Comparative analysis of labour dispatching and outsourcing

By Wu Kun and Jin Jing, Tian Tai Law Firm

Labour dispatching and outsourcing, as supplementary forms of employment for enterprises, have a long history of being comparatively analysed in practice. The authors argue that, due to the current discrepancy in the business capabilities of Chinese outsourcing service companies and the management level of employers, the choice by an enterprise between the labour dispatching model and the outsourcing model is essentially a choice about risks and costs.

Wu Kun Tian Tai Law Firm enterprises employment
Wu Kun
Tian Tai Law Firm

An enterprise may decide on the specific employment model it wishes to use after conducting a comprehensive assessment based on its own management capabilities, the necessity to participate in the process of managing employees in the course of their provision of labour, the service capabilities and qualifications of the outsourcing service company, etc. This article compares and analyses the differences between labour dispatching and outsourcing to provide a reference for enterprises needing to make a choice.

Market access

China’s requirements in respect of the establishment, access and oversight of labour dispatching companies are more stringent than those for outsourcing companies. These are more specifically manifested as follows: (1) the registered capital for the establishment of a labour dispatching company may not be less than RMB2 million (US$289,000); and (2) to engage in the labour dispatching business it is necessary to have the operating qualification of having secured administrative permission in accordance with the law.

Jin Jing Tian Tai Law Firm enterprises employment
Jin Jing
Tian Tai Law Firm

An employer can screen the entities with which it proposes to co-operate by understanding whether the labour dispatching companies have labour dispatching qualifications, and as they have been indirectly endorsed by the government, the scope of the enterprise’s choice of co-operating party is easily narrowed. In contrast, choosing an outsourcing company requires the employer to formulate more complex internal supplier screening rules so as to ensure that the service capabilities of the co-operating entity satisfy requirements.

Applicable laws

In the labour dispatching model, the employer and labour dispatching entity are subject to the Employment Contract Law and the Interim Provisions for Labour Dispatching, in addition to the business contract executed by them. In contrast, in the outsourcing model, the co-operation between the parties’ proceeds based on the terms of the contract executed by them, and the parties are subject to the Contract Law.

Provided that the terms specified by them do not violate the mandatory provisions of laws, the co-operation matters between the parties are mainly governed by party autonomy and dealt with in accordance with the terms of the contract.

Applicable positions

An employer proposing to use dispatched workers is required to consider the nature of the job and the number of workers, as the labour dispatching model is limited to temporary, auxiliary or substitutable positions, and the number of workers so employed may not exceed 10% of the total workforce.

However, with respect to the outsourcing model, the employer need only carry out business-level consideration based on the company’s business structure and actual operating circumstances, and the parties may proceed with their co-operation in respect of any matters not prohibited by law.

There is no limit on the number of workers that may be used in this manner and, through a reasonable design of the terms, the employer can actually use the outsourced personnel to provide services without bearing labour law risks.

Management and methods

An employer may, in accordance with the law, directly participate in the management of dispatched workers and require them to provide labour in accordance with its evaluation standards and relevant systems. Through its control of the labour process and results, it can procure their satisfaction of the requirements, thereby making up, to a certain extent, any inadequacies in the management capabilities of the labour dispatching entity.

However, if an employer opts for the outsourcing model, management of the business itself is emphasized, and if the requirements in respect of the service capabilities of the outsourcing enterprise are relatively stringent, it will not be able to participate in the management of the labour provision process, and will only be able to assess whether the labour provided by the outsourced personnel satisfies requirements by way of the service procedures and service results.

Scope of liability

In practice, as the fees in a labour dispatching project are relatively low, the labour dispatching entity will, in the majority of cases, require in the labour dispatch contract entered into by it and the employer, that the employer, as the actual obligation bearing entity, bear the labour risks arising in the course of the employment of the dispatched workers, including but not limited to personnel transfers, payment of severance pay, compensation, pregnancy of female employees, work-related injuries, sick leave, etc., with the compensation or any damages arising to be borne in whole or in part by the employer.

Generally speaking, in the outsourcing model the contract between the employer and the outsourcing company will expressly specify that the labour risks arising in the course of the use of outsourced personnel will be borne by the outsourcing entity. As the fees for outsourcing services are relatively high, the outsourcing enterprise will willingly bear the any legal risks arising, and will minimize the possibility of its paying severance pay and compensation through the optimal internal allocation of personnel, so as to maximize its benefits.

In short, the choice between labour dispatching and outsourcing needs to be determined based on the employer’s actual circumstances. An employer needs to avoid a mode of employment that is “fake outsourcing and actual dispatching”, and the potential legal risks arising from that. To avoid being found to be engaging in “fake outsourcing and actual dispatching”, an enterprise needs to avoid directly managing the working personnel and the labour provision process.

More specifically, with a view to achieving its management objectives, the employer may conduct an evaluation of the outsourcing enterprise based on whether the service results or the service provision process comply with the standards specified in the contract, e.g., by specifying: (1) the service evaluation standards; (2) the time requirement for replacing or returning service personnel; (3) the elimination of personnel whose service quality is found to be sub-standard; and (4) damages for losses incurred in the course of the services.

Wu Kun and Jin Jing are associates at Tian Tai Law Firm

Wu Kun Jin Jing Tian Tai Law Firm enterprises employmentTiantai Law Firm
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