Rethinking hiring practices

The Tentative Provisions on Temporary Placement (劳务派遣暂行规定) (Tentative Provisions), which were issued by the Ministry of Human Resources and Social Security, became effective on March 1 2014. The Tentative Provisions govern labour dispatch, which is the practice of engaging workers through third-party agents. The agents, who are the legal employers of the workers, send workers to third parties, who manage and instruct the workers. These new labour regulations are likely to result in many employers across the country reassessing and changing their hiring practices.

While these regulations have gained a substantial amount of attention, questions remain about whether local administrative agencies and courts intend to enforce the rules, and risk not only alienating business interests but also harming employment opportunities, particularly in the manufacturing industry.

Employment law history

Labour dispatch developed in the early 1980s as a means to staff representative offices of foreign companies, which did not have legal capacity to hire PRC nationals themselves. The form of employment then spread as many employers, including foreign-invested, locally-owned and state-owned companies, found that labour dispatch offered a more flexible form of employment; employers were able to return workers to agents instead of being bound by direct labour contracts. The 2008 PRC Employment Contract Law (中华人民共和国劳动合同法) (ECL) attempted to restrict and regulate labour dispatch practice, but, in fact, had the opposite effect with more employers adopting the staffing practice so as to avoid the ECL's new protections for directly-hired employees, in particular, limits on fixed-term labour contracts.

The government largely took a hands-off policy toward labour dispatch during the financial crisis that followed shortly after the implementation of the ECL. Preserving employment opportunities took priority over stemming the use of labour dispatch. The central government's attention last year swung back to restricting labour dispatch with amendments to the ECL (2013 ECL Amendment) and the Tentative Provisions earlier this year.

The 2013 ECL Amendment clearly stated that direct employment should be the primary form of employment, with labour dispatch to be used as only a supplementary form. What is now driving the renewed attention to restrict labour dispatch?

The Tentative Provisions refer to the goal of promoting “stable employment relationships”. Moving workers from labour dispatch to direct employment would give workers direct contractual relationships with the employer that manages them. Moreover, the workers would receive full protection of the ECL as well as the possibility of open-term contracts. A so-called “harmonious relationship” may be furthered by avoiding the perception that dispatched workers are second-class employees and eliminating the fear of return at any time to an agency. An unstated goal may be to include dispatch workers within the enterprise trade unions (and the salaries of the workers in the 2% employer contribution).

Part of the aim of regulating labour dispatch is to consolidate the labour agency business through licensing and eliminating agents that may not have been adequately protecting workers, such as paying salaries on time or providing social insurance, though there is the possibility that many direct employers actually have worse compliance records in protecting employees than the large agencies, such as FESCO and CIIC.

Permitted positions and the 10% cap

The Tentative Provisions essentially leave up to the employer the selection of which positions are auxiliary after it follows a statutory employee consultation procedure. Following this procedure, the employer must announce which positions it considers auxiliary and then give the employees, the union and employee representatives an opportunity to comment on the list. The employer, however, retains the right to make the final determination.

This employer discretion is effectively limited under the Tentative Provisions with a rule that only 10% of an employer's total workforce can be filled by dispatch workers. For the many employers that use labour dispatch, the 10% figure represents a significant compliance challenge. To meet the cap, employers are given a two-year grace period (until February 29 2016). During this time, employers would not be permitted to replace dispatch workers – or even increase the number due to an urgent business need – based on a prohibition in the Tentative Provisions against hiring new dispatch workers after the 10% limit is reached.

The Tentative Provisions also require that employers above the 10% threshold submit plans on how they will achieve compliance. Beijing became the first jurisdiction to detail the information that employers are required to submit, and other jurisdictions are expected to follow the Beijing requirements.

By August 31 2014, employers must disclose:

• Total number of employees, number of directly-hired employees, number of dispatch workers, and percentage of workforce that is dispatch labour;
• Number of dispatch workers that are categorised as holding temporary, substitute, or auxiliary positions;
• Records showing completion of employee consultation procedure for the definition of auxiliary positions;
• Information on the dispatch agencies used; and
• A proposal to reduce the percentage of labour dispatch.

The two-year grace period applies only to companies that had been using dispatch labour as of March 1 2014. An employer that began to use dispatch labour only after that date would be held to the 10% limit without the benefit of the grace period.

Exceptions

The Tentative Provisions clarify that representative offices of foreign companies, foreign financial institutions, and other entities that are legally required to use dispatch workers are not subject to the 10% cap. These offices and entities are also not subject to the limitation on the three types of positions.

