The Issue

The labour dispatch model in China is facing a significant shake-up. Since 2008, when the Labour Contract Law came into force, the model has been used extensively across China, with mainland trade unions estimating that around 60 million workers are employed as dispatch workers.

However, with a recent amendment to the law, companies need to revisit their reliance on labour dispatch workers and may need to change their current labour practices.

Labour dispatch provides companies with a flexible and cost-effective way of hiring labour in China. Instead of hiring employees onto the company’s books, personnel can be engaged through the use of a labour dispatch services company. The cost savings arise because the “equal pay for equal work” principle set out under the Labour Contract Law has not been strictly implemented. In practice, dispatched workers are often paid less than a company employee engaged in the same or similar work.

The lack of direct employment relationship between the company and dispatched worker can also allow companies to return workers to the labour dispatch services company when they are no longer required, subject to any terms between the parties in the labour dispatch agreement. This means that the company may be able to sidestep the onerous termination procedure that exists under China employment law.

The Changes

On 28 December 2012, amendments to the Labour Contract Law were approved, which come into effect on 1 July this year. The new legislation aims to prevent overuse of dispatched workers. Employers will not only be restricted in the circumstances in which dispatched workers can be used, but the number of dispatched workers may not exceed a percentage of its total workforce. The exact percentage is not yet clear, but it may be as low as 10 per cent.

Circumstances in which labour dispatch employees can be used are limited to “temporary, auxiliary or substitute” positions. The first and last categories are clear – temporary positions are those for not more than six months while substitute positions are those that are vacant for a fixed period because of an employee’s absence from work, such as due to vacation or study leave. However, the second category – “auxiliary” positions – has prompted much debate, as its precise meaning is unclear.

Auxiliary positions are “positions that support the business of the company”. This suggests that dispatch workers may be used for non-core company activities such as IT, catering or security. But how will “auxiliary” be interpreted by the labour tribunal and the courts? What is core, and what is non-core?

Since the amendments were announced, many companies have sought clarity on their impact. With the 1 July deadline looming, these new rules are likely to materially decrease the number of positions for which dispatched workers can be used. The cost savings that, until now, this labour model has provided for companies will also be substantially reduced. Companies will be required to offer dispatched workers equal compensation to that of directly hired employees working in the same position. If a company does not employ any staff directly in the same positions as dispatched workers, then the compensation will need to be the same as that paid for identical or similar positions in the local market.

Any discrimination in the amount dispatched workers are paid compared with an equivalent employee or individual in the local market must be eradicated by 1 July. Failure to do so may result in fines of between 5,000 and 10,000 yuan per dispatched worker. Labour dispatch agreements that were already in place at the time the new regime was announced can continue until their date of expiration, but the “equal pay for equal work” principle must be observed immediately. As the expiry date for most of these arrangements approaches, companies will need to consider the replacement arrangements they can put in place.

The Action

Now is the time to assess impact and plan accordingly. Companies operating in China who make use of dispatched workers are likely to have to hire more employees directly. This, together with having to pay dispatched workers the same as their own employees, will increase labour costs. In addition, the flexibility that a wide use of dispatched workers offers to a company will be affected and lead to future redundancy exercises becoming more complicated and more expensive.

Companies should review existing labour dispatch arrangements and verify whether dispatched workers in permitted roles are paid the same as directly hired employees in the same positions. Finally, any contracts currently under negotiation must take account of these new rules.

Kathleen Healy is a partner in Freshfields’ expanding Employment, Pensions and Benefits practice in Asia. Based in Hong Kong, she specialises in advising on Asia-Pacific employment and HR projects, and on the multi-jurisdictional employment aspects of internal investigations.

The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.