutions, foreign diplomatic offices, foreign media offices and representative offices of the United Nations that are required under law to use dispatched employees are not subject to the provisions regarding Qualified Positions, the 10% cap on dispatched employees with auxiliary positions, or deemed direct employment. The Draft Regulations indicate that all other provisions regarding dispatched employees would apply to these offices.