Labor Dispatch Under the Amended Labor Contract Law of China

by Davis Wright Tremaine LLP

Since the Labor Contract Law of China became effective in 2008, many employers have been using labor dispatch to ease the financial and regulatory impacts of the law. On Dec. 28, 2012, the Labor Contract Law of China was amended. The amended Labor Contract Law imposes restrictions on labor dispatch arrangements.

According to Article 66 of the amended China Labor Contract Law, labor dispatch may only be applied to temporary, auxiliary or substitute positions. For these three types of positions:

  • Temporary positions cannot be longer than six months;
  • Auxiliary positions are those that support the main business line; and
  • Substitute positions are to cover employees on vacations or leaves.

In addition, the employer must strictly control the number of dispatched workers, which shall not exceed a certain proportion of its total employees, and the specific proportion is to be prescribed by the labor administrative department of the State Council.

The above law is unclear on certain issues. For example, the definition and scope of “auxiliary position” is ambiguous, and the cap of proportion of dispatched employees is still pending detailed rules. Thus, in practice, employers in China are still waiting for the promulgation of more specific rules.

In response, the Chinese Ministry of Human Resource and Social Security recently announced a draft of the Certain Provisions Regarding Labor Dispatch (the “Draft Provisions”) on Aug. 7, 2013, soliciting public comments. Under the Draft Provisions:

  • The cap for dispatched employees in auxiliary positions hired by an employer would be 10 percent of its total employment. Total employment consists of the employees directly hired by the employer and the dispatched employees in auxiliary positions.
  • The employer must negotiate with the labor union or representatives of the employees in deciding on a list of auxiliary positions, and must publish this list to all its staff for supervision.
  • Existing dispatch agreements and labor contracts entered into before the amendment to the Labor Contract Law can still be performed continually until expiration. However, if the proportion of dispatched employees in auxiliary positions exceeds 10 percent, the employer shall not hire any new dispatched workers in auxiliary positions until the satisfaction of the proportion requirement.

Although the Draft Provisions have not been finalized, they are still worth noting in order to understand the position the authority is taking, and also as an interim guideline for compliance purposes. However, some questions remain under the Draft Provisions. We have summarized some of the issues as following.

1. Lack of detailed standard for auxiliary positions
The Draft Provisions provide a mandatory process in deciding the list of auxiliary positions, e.g. negotiation with the labor union or representatives of the employees. However, the detailed standard of auxiliary positions is still ambiguous. It is difficult to interpret certain key terms in the definition of auxiliary positions such as “main business line”. For example, many multinational companies have set up their investment or management companies as the holding companies for their China investments. Does “main business line” mean the industry this holding company is in (which is typically investment management and management consulting) or the industry of this group of companies, such as oil and gas, retail, etc. Thus, the definition and scope of auxiliary positions needs to be further expanded upon in order to provide clearer guidelines for both employers and employees.

2. Ambiguity of exceptions not subject to Labor Dispatch Rules
The Draft Provisions have provided three situations which should not be subject to the rules for labor dispatch. One of the situations is that the employer designates or appoints employees to its “superior” or “subordinate” entities.

From a legislative perspective, “superior” or “subordinate” is not appropriate to be used in a context regarding a commercial entity. It is difficult to interpret the definition and scope of superior or subordinate entities. “Affiliated entity,” on the other hand, would be a more appropriate term to be used here by the lawmaker. Hopefully this article can be revised before it is finalized.

3. Tenure carried forward
According to Article 10 of the Implementation Rules of the Labor Contract Law, when an employee is transferred to a new employer for reasons not attributable to the employee himself, his tenure with the original employer shall be carried forward and added up into his tenure with the new employer. Nevertheless, if the original employer has already made financial compensation for his tenure with the original employee, the new employer does not need to compensate for this part of tenure again when terminating the employment contract. It is unclear whether and how such principles should be applied when the employer has to hire those dispatched employees directly, as required by law.

4. Open term labor contract
A related issue is open term labor contracts. According to the current Labor Contract Law, when a labor contract is to be renewed after two consecutive fixed terms, an open term labor contract should be signed unless the employee proposes otherwise. Assuming that a dispatched employee has performed two fixed-term labor contracts and the employer decides to enter into a labor contract with the employee directly, the laws are silent on whether an open term contract should be signed under this circumstance. On the one hand, this employee is to work for the same employer under the new labor contract. On the other hand, theoretically he is to be hired by a different entity.

End notes
The Draft Provisions have clarified the rules under the amended Labor Contract Law. However, as analyzed above, there are still certain issues which need to be further considered and addressed in the future amendments. Some of the above issues hopefully will be addressed in the final version.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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