Draft Rules on Labour Dispatch Arrangements in China

14 August 2013

Grace Chen, Catherine Zhai

Following the Amendment to the PRC Labour Contract Law issued on 28 December 2012 with effect from 1 July 2013 (the “Amendment”), the PRC Ministry of Human Resources and Social Security (“MOHRSS”) issued on 7 August 2013 a draft of the Various Rules on Labour Dispatch (the “Draft Rules”) for public comment until 7 September 2013. The Draft Rules are intended to provide guidance on the dispatch of individuals to companies by labour dispatch entities. See below a summary of the Draft Rules.

Definition and Restrictions

The Draft Rules reiterate the definition of labour dispatch arrangements as earlier stipulated in the Amendment, i.e., labour dispatch arrangements are supplementary arrangements that may only be used for temporary positions (six months or less), ancillary positions (non-core role that provides services to the core business) or substitutive positions (intended for temporary replacement of a permanent employee who is not able to report to duty for a certain period for reasons such as study leave or other leaves). The Draft Rules also go further in making clear that companies must strictly control the number of individuals employed under labour dispatch arrangements, and the percentage of individuals employed under labour dispatch arrangements should not exceed 10% of the total number of employees comprising those employed under both labour contracts and labour dispatch arrangements.

Exemptions

Entities that are exempt from the aforementioned rules concerning labour dispatch arrangements include diplomatic missions in China, offices of organizations of the United Nations System, representative offices of foreign news organizations, representative offices of foreign companies, and representative offices of foreign financial institutions.  This clarification resolves the complication presented by the Amendment, as these entities are required by law to hire all domestic employees through labour dispatch arrangements and therefore would not have been able to comply with the restrictions as to the types of position and percentage of dispatched employees imposed by the Amendment and the Draft Rules.   Moreover, we believe that certain other provisions of the Draft Rules (particularly those pertaining to the performance and termination of labour contracts) should not apply to these exempted entities or to labour dispatch entities in service of such exempted entities.

Labour contracts under labour dispatch arrangements

The Draft Rules set out specific guidelines with respect to the labour contracts entered into with employees under labour dispatch arrangements. Specifically, the Draft Rules address issues relating to contract duration, indefinite labour contracts, probation period, the principle of “equal pay for equal work”, termination, economic compensation, and the obligations of the labour dispatch entities and employing companies under such arrangements.

The Draft Rules impose a number of restrictions with respect to such labour contracts.  For example, labour dispatch entities must enter into written contracts with the dispatched individuals, which must be at least two years in duration (indefinite term agreements are permitted) and make clear that the employment is under a labour dispatch arrangement. Although the dispatched individuals may be dispatched to work on a specific project, labour dispatch entities are not permitted to enter into labour contracts with these individuals where the duration of the labour contract is determined by the length of time required for project completion. Labour dispatch entities are also not permitted to enter into labour contracts with dispatched employees on a part-time basis, although they are allowed to arrange for dispatched employees to work part-time at the employing companies.   Furthermore, labour dispatch entities are permitted to impose a probation period, but only once per employee. This probation period is different from the “job trial” or “work trial” periods that may be agreed upon between the labour dispatch entities and the employing companies.

The Draft Rules impose onerous obligations on the labour dispatch entities; they do not appear to have truly taken into account their unique role as an intermediary and quasi-employer. As stated above, a labour dispatch entity must sign at least a two year contract with each employee. There are a number of circumstances under which an employing company is permitted to return employees to the labour dispatch entities (e.g., corporate restructuring, financial difficulties, bankruptcy, revocation of business license, etc., on the part of the employing company). However, the labour dispatch entity is not permitted to terminate its labour contracts with these individuals, and each individual must be either dispatched to a new employing company with the same or better employment terms (otherwise the individual is free to reject the offer) or paid minimum wages for that locality until he/she is dispatched to a new employing company.

A labour dispatch entity is permitted to terminate the labour contract only upon mutual agreement, under circumstances involving bad behaviour, sickness or incompetence on the part of the employee, or if the labour dispatch entity itself has suffered financial or operational difficulties (e.g., bankruptcy, revocation of business license, order to shut down, etc.), and it must pay severance to the terminated employees under all of the above circumstances. The obligations imposed on labour dispatch entities in such instances are more stringent than those imposed by the Labour Contract Law on companies that enter into labour contracts directly with their employees, for example, these companies would not have to pay severance for termination of a labour contract due to bad behaviour of an employee or upon expiration of a labour contract due to an employee’s refusal to renew at the same or better terms.

