Recruiting in China

From 1 July 2013, the use of labour dispatch services will likely be a less attractive means of maintaining a more flexible workforce. Companies taking dispatched employees will need to comply with an “equal pay for equal work” principle, and the range of positions for which they can engage dispatched workers will be limited. The registered capital requirement for labour dispatch service providers will also be increased four-fold. Forward planning for both labour dispatch services providers and companies that use dispatched employees is recommended.

Changes to China’s labour dispatch rules were enacted on 28 December 2012 by way of amendments to China’s Labour Contract Law. The amendments will be effective from 1 July 2013. For comment on the draft amendments that were circulated for public comment in mid-2012, please see our July 2012 e-bulletin.

Background

Labour dispatch practices involve a business choosing to outsource workers from third-party dispatch agencies rather than directly employing the workers. This can result in cost-savings and make it easier to terminate the relationship with the worker.

New provisions

The Labour Contract Law amendments introduce a number of changes, some of which are consistent with those in the draft amendment circulated in mid-2012. The first four changes listed below were not in the mid-2012 draft, while the remainder of the changes noted below are substantially the same as those in the mid-2012 draft:

• The registered capital of a labour dispatch company must be at least RMB2,000,000. This represents a four-fold increase from the current requirement of RMB500,000. Companies currently providing such services will need to increase their registered capital in order to provide further labour dispatch services.

• A labour dispatch company must have permanent business premises and facilities that are suitable for the conduct of their business. While it is unclear exactly what this will mean in practice, any existing dispatch service provider would be wise to carefully review the new requirements before renewing their leases.

• Employment by labour dispatch is only a supplemental form of employment for Chinese enterprises, with directemployment by labour contract being the basic form of employment. Identifying labour dispatch as supplementary is aimed at preventing the overuse of labour dispatch.

• The number of dispatched employees engaged by an employer may not exceed a certain percentage of its total number of employees. The exact percentage, however, is yet to be stipulated by the labour administrative authority under the State Council.

• To engage in labour dispatch, a labour dispatch company must obtain a permit from the relevant labour bureau. Labour dispatch permits had been explicitly required prior to 2008. However, when the PRC Labour Contract Law came into effect in 2008 it did not include a permit requirement. Under the new rules, a labour dispatch company established before 1 July 2013 will clearly be required to obtain a labour dispatch permit by 1 July 2014 in order to take up new labour dispatch business. Such labour dispatch companies will need to ensure that their registered capital and business premises comply with the new requirements.

• Workers can be dispatched only for “temporary, auxiliary or substitute positions”. Temporary positions cannot be for longer than six months; auxiliary positions are those that support the main business line; and substitute positions are for covering employees on vacations or study leave. The current rules, by contrast, are generally taken to permit long-term dispatch relationships in a wide variety of positions. This amendment emphasizes the supplemental nature of labour dispatch and is aimed at preventing labour dispatch from being a substitute for direct employment.

• The amendments require equal pay for equal work; that is, the same remuneration standard should apply to both dispatched employees and directly hired employees. Any existing labour contracts and labour dispatch agreements that are inconsistent with the "equal pay for equal work" requirement will need to be amended.

• Employers and dispatch agencies violating the law may be fined between RMB5,000 and RMB10,000 per dispatched worker if they fail to correct the violations within the time period specified by the relevant labour bureau.

Under the new rules, employers that have been relying on dispatched workers might be required to directly employ more workers. This would increase payrolls, and make future down-sizing more difficult and more expensive.