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 Molly Qin.
China’s Ministry of Human Resources and Social Security issued provisions that align closely with recent changes to the PRC Labor Contract Law in order to help standardize labor dispatch in the country. The draft calls for a clearer definition of auxiliary positions, which will affect employers that historically employ a large amount of dispatched employees. However, a grace period is also provided so that employers can adjust their employment models in China.
On 7 August 2013, the Ministry of Human Resources and Social Security of the People’s Republic of China promulgated “Several Provisions on Labor Dispatch (Draft for Comments)” (the Draft) to solicit public opinion on how to regulate the labor dispatch in the country. This effort is intended to echo the Decision of Amendment of the Labor Contract Law (the Decision), effective from 1 July 2013, for the purpose of detailing the rules for labor dispatch and providing implementation guidance.
The Draft echoes the Decision’s recommendation that labor dispatch shall only apply to positions of temporary, auxiliary and substitutive nature (Three Characters). In addition to the established definitions that a temporary position applies only to a position lasting no longer than six months, and a substitutive position applies to a position vacated for off-work studies, time off, etc., the Draft specifies that an employer shall propose the list of auxiliary positions in line with industry features and business operation needs, and confirm the list upon consultation with a labor union or employee representative meeting before making it public.
The Draft further reinforces the supervisory function of the labor union in that if an employer violates the provisions—especially regarding Three Characters—or the maximum ratio of dispatched employees, the labor union is entitled to raise concerns and ask for corrective actions.
Maximum Ratio of Dispatched Employees
The Draft mandates 10 per cent as the maximum ratio for dispatched employees among the total employee pool of an employer. That said, an employer cannot unlimitedly set auxiliary positions and should be limited to the ratio ceiling at 10 per cent. Such limitation would have a great impact on companies that have a large amount of dispatched employees, and certain adjustments would be accommodated in order to comply with the law, as well as optimize the benefits for the business.
Expanded Coverage of Labor Dispatch Services
According to the Draft, if an employer subcontracts certain business operations to a third-party contractor but still takes direct control and management of the employees of the said contractor, such subcontracting behavior shall be regarded as labor dispatch, and therefore subject to the regulations on labor dispatch.
This expanded definition of labor dispatch is meant to prevent an employer from taking advantage of the subcontract to circumvent the restrictions and limitations for labor dispatch, including, but without limitation to, the maximum ratio of dispatched employees. Therefore, it requires special attention and due consideration when an employer intends to adopt the subcontracting model for certain parts of its business operations.
The penalty for violating the rules on labor dispatch is RMB 5,000 to RMB 10,000 per person. It is worth noting, however, that if an employer violates the relevant rules on labor dispatch, especially those of “Three Characters” and the ratio ceiling of auxiliary positions, and makes no rectification within one month of being given administrative penalty, the dispatched employees will be deemed to have established an employment relationship with the employer, and the employment contract will be deemed to take effect one day after the end of the one-month period after receiving the penalty.
The Draft provides a grace period for employers to be compliant. That said, any labor dispatch duly established prior to 1 July 2013, when the Decision took effect, shall continue to be in force until the expiration of the term period, which is up to two years. If the existing labor dispatch does not follow the "Equal Pay for Work of Equal Value" principle, it is further proposed that the amendment shall be made accordingly and immediately. Further, for any employer that has a large amount of dispatched employees exceeding the 10 per cent ratio ceiling, it shall not recruit any new dispatched employees, even for auxiliary positions.
To summarize, the Draft calls for clear identification of the auxiliary positions through participation in either a labor union or employee representative meeting followed by the strict 10 per cent ratio ceiling for all auxiliary positions in any event. This gives little room for an employer to maneuver if such employer historically has had a large amount of dispatched employees. However, the Draft also provides for a grace period so that an employer could take time to consider and adjust its employment model in China.
The MWE China Difference
The authors have been closely following the legislative motion in this regard since 2008, when the Labor Contract Law of the People’s Republic of China went into effect, and have accumulated profound experience in advising various multinational companies on how to adjust their employment models in China so as to optimize both compliance requirements and business endeavors.