In accordance with China’s labor laws,[1] as of March 1st, the number of dispatched staff members working in a company may not exceed 10% of total number of direct employees. What does this mean for companies in the China market, and what can be done to minimize adverse impact? This News Alert will provide you with useful background and outline certain measures which can be considered to help preserve business continuity while minimizing potential risk of regulatory enforcement.
1.Background
A “Direct Employee” is a worker who have entered into an employment contract directly with a company. In contrast, a “Dispatched Laborer” is a worker who has a direct employment relationship with a third party employer, and that third party employer provides the Dispatched Laborer to work at a client company. After March 1st, any company using a large proportion of “dispatched” laborers would be at risk of a regulatory non-compliance and possible punishment. Some companies may prefer to transition to a largely permanent workforce, but other companies may wish to consider the third option of employee outsourcing.
“Outsourcing” is when a company engages a third party service provider to provide a functional business service. Superficially at least, Outsourcing may seem similar to a Dispatched Labor arrangement, but there are significant differences. Most notably, Outsourcing organizes labor support in terms of business service requirements, and not in terms of the labor itself. For example, instead of engaging a third party to provide dispatched labor to work in a call center, the company would engage a third party to provide a call center service.
2.Legal Risks
These recent changes to China’s labor laws are as yet untested. Accordingly, there may be a degree of risk that any given Outsourcing approach could trigger regulatory scrutiny. The principal risk would be that an Outsourcing approach might be deemed to constitute a de facto labor dispatch, potentially subjecting a company to risk of administrative penalties and/or civil liabilities. In terms of administrative penalties, if an Outsourcing arrangement was deemed to constitute Dispatched Labor, and if the number of such laborers (not otherwise justifiable) exceeds 10% of the Company’s aggregate number of Direct Employees, then the Labor Administrative Department may order the company to correct its non-compliance and, eventually, could impose fines ranging from RMB5, 000 to RMB10, 000 for each additional Dispatched Laborer. In terms of civil liabilities, under the same set of facts, if the compensation to such laborers was inferior to that of a company’s Direct Employees, then the company may be liable to the laborers to pay the difference.
3.Mitigating Legal Risks
The risk that an Outsourcing approach may be deemed to constitute a de facto labor dispatch may be controlled by implementing certain prudential measures. For example, a company should seek to select a licensed and reputable Outsourcing company. As another example, a company should seek to utilize a well-drafted Outsourcing agreement that includes carefully crafted expression of service descriptions. Additionally, a company should seek to avoid direct management of the relevant personnel.
China’s labor and employment law is complicated and ever changing, with significant variations from one location to another. Accordingly, what works in one city or province may not work elsewhere. This being the case, your best option will nearly always be to select experienced and reputable outside legal counsel to review your employment program periodically and to provide timely advice on regulatory developments and market trends.
[1]Labor Contract Law, promulgated by the Standing Committee of the National People’s Congress (“NPC”) on June 29, 2007 and revised on Dec. 28, 2012, and effective as of Jul. 1, 2013 (“Labor Contract Law”); Interim Provisions on Labor Dispatch, promulgated by the Ministry of Human Resources and Social Security on Dec. 20, 2013 and effective as of Mar. 1, 2014 (“Interim Provisions on Labor Dispatch”).