McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai. This China Law Alert was authored by MWE China Law Offices lawyers John Huang and May Lu.
Since the Labour Contract Law became effective in 2008, the use of the labour dispatch model in China has increased—to the point of “abuse” according to some voices. However, new regulations are expected to come into effect soon. Companies using the model would be well-advised to review the functions their Dispatch Employees perform, so that their organisations may successfully adapt to the changes.
Overview of Labour Dispatch in China
A labour dispatch employment arrangement arises when an enterprise (Labour User) wishes to utilize a dispatch worker (Dispatched Employee). An intermediary, the dispatch provider (Dispatch Agency), is used to enter into a labour contract with the Dispatched Employee. Thereafter, the Dispatch Agency sends the Dispatched Employee to the Labour User. In this arrangement, the employment relationship is only established between the Dispatch Agency and the Dispatched Employee.
Before the People’s Republic of China’s Labour Contract Law came into effect in 2008, the labour dispatch model was used in limited scenarios, for example, a representative office of a foreign company, which is not considered an independent legal entity in China, would have to engage a Dispatch Agency to hire (i.e., enter into employment contracts with) Chinese citizens.
However, Labour Dispatch has boomed after the Labour Contract Law came into effect in 2008. According to the China Trade Union’s 2010 research report, there are currently more than 60 million Dispatched Employees in China. Beside the high numbers and widespread use, another characteristic of the Labour Dispatch model that draws the attention of relevant authorities is its adoption by the full range of enterprises, including state-owned, foreign-invested and domestic-invested enterprises. In addition, labour dispatch covers almost all industry sectors, including manufacturing, service outsourcing and research and development centres. In addition, an enterprise may use a Dispatched Employee in any work position, regardless of the length of employment or level of the position.
Many enterprises using the labour dispatch model are being challenged for using Dispatched Employees in work positions other than the qualifying “three categories” required by the 2008 Labour Contract Law, i.e., “temporary, auxiliary or substitutive”. When using Dispatched Employees, many enterprises also “breach the rule of same position, same salaries and benefits” and “hurt the employees’ legal interests”.
As a result, more voices have been calling for stricter rules for limiting the application of the labour dispatch model in recent years. In 2012 the China Trade Union, the Ministry of Human Resources and Social Security, and national and local legislation institutions have all echoed the above concerns and considered revising the relevant clauses in the 2008 Labour Contract Law.
Possible Changes in the Laws Regarding Labour Dispatch
One of the reasons the labour dispatch model is said to be “abused” is that Article 66 in the 2008 Labour Contract Law states “Labour dispatch services are normally used for positions that are temporary, auxiliary, or substitutive” (emphasis added). With the use of the word “normally,” we see that ambiguity was purposefully inserted by China’s law-making body into the provision.
As such, in practice, the implementation of Article 66 is one of the most disputed areas. There are some obvious breaches, such as when Dispatched Employees have been working in the same work positions for more than 10 years (clearly does not fall within “temporary”) or when more than 80 per cent of employees of an enterprise are Dispatched Employees (clearly does not seem “auxiliary” to the business).
Such blatant misuse has been cited by various authorities and there have been many calls to clearly define the three categories. In the draft revisions made to Article 66 in April 2002, the word “normally” was deleted and definitions for the “three categories” were proposed. Additionally, some provinces have implemented local rules or issued draft local rules in an effort to define the three categories. For example, in “Measures regarding Labour Dispatch” issued by Ji Lin Province (in the northern part of China), which became effective 1 January 2012, states “temporary” refers to a position of a duration of less than 12 months, “auxiliary” refers to non-core business positions and “substitutive” refers to an employee working in place of the original employee who is absent for reasons such as sick leave, treatment for work-related injury, maternity leave, training or military service and study.
In addition to defining the “three categories”, draft “Labour Dispatch Rules” issued by Guangdong Province (in the southern part of China) further require an enterprise to register with local labour authorities if the dispatched employees of this enterprise are more than 20 persons and 10 per cent of its labour force. Further, the draft states the total number of dispatched employees shall be no more 30 per cent of the total permanent labour force of an enterprise.
Pros and Cons of Using the Labour Dispatch Model
After the 2008 Labour Contract Law went into effect, many companies favoured using Dispatched Employees because they brought advantages such as flexible employment relationships and cost savings. An employer could hire employees through a licensed Dispatch Agency and return those Dispatched Employees to the Dispatch Agency when it had no further manpower needs. Compared to the complicated termination procedures and requirements of the 2008 Labour Contract Law for an employee directly hired by the employer, the Dispatch Model provides a certain degree of flexibility for employers.
There are also certain cost savings to using a Dispatched Employee rather than a direct hire. According to the CIIC (China International Intellectech Corp, a leading Dispatch Agency), on average, the salary of a Dispatched Employee is approximately 16 per cent lower than a direct-hire employee. In addition, other employment costs such as non-mandatory monetary benefits, including training fees and commercial insurance, are also lower.
However, it bears mentioning that a Dispatched Employee is typically not as loyal to an employer as a direct-hire employee. The use of Dispatched Employees may also lower the overall quality of know-how in a company, which could create obstacles to the further development of the company in the future. In addition, hiring Dispatched Employees does not create stable employment relationships, which adds to the social costs borne by society when it has to adjudicate the labour disputes that arise out of such relationships. According to a White Paper issued by the HuangPu District Court in Shanghai, labour disputes related to Dispatched Employees is one of the key areas of dispute in recent years.
With the developments in labour dispatch since 2008, new regulations are expected to soon come into effect both at the national and local levels. Companies that currently use the labour dispatch model to staff their workforces should consider taking a more proactive and thorough review of the functions their Dispatch Employees perform so that their organisations may successfully adapt to the changes that may transpire in the near future.