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Companies currently using dispatch labor are given a two-year grace period to comply with limits on the use of dispatch labor pursuant to regulations issued on January 26, 2014 by the Ministry of Human Resources and Social Security (“MOHRSS”). The Interim Regulations on Labor Dispatch (the “Interim Regulations”) take effect on March 1, 2014.

The Interim Regulations are intended to implement provisions of the Labor Contract Law (“LCL”) regarding labor dispatch that became effective on July 1, 2013. When compared to draft regulations on labor dispatch issued by the MOHRSS on August 7, 2013 (the “Draft Regulations”), the Interim Regulations will likely create a rather flexible environment for use of dispatch labor during the grace period.

The LCL provides that labor dispatch is permitted only for temporary, auxiliary, and substitute positions, which are defined as:

• “temporary” means a position with a duration of a maximum of six months;
• “auxiliary” means a position that is not engaged in the principal business of the employer;
• “substitute” means a position that replaces another employee who cannot work for a certain period of time due to off-the-job study, leave or “other reasons”.

The key points of the Interim Regulations are as follows:

• Definition of “labor dispatch”. The Interim Regulations fail to define “labor dispatch”. The Draft Regulations had included a definition, which focused on the secondment of an employee from an employer to a “host entity” that directly manages the employee. Still, the Interim Regulations provide that outsourcing and independent contractor relationships that are disguised forms of labor dispatch will be treated as labor dispatch and therefore subject to the requirements of the Interim Regulations.
• 10% cap on use of dispatched employees. A company is permitted to use dispatch labor for only 10% of its labor force, which includes the total of directly-hired employees and dispatched employees. While the Draft Regulations had excluded dispatch workers in temporary and substitute positions from a cap, the 10% cap under the Interim Regulations includes all dispatched employees.
• Two-year grace period for 10% cap. Companies will have until March 1, 2016 to comply with the 10% requirement. A company not in compliance with the 10% cap on March 1, 2014 is required to file a plan with the local labor bureau on how it intends to comply with the 10% limit. In addition, companies may not use additional dispatched employees until the percentage of dispatched employees is reduced to 10%. No specific penalties are set forth in the Interim Regulations for failure to comply with these requirements during the two-year grace period. The grace period applies only to companies using dispatch labor prior to March 1, 2014. As a result, companies without dispatch labor on that date would be immediately subject to the 10% cap.
• Applicability to representative offices. The Interim Regulations clarify that representative offices of foreign companies, foreign financial institutions, and other entities that are legally required to use dispatch employees are not subject to the 10% cap on dispatched employees. In addition, assignments of PRC nationals to jobs abroad and use of domestic workers hired from agencies are not considered labor dispatch.
• Grandfathering provision. Labor contracts and labor dispatch agreements entered into prior to December 28, 2012 with expiration dates after February 29, 2016 may continue to be performed until their expiration dates. The Interim Regulations do not address open-term contracts.
• “Auxiliary” positions determined through employee consultations. Companies must follow the employee consultation procedure set forth under Article 4 of the LCL to define which positions are “auxiliary”. Under such procedure, generally speaking, a company would suggest a list of positions that the company considers to be auxiliary positions. Employees, the enterprise union, and employee representatives then would have a right to express their opinions to management.
• Conditions for return and termination of dispatched employees. In addition to grounds for termination of a dispatched employee provided in Article 65 of the LCL (e.g., employee gross misconduct, incompetence, or exhaustion of medical treatment period), the Interim Regulations provide the grounds when a dispatched employee may be returned to a labor agency by a company but not terminated by the labor agency. These grounds include:
  • The dispatched employee is returned based on Articles 40(3) or 41 of the LCL (i.e., change in “objective circumstances” and mass layoffs, respectively);
  • The dispatched employee is returned due to conditions affecting the company that generally correspond to Articles 44(4) or 44(5) of the LCL (i.e., bankruptcy, revocation of business license, being ordered to close down the business, liquidation, or discontinued operation upon expiration of operation period);
  • The dispatched employee is returned due to the expiration of the labor dispatch service agreement.

If a dispatched employee is returned under any of these grounds, the labor agency may terminate the dispatched employee if the employee refuses another position on the same or better terms. The labor agency may not terminate the employee if the proposed terms are lower, but must pay the dispatched employee at least the local minimum wage when the employee is not dispatched.

The Interim Regulations provide that a dispatched employee who is in a medical treatment period, pregnant, on maternity leave, in a nursing period, or other circumstances under Article 42 of the LCL is protected from being returned to a labor agency on the basis of Articles 40(3) or 41 of the LCL.

• Legal Sanctions. In addition to penalties and liability set forth under the LCL, the Interim Regulations provide two additional types of sanctions on companies that illegally use labor dispatch:
  • If the company fails to follow the employee consultation procedure to determine auxiliary positions, the labor bureau may order the company to complete the procedure. Dispatch employees may also sue for damages.
  • Where a company returns a dispatched employee in violation of the Interim Regulations, the labor bureau may order reinstatement of the dispatched employee and fine the company RMB 5,000-10,000 for failure to reinstate the dispatched employee within an ordered time period. Dispatched employees may also sue for damages.
• Social insurance of dispatched employees. The Interim Regulations provide that when a labor agency dispatches employees across “regions” (i.e., to another city), the agency must enroll the employees in social insurance programs in the location of the host company and make social insurance contributions. If the labor agency does not have a branch in that location, the burden shifts to the company to enroll the employees in social insurance programs and make contributions.
• Occupational injuries and illnesses. The Interim Regulations require labor agencies to handle occupational injury assessments with the host companies assisting in the investigation and verification. While labor agencies are liable for occupational injuries, compensation obligations may be subject to contract. Companies, however, are responsible for handling matters relating to the diagnosis and assessment of occupational illnesses.
• De facto employment. The Interim Regulations fail to include provisions in the Draft Regulations requiring companies to verify that dispatched employees have signed labor contracts with labor agencies, and that companies would be deemed as direct employers of dispatched employees who do not sign labor contracts with labor agencies.