Certain dispatch arrangements are also grandfathered under the Tentative Provisions. Labour contracts and labour dispatch agreements entered into before December 28 2012 with expiration dates after February 29 2016 may continue to be performed until their expiration dates.

Equal pay for equal work

Reflecting a policy to prevent discrimination against dispatch workers (as well as eliminate an incentive for employers to use dispatch labour), the ECL requires that dispatch workers be provided equal pay for equal work in comparison with directly-hired employees holding similar positions. The ECL describes this requirement in terms of remuneration, which has generally been interpreted to be limited to salary, bonuses and other forms of cash payments.

As for benefits, although the Tentative Provisions require that dispatch workers be given benefits relating to their job positions “without discrimination”, the rules did not expressly include benefits within the scope of equal pay for equal work. As a result, employers would likely be permitted to offer fewer benefits to dispatch workers, particularly if their job positions are differentiated from those of direct hires.

Returning dispatched workers

While the Tentative Provisions generally impose greater restrictions on the use of dispatch workers, the new rules also expand the grounds when workers can be returned to agencies, which brings the practice closer in line to those applicable for directly-hired employees:

• Articles 40(3) or 41 of the ECL (i.e. change in “objective circumstances” and mass layoffs, respectively);
• Conditions affecting the employer that generally correspond to Articles 44(4) or 44(5) of the ECL (bankruptcy, revocation of business licence, being ordered to close down the business, liquidation, or discontinued operation upon expiration of operation period); and
• Expiration of the labour dispatch service agreement.

The additional ECL-related grounds, however, may be of rather limited use given that employers often have difficulty establishing relevant grounds and China's overriding policy against the unilateral termination of employees. In addition, labour agencies may be expected to challenge the return of workers on these grounds given that the agencies are required to pay the workers at least the local minimum wage if the agencies cannot find other positions for the workers that offer the same or better terms than their original positions.

Enforcement and penalties

Labour bureaus are expected to begin inspections of companies for compliance with labour dispatch requirements later this year. Sichuan province was the first jurisdiction to announce such inspections, which will reportedly occur in May and June this year. Other jurisdictions are likely to follow later in the summer.

The application of fines on employers that fail to comply with the labour dispatch rules rests with local officials, who might be hesitant to sanction a major employer and risk investment, tax revenue and employment opportunities. Smaller employers may fly under the radar screen. Moreover, labour arbitration tribunals and courts may be hesitant to accept cases filed by dispatch workers, particularly if they involve a large number of workers.

For some violations, the remedy may be simple. For example, if an employer fails to follow the employee consultation procedure when determining auxiliary positions, the labour bureau is limited to ordering the employer to complete the consultation procedure. As discussed, the procedure is relatively straightforward and gives employees no veto rights.

The law is not clear on what administrative sanction would apply if an employer violates the 10% cap on dispatch labour or if the workers are not one of the three types of permitted positions. The first step would be an order from the labour bureau to make a correction. Compliance could not be achieved by unilaterally returning the workers to their labour agencies, because violations of the 10% cap or the three permitted types of positions are not statutory grounds for returning dispatched employees. Moreover, there is no legal ground to order the employer to directly hire the workers. Further regulatory guidance is expected to confirm what steps employers must take when they are in violation.

Even if the local governments are not aggressively enforcing the labour dispatch requirements, for many multinational companies the concern to comply with the new requirements may come from global compliance codes, and also from customers, non-governmental organisations and media coverage.

Alternatives

While the intent of the Tentative Provisions is to encourage employers to transfer workers from labour dispatch to direct hires – and many employers are in fact doing so – employers remain interested in alternatives to bringing on the workers as direct hires while using labour dispatch to the greatest extent legally possible. Among the possible alternatives are project-based contracts and part-time employment, which permits at-will termination.

While the outsourcing and use of contract workers have gained substantial attention, these alternatives remain risky in the absence of clear legal definitions. The little guidance that is available, primarily from Jiangsu province, sets some basic parameters that could prevent outsourced or contract workers from being deemed dispatch labour: whether payment is being made for services or labour; whether the service provider has right to determine which workers and how many to deploy; whether the workers are located on-site of the host company; which party manages and instructs the workers; and which party provides the tools and equipment used by the workers

The drafters of the Tentative Provisions were clearly aware of the somewhat common practice of merely substituting contracts with the word “outsourcing” replacing “labour dispatch” in labour agency contracts. As a result, the Tentative Provisions state that disguised forms of contracting or outsourcing arrangements would be treated as labour dispatch.


Jeffrey Wilson, Jun He Law Offices, Shanghai


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