Opinion: Regulating labour dispatch

One of the main reasons causing discussion over labour dispatch workers is overcoming the internal headcount restriction since dispatch workers are not counted as formal employees. Dispatch workers also save costs by applying different salary and benefits structures compared to the regular employees. Another factor is the flexibility in maintaining a competitive workforce, because dispatch workers can be hired and fired more easily than regular employees.

Some scholars and governmental or semi-government agencies, especially the All China Federation of Trade Union (ACFTU), continuously and repeatedly criticise that the labour dispatch model is immoral and argue that it has been abused in China. After years of lobbying, the ACFTU finally convinced the national legislature to deliberate and try to pass this draft amendment to place more restrictions on the model.

Staffing agencies

In order to restrict the number of staffing agencies and also ensure they are financially capable to protect dispatch workers' interests, the Employment Contract Law requires a staffing agency to have a minimum registered capital of Rmb500,000 ($78,800). It is interesting that the same requirement for a regular company is only Rmb30,000 ($4,700) under the PRC Company Law (中华人民共和国公司法). The Employment Contract Law does not require any permit for setting up a staffing agency. In order to comply with the Law, many cities abolished their previous special permit requirements to enter the staffing agency business, making it too easy to establish agencies. This perhaps is a major reason causing the number of staffing agencies to boom in the past five years. A negative result is that many small and individually owned staffing agencies do not comply with the Employment Law and underpay salary and social insurance contributions for dispatch workers.

The draft amendment, however, proposes to increase the minimum registered capital requirement to Rmb1 million ($157,600) and require a special permit for engaging in the staffing business. The existing staffing agencies would also be required to obtain the special permit before continuing in the staffing business.

It is wise to restrict the number of staffing agencies and improve quality control by imposing a special permit requirement. However, the minimum registered capital requirement will not be effective even if it is raised to Rmb1 million because it is easy to meet a registered capital requirement in China. This raises concerns over what will happen to dispatch workers employed by an existing staffing agency that fails to obtain the special permit to continue their business. Will they be transferred to another staffing agency or will they be laid off because the agency shuts down? There appear to be many implementing issues that must be deliberated before the permit requirement can be put in place.

Excessive use

To restrict the use of dispatch workers, the Law provides that workers generally should be used in temporary, auxiliary and substitute positions (three category positions). However, the Law does not require dispatch workers be used in the three-category positions only and indeed fails to define what are temporary, auxiliary and substitute positions. As a result, this provision actually is ignored in practice and dispatch workers are used in almost every type of position. To address this issue, the draft amendment requires that dispatch workers only be used in the three-category positions and defines what the three positions are. Unfortunately, these definitions are still very loose and loopholes exist. For example, an auxiliary position is defined as a position where an employee provides supportive work to the employer's main business. But, what is supportive work? For example, it is questionable whether the employees of the finance, IT and human resources departments and possibly even the general manager, could be considered doing supportive work and thus be filled with dispatch workers.

In practice, the line between labour dispatch and outsourcing is blurry. For example, a software company cannot hire a dispatch worker from a staffing agency as a programmer since the programmer is not a supportive position. However, what if the software company contracts with the staffing agency and outsources the programming to the staffing agency, then the staffing agency provides the service through the same person to the software company. Is this a labour dispatch or an outsourcing service? The vagueness in the Law will certainly create loopholes and increase difficulty in enforcement, making it possible to avoid the three-category restrictions.

Equal work – lower pay

The Law states that a dispatch worker has a right to equal work and equal pay compared to regular employees at the same user entity. In reality, most companies provide less pay and benefits to dispatch workers compared to regular employees in the same or similar positions. This leads to many dispatch workers feeling they are treated unfairly and strongly hope that the draft amendment can address this issue. They may be disappointed to see that the draft actually does nothing in this respect. It only provides that the compensation set forth in the employment contract between a dispatch worker and a staffing agency and in the service agreement between the user entity and the staffing agency must be compliant with the equal work and equal pay rule.

In practice, the equal work for equal pay rule is too general to enforce. It is too hard to define what constitutes equal work, as must the position in question be the same or will similar positions count. In addition, what is equal pay and are benefits considered part of equal pay? There is no news that any dispatch worker has challenged this rule under the Law in court, so it is improbable that this would be challenged under the draft amendment either.

Increased penalties

To enhance the protection over dispatch workers, the draft amendment also increases penalties for non-compliance with the legal requirements for labour dispatch. However, the responsibility for enforcement of these legal requirements remains with labour authorities. In our view, it is unlikely that the labour authorities would have the appetite to enforce these requirements regarding labour dispatch, especially as the main targets of the enforcement are large state-owned companies and government-owned staffing agencies. In addition, the inherent vagueness of the requirements regarding the three category positions and equal work for equal pay also increase the difficulty of enforcement.

The draft amendment will not successfully solve the inherent problems of the labour dispatch model. Especially considering if the draft amendment is passed in its entirety, it is not likely to be strictly enforced. The main driver for the dispatch worker market is pressure for the reduction of costs. But the draft amendment will not at all alleviate that pressure and is likely to increase with the continuous recession of the global economy, including China's. The labour dispatch model will continue to survive and even grow because of strong market needs for saving costs. If the draft amendment passes and is strictly enforced, companies will either cease to use any dispatch workers (rather than transfer them to regular employees), which would cause more unemployment, or they will find a way to circumvent the restrictions and continue to use dispatch workers. Finally, the legislature should also be cautious that some enterprises may use the restrictions under the draft amendment, like the three category positions requirement, as a means to “legally” lay off dispatch workers they no longer wish to employ, causing more unemployment.

Gordon Feng, Qian Nie and Erika Collins, Paul Hastings, Shanghai