China introduces more control over use of temporary workers

Out-Law Analysis | 27 Jun 2013 | 9:34 am | 4 min. read

FOCUS: From 1 July 2013 it will be more difficult to operate a labour dispatch enterprise, offering temporary workers to employers, in China following a change in Chinese labour law. 

The Chinese government has taken steps to define more closely in what circumstances labour dispatch can be used to fill vacancies to prevent labour dispatch contracts being used to fill vacancies that would otherwise be filled by permanent workers.

The Standing Committee of the National People's Congress on the Revision of the PRC Labour Contract Law proposals late last year to reform the Labour Contract Law. Most of the measures come into force on 1 July.

The amendment makes it more difficult to operate a labour dispatch enterprise by increasing the requirements for conducting labour dispatch business.

The new, more onerous requirements are:

  • the holding of a minimum registered capital of RMB2 million (GBP212,200), up from RMB500,000;
  • the holding of a special licence from the labour administrative authority. The deadline for this change is 30 June 2014.

Equal pay for equal work

The principle of ‘equal pay for equal work’ is not new. It appeared in the Women's Protection Law in 1992 to protect female employees, then in the Labour Law in 1995 to protect employees generally, and in the Labour Contract Law in 2008 to protect labour dispatch employees in particular. The amendment re-emphasises the requirement, and sets a deadline of 1 July 2013 for providing equal pay for equal work to employees retained through labour dispatch.

Clearer definitions

Previously, the Labour Contract Law provided that labour dispatch could in general be used to fill temporary, auxiliary and substitute positions in employing units. However, the Labour Contract Law did not define the meaning of such job positions. This led to the widespread use and abuse of labour dispatch as a general substitute in many enterprises after 2008.

The amendment now gives more clear definitions as follows:

  • a temporary job is a position that will continue for six months or less;
  • an auxiliary job is a ‘non-primary business’ position intended to provide service to a primary business position;
  • a substitute job position is one in which the regular employee cannot provide a service due to full-time study, vocational training, or other reasons.

The amendment attempts to limit the use of labour dispatch by stipulating that it can only be used for temporary, ancillary or substitute positions. The signing of new labour dispatch contracts for job positions other than temporary, auxiliary and alternative job positions is prohibited from 1 July 2013, and any contracts for dispatched employees in other positions will violate the amendment. Also, the amendment stipulates that the number of the labour dispatch individuals shall not exceed a certain percentage of the total employees. How to determine the percentage has not yet been released.

Tougher penalties

The amendment contains a grandfather clause stipulating that all labour dispatch entities must be licensed by the labour authorities within one year after the effectiveness of the amendment.

The amendment contains strengthened penalties for labour dispatch entities without a licence or which otherwise violate the amendment. For operating without a licence, a business faces a confiscation penalty of up to five times the amount of money that it gained illegally and a fine of up to RMB50,000. The fine for violation of the labour dispatch rules was increased from RMB1,000-5,000 per person to RMB5,000-10,000 per person.

Employing enterprises do not face any fines for violating the labour dispatch rules, although the labour dispatch service contracts usually allocate the risks of fines and penalties to the employing enterprise.

Unresolved issues

Although the amendment clarifies some issues, it leaves some others unresolved.

Rate of dispatch employees: The amendment states that the ratio between the labour dispatch employees and regular employees will be stipulated by the labour department of the State Council. The standards have not yet been released, but are expected to be available soon after the amendment comes into effect.

Calculating cumulative fixed-term: When a labour dispatch employee is hired by an employing unit as a formal employee, since the employee will still work in the original workplace and position but with a different legal employer, his/her service years will be carried forward. Under these circumstances, it is unclear whether the previous dispatched employment term will count as a fixed term of employment for purposes of determining when, after two fixed terms, an open-term contract must be offered.

Definition of auxiliary positions: Of the definitions for the different types of positions permitted to be filled by labour dispatch, the definition of auxiliary positions is least clear. Because the definition of “primary business position” is open to interpretation, the scope of “auxiliary positions” may also be subject to varying interpretation in different contexts. This may give employers some scope for structuring their labour functions to increase the ratio of auxiliary to primary positions so as to maximise their ability to use dispatched employees.

Practical matters: Companies using dispatched labour should consider the following responses in preparation for the coming into effect of the amendment.

Update payroll system: Companies need to prepare or update their payroll system to be compliant with the principle of equal pay for equal work, and enforce the new payroll system as of 1 July 2013.

Other options: Companies should audit their HR function and their labour dispatch practices, and confirm if they are currently using dispatched employees other than in temporary, auxiliary, and alternative job positions. If so, other options should be considered to staff these functions, such as labour outsourcing or hiring the dispatched employees directly.

Audit the service provider: Employing units should audit their labour dispatch entities to ensure that they are properly licensed. Employing units should also review its service contracts to ensure that its liability for the labour dispatch entity’s acts is minimised.

Gillian Miao is a Shanghai-based lawyer at Pinsent Masons, the law firm behind Out-Law.com