These onerous burdens imposed on labour dispatch entities may be of concern to employing companies, particularly as such risks will likely be shifted contractually to them by the labour dispatch entities, for example, by requiring the employing companies to enter into labour dispatch contracts that effectively bind the employing company to each dispatched employee for a fixed period with limited options for early termination and continuing obligations after termination of the arrangement. These issues may be intensified in the case of entities that are exempt from the restrictions on labour dispatch with respect to the types of position and percentage of dispatched employees, as all of their employees will be employed under labour dispatch arrangements and these employees are more likely to have specialized skill sets that may not be readily transferable to another employing entity.

Cross-region labour dispatch arrangements

Salaries and benefits (collectively, the “Employee Benefits”) of the dispatched employees in cross-region labour dispatch arrangements shall be handled in accordance with standards of the location of the employing company, except where the registration location of the labour dispatch entity offers superior Employee Benefits and the labour dispatch entity has already agreed with the cross-region employee that such higher Employee Benefits will apply.

If a labour dispatch entity has a branch company or subsidiary at the same location as the employing company, it should have the branch company or subsidiary handle the social insurance matters for such cross-region employees. If it does not have a branch company or subsidiary at the same location, the social insurance matters for such cross-region employees will be handled in accordance with the standards of the location where the labour dispatch entity is registered.

Supervision and Management

Labour dispatch entities and arrangements are subject to the authority of MOHRSS and its local counterparts. The trade unions are tasked with protecting the lawful rights of the employees under the labour dispatch arrangements. The Draft Rules also call for the establishment of industry associations and systems for evaluating the creditworthiness of the labour dispatch entities at the local level.

Legal liability

Labour dispatch entities that illegally cancel or terminate the labour contracts with dispatched employees shall be liable to each such employee for compensation equivalent to two times the statutory severance amount. Labour dispatch entities will also bear joint liability along with the employing company that causes injury or damages to its dispatched employees.

Labour dispatch entities and employing companies that violate any rules concerning labour dispatch under the Labour Contract Law will be asked to make rectification by the competent authority and failure to make rectification will result in fines ranging between RMB 5000 to RMB 10,000 per employee, and labour dispatch entities may have their operational licenses revoked. This is also provided in the Amendment under Article 92 of the amended Labour Contract Law. Furthermore, employing companies that have employed individuals under labour dispatch arrangements for positions other than temporary, ancillary or substitutive positions or have employed individuals under labour dispatch arrangements in excess of the legally permitted percentage must make the necessary rectifications within one month after fines are imposed for such violations.  Otherwise, these individuals shall be deemed as having directly entered into labour contracts with the company, the effective date of each such contract being a month and a day after a fine is imposed for the relevant violation.

Transitional Measures

From the transitional measures set out in the Draft Rules, it appears that the Government’s intention is to grandfather existing labour dispatch arrangements lawfully entered into prior to the Amendment.  Labour contracts and labour dispatch agreements for such arrangements entered into in accordance with the Law prior to the Amendment shall continue to be performed until they have expired, and labour dispatch entities may not terminate such contracts prior to their expiration on the basis that they are not able to obtain the administrative permits as required by law.

Furthermore, employing companies may not seek to return dispatched employees to their labour dispatch entities on any of the following bases: that (1) it does not comply with the Draft Rules concerning temporary positions, ancillary positions or substitutive positions, (2) it has exceeded the legally permitted percentage of employees under labour dispatch arrangements and/ or (3) the labour dispatch entity is not able to obtain the administrative permit as required by law. However, labour contracts and labour dispatch agreements with content that do not comply with the principle of “equal pay for equal work” as set out in the Amendment shall be adjusted in accordance with the Amendment.   Employing companies with such grandfathered labour dispatch arrangements will not be permitted to enter into new labour dispatch arrangements until their labour dispatch arrangements constitute 10% or less of the total number of individuals employed, whether directly by the company or indirectly under labour dispatch arrangements.

Conclusion

Although the Draft Rules represent an important step forward for clarifying the utilization of employee dispatch arrangements in China, further details and clarification would go a long way towards achieving effective implementation of the Amendment. We recommend that you consider taking this opportunity to submit comments to MOHRSS on the provisions of the Draft Rules that may affect the present and future interests of your company. Please let us know if we can be of any assistance in this regard. 

For further information please contact:

Grace Chen
Partner
Phone: +86 10 5933 5678
grace.chen@twobirds.com

Hong Kong Office
Tel: +852 2248 6000
Fax: +852 2248 6011  
Beijing Office 
Tel: +86 10 5933 5688 
Fax: +86 10 5933 5666 
Shanghai Office 
Tel: +86 21 2312 1268 
Fax: +86 21 2312 1212

This update gives general information only as at the date of first publication and is not intended to give a comprehensive analysis. It should not be used as a substitute for legal or other professional advice, which should be obtained in specific circumstances. 

This article is part of the Asia Employment Law Newsletter for November 2013