Opinion: Regulating labour dispatch

The Draft also requests employers and employees to determine jointly the detailed scope of auxiliary positions. Auxiliary positions are defined as “non-core business positions that provide services to core business”. While this definition may seem very broad and unclear, practically it is very difficult to give a more specific definition because the scope of auxiliary positions varies significantly from industry to industry. For example, a security guard in a plant is no doubt an auxiliary position, but it is a core position in a security service company. The Draft provides that an employer should propose the scope of auxiliary positions and then consult with the union or the employee representative congress (ERC) to determine the final scope. The questions of how auxiliary positions should be defined if an employer does not have a union or an ERC, or what happens if the parties cannot reach an agreement, remain unanswered in the Draft. For enterprises that do not have unions or ERC, alternatives might be to specify the scope of auxiliary positions in the employee handbook, or to seek each employee's written consent on the scope.

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Limited roles of union

ACFTU (All China Federation of Trade Union) no doubt is the biggest advocate for the Amendment, but the Draft vested limited power in unions. Apart from the fact that companies should consult and determine jointly with unions about the scope of auxiliary positions, unions have the right to monitor whether user entities and staffing agencies comply with the Amendment and raise comments or request corrections if the user entities and staffing agencies violate laws. The Draft also requires the union to give support to dispatch employees in labour arbitration or court proceedings.

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Open-ended contracts

A subject of controversy has been whether a dispatch employee is entitled to an open-ended contract when he has worked for the staffing agency for more than 10 years, or he has completed two consecutive fixed-term employment contracts with the same staffing agency (as would be the case in a typical employee and employer relationship). The Draft makes it clear that dispatch employees are not entitled to open-ended employment contracts. However, it is unclear whether this provision will remain the same in the final text since it clearly works against the stated purpose of the Amendment to protect dispatch employees' interests.

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Grandfather rules

The Draft loosens the grandfather rules under the Amendment in order to give enterprises more time and flexibility to comply with the Amendment and avoid mass layoffs caused by companies coming into compliance with the Amendment.

• Under the Amendment, any dispatch agreement between employers and staffing agencies and the related employment contracts with dispatch employees, which were made before December 28 2012, can continue to be performed until expiration. The Draft extends that cut-off date from December 28 2012 to July 1 2013, allowing more dispatch agreements and contracts to be grandfathered.
• The Amendment requires that staffing agencies must obtain a permit for labour dispatch no later than June 30 2014. The Draft allows a staffing agency which fails to obtain or maintain the permit to continue the labour dispatch business until any existing labour dispatch agreements and related employment contracts expire.
• The Draft does not require employers to reduce the number of dispatch employees working in auxiliary positions to 10% in a limited period. User entities are only prohibited from hiring new dispatch employees to auxiliary positions if they are not in compliance with the 10% ratio. In other words, if a user entity has low turnover rate, it can keep the existing dispatch employees team unchanged for a long time.
• User entities and staffing agencies are prohibited from using compliance with the Amendment as a convenient excuse to terminate dispatch employees.

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More reasons to return dispatch employees

Under the ECL, the user entity may return a dispatch employee to the staffing agency and the staffing agency can thereafter terminate the employee for reasons under Article 39 of ECL (material misconduct), Article 40.1 (sickness) or Article 40.2 (incompetence). It has been unclear whether user entities can terminate a dispatch employee for reasons under Article 40.3 (a material change of objective conditions rendering the employment contract unable to be performed), Article 41 (economic layoff) or Article 44 (when the user entity is bankrupt, dissolved or deregistered), or when the dispatch agreement between the user entity and the staffing agency expires.

The Draft makes it clear that user entities are allowed to return employees under those circumstances, but the staffing agency is not allowed to terminate the employees after they are returned. The staffing agency must retain the employees until the expiration of their employment contracts. The staffing agency must pay minimum wage to the returned employees if they do not work after the return. The staffing agency may terminate the employees if they refuse to be reassigned to another user entity on the same or better terms and conditions of secondment. However, in such circumstances, the staffing agency is required to pay severance for the termination, which does not seem fair to us.

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Mandatory conversion to direct hires

Under the Draft, a dispatch employee will be deemed to be an employee of the user entity under the following circumstances:

• The staffing agency fails to sign an employment contract with the dispatch employee; or
• After being fined by the labour authorities for use of the dispatch employee in a position that may not be filled with dispatch employees, or for failure to comply with the ratio requirement, the user entity fails to rectify the violation within one month.

These circumstances of mandatory conversion probably would not happen in reality, especially the second one. It is difficult to imagine that an employer would refuse to rectify the violation after being penalised by the labour authorities. Under the Draft, the employer can return the illegally-hired dispatch employees to the user entities to avoid them being mandatorily converted to direct employees.

The purpose of the Amendment is to restrict use of dispatch employees in order to protect their interests. But that purpose is unlikely to be achieved because it fails to prescribe the correct medicine for the illness that causes problems in the labour dispatch market. For example, reduction of costs and maintenance of a flexible workforce are two major reasons that enterprises prefer to use dispatch employees. If labour costs keep rising and termination of employees remains difficult, we could only expect that the labour dispatch market would keep developing in one way or another.

The Draft clearly suggests that MOHRSS is more concerned about potential unemployment that could be caused by enforcement of the Amendment than regulating the labour dispatch market, under the current critical economic situation. Apart from the extended grandfather rules in the Draft, we expect that MOHRSS and the local labour bureaus would take a soft approach in enforcing the Amendment in order to achieve a smooth transition from the labour dispatch model to a direct-hire model.

Gordon Feng and Michelle Gyves, Paul Hastings, Shanghai and New York