International Expansion Blog

Keeping Up with China’s Evolving Labor Dispatch Laws

Labor Dispatching, High Street Partners, Higher  EducationBy John Bostwick, Technical Writer, Higher Education and Nonprofits

Some Background on Labor Dispatching in China

The practice of labor dispatching in China involves government-licensed agencies dispatching workers to third-party companies for assignments. In other words, a company (variously called a “hiring company,” “receiving entity” and “accepting entity”) uses a dispatch agency to outsource the hiring of local workers, rather than hiring workers directly. Under China employment laws, labor dispatch workers should only be used to supplement a company’s directly hired workforce.

Use of labor dispatch services in China has increased significantly in recent years. For that reason and others, there is a widespread perception that many companies operating in China have been using the practice to circumvent costly Chinese worker-protection laws, such as paying mandated overtime and severance to directly hired workers. In response, China authorities recently amended the country’s 2008 Labor Contract Law governing labor dispatching.

Labor Dispatch Amendments, Effective July 1, 2013

Amendments to the 2008 contract law took effect July 1, 2013, and clarify certain aspects of labor dispatching in China. For example, the amendments make clear that hiring workers directly is the primary means of employment in China, and that dispatch workers should be describable as temporary (i.e., in short-term positions), auxiliary (i.e., performing duties that are not part of the hiring company’s core business) or substitute (i.e., filling positions vacated by directly hired workers on leave). Labor dispatch workers should also receive equal pay for the same work as that performed by directly hired workers. And, just as significant, both labor dispatching agencies and hiring companies are now subject to increased penalties in the event of non-compliance.

Labor Dispatch Provisional Regulations, Effective March 1, 2014

Subsequent to the 2013 amendments, China authorities introduced new provisional labor dispatch regulations. These became effective March 1, 2014, and expanded on the amendments. Under the new regulations, hiring companies must comply with the following obligations*:

• Dispatch workers must comprise only up to 10% of a hiring company’s total staff.
• Hiring companies must go through a proposal process and inform their employees of their intentions before hiring auxiliary-type dispatch workers.
• Hiring companies and dispatch agencies must include certain mandated terms and conditions in their agreements so as to protect dispatch workers.

The regulations also specify when it is permissible (and impermissible) to terminate a dispatch worker’s contract.

What the Changes Mean to Your Organization

If your company or nonprofit is engaging or plans to engage dispatch workers in China, you’ll need to make sure those workers comprise 10% or less of your workforce. (There is a grace period for hiring companies that had existing dispatch-worker arrangements in place before the most recent changes to the law.) And if your organization finds that it must increase its number of directly hired workers to avoid crossing the threshold, you’ll have to budget accordingly.

In addition to reviewing your organization’s percentage of dispatch workers, you’ll almost certainly want to hire an outside firm familiar with local laws to ensure that your dispatch-worker agreements are in compliance with the new, more worker-friendly regulations. Organizations that ignore these new rules could face severe fines and reputational damage.

*Foreign companies and organizations operating under a Representative Office (RO) type legal-entity structure in China should note that they are exempt from the 10% rule and the rule that dispatch workers must be temporary, auxiliary or substitute, as ROs must use labor dispatch agencies to hire local workers.

Want to learn more about business in Asia? Check out our webinar recording: Doing business in Asia: What you need to know for 2014