Amendments to the Labor Contract Law on Labor Dispatch Services Take Effect July 1, 2013

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On Dec. 28, 2012, China's Standing Committee of the National People's Congress (the “NPC’s Standing Committee”) promulgated the Amendments to China’s Labor Contract Law (the “Amendments”). The Amendments will take effect July 1, 2013. Pursuant to the Amendments, it is likely that the use of labor dispatch services will be a less attractive means of maintaining a more flexible workforce.

Highlights of the Amendments include:

Higher requirements for labor dispatch companies (amendments to Article 57 of LCL)

  • The registered capital of a labor dispatch company is required to be at least RMB 2 million, while the current requirement under China’s Labor Contract Law (“LCL”) is RMB 500,000. Companies currently providing such services will have to increase their registered capital in order to continue to provide labor dispatch services in the future.
  • A labor dispatch company must have permanent business premises and facilities that are suitable for the conduct of their business. It is unclear exactly what this will mean in practice. Any existing dispatch service provider would be wise to keep the new requirements in mind before renewing their leases.
  • A labor dispatch company must have its labor dispatch management system meet the requirements stipulated by laws and regulations.
  • Companies which intend to provide labor dispatch services must apply to labor authorities for permits. Without such permits, the companies are not allowed to conduct relevant registration. The LCL did not include a permit requirement.

“Equal pay for equal work” principle (amendments to Article 63 of LCL)

  • Article 63 of the LCL provides that the dispatched employees shall have the right of “equal pay for equal work”. The Amendments further explicitly provide that “equal pay for equal work” shall be a principle, and the dispatched employees shall receive the same pay as that received by employees of the accepting entity at similar positions.
  • The pay to a dispatched employee under the labor contract between the employee and the labor dispatch company, or under the labor dispatch agreement between the labor dispatch company and the accepting entity, must satisfy the above requirement.

Stricter limitation to range of positions for engaging dispatched workers (amendments to Article 66 of LCL)

  • The Amendments emphasize the supplemental nature of labor dispatch and are aimed at preventing it from being a substitute for direct employment.
  • The LCL has stipulated that workers can be dispatched only for “temporary, auxiliary or substitute positions,” but it is unclear under the LCL what kinds of positions are meant by this. The current rules are generally taken to permit long-term dispatch relationships in a wide variety of positions. The Amendments define the “temporary, auxiliary or substitute positions” as follows:
    • Temporary positions cannot be for longer than six months;
    • Auxiliary positions are those that support the main business line, rather than positions that belong to the main business of the company; and
    • Substitute positions are for covering employees on vacations or study leaves.

According to a senior official at the NPC’s Standing Committee, the dispatched positions only need to meet any one of these requirements. Importantly, the number of dispatched employees engaged by an employer may not exceed a certain percentage of its total number of employees. The exact percentage, however, has yet to be stipulated by the labor administrative authority under the State Council.

More severe punishments for labor dispatch companies (amendments to Article 92 of the LCL)

  • If a company provides labor dispatch services without a permit, the labor authorities will confiscate all illegal gains and impose a fine of no less than the amount of the gain but no more than five times the illegal gain. In the event of no illegal gains, a fine of no more than RMB 50,000 will be imposed
  • Employers and dispatch agencies violating the law may be fined between RMB 5,000 and RMB 10,000 per dispatched worker if they fail to correct the violations within the time period specified by the relevant labor bureau. For labor dispatch companies, their labor dispatch business permit may be revoked.

Transitional provisions

  • Existing labor contracts and labor dispatch agreements are valid until they expire, but any provisions which violate the provisions on “equal pay for equal work” under the Amendments must be modified.
  • A labor dispatch company established before July 1, 2013 will be required to obtain a labor dispatch permit and conduct company change registration by July 1, 2014 (with a one-year grace period) in order to take up new labor dispatch business.

Conclusion

The use of labor dispatch services will likely be a less attractive means of maintaining a more flexible workforce.  For labor dispatch companies, it is now more difficult to qualify to provide labor dispatch services, and qualified companies may have more capability to make compensation to dispatched employees (if necessary). For the accepting entity, any costs that might have been saved by labor dispatch under the LCL may not be saved under the Amendments, and for most positions, the accepting entity does not have the right to use dispatched employees.

The accepting entities may have to establish employment relationships with the currently dispatched employees whose proportion has exceeded the legal percentage, otherwise their relationship may be determined as an employment relationship in labor supervision or labor dispute resolution procedures—and administrative punishment might follow suit. For the dispatched employees not on the “temporary, auxiliary or substitute positions,” their relationship with accepting entities may also be determined as an employment relationship in labor supervision or labor dispute resolution procedures, with administrative punishment also possible.

Notably, there will likely be new implementation rules between now and July 1, 2013.