Employment Contract Law draws line on hiring workers via agencies

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On 28 December 2012, the Standing Committee of the National People’s Congress finally passed an amendment to the Employment Contract Law (ECL), under which companies will no longer be allowed to hire employees through staffing agencies (such as FESCO, CIIC, China Start, etc.) except in very narrow circumstances. The amendments will take effect on 1 July this year.

bld1Prior to the original enactment of the ECL on 1 January 2008, many employees had no written employment contracts, and thus little legal protection. The original legislative intent of the ECL was to have as many employees as possible sign direct employment contracts with companies, since this would provide employees with greater legal protection and reduce the risk of abuse of their legal rights.

However, since the relevant ECL section on labour dispatch was vaguely worded and included no penalty for the misuse of labour dispatch arrangements, the number of staff hired through labour dispatch arrangements conversely increased, in an apparent attempt to reduce payroll costs and employer liabilities (as well as get around headcount restrictions imposed by company headquarters). According to reports in the official Chinese media, the number of staff engaged through labour dispatch arrangements significantly increased to 37 million in 2011 (although some unconfirmed reports suggested the figure could be as high as 60 million). If only a fraction of this many staff will have to be switched to direct employment or laid off as a result of the new law, it will be a significant undertaking for the economy, and society at large.

bld2Important changes made

Under the newly amended ECL, the following important changes were made:

  • Companies should hire most employees directly, and may use labour dispatch “only” for temporary, auxiliary and substitute job positions. The original ECL only stated that labour dispatch should “generally” be used for such job positions.
  • The amended ECL now provides definitions of three crucial terms:
    • A “temporary” job position is defined as a position in which the person is hired for a consecutive period of no more than six months.
    • An “auxiliary” position is defined as one in which staff engaging in a company’s non-core business provide services to those involved in the core business.
    • A “substitute” position is defined as one in which staff are hired to temporarily replace employees who leave work for a fixed period of time for study, leave or other reasons.
  • Host companies will be limited to only hiring a certain number or percentage of their workforce through labour dispatch, although the exact threshold will be specified in later regulations issued by the Ministry of Human Resources and Social Security. As an indication, under draft Guangdong rules, no more than 30% of the total workforce may be hired through agencies.
  • Legally hired dispatch staff must be paid the same compensation as directly hired employees in the same position.
  • If host companies violate the provisions on labour dispatch, they can be fined up to RMB10,000 (US$1,600 – double the previous fine) for each staff member hired through labour dispatch. Under the amended ECL, hiring dispatched staff outside the allowable scope would now more clearly be subject to this fine.
  • Companies wishing to engage in labour dispatch must now obtain a special licence from the local labour bureau, and the capital requirements have been increased four-fold to RMB2 million. If a company engages in labour dispatch services without such a licence, it risks fines of up to five times the amount of illegally generated income, or RMB50,000 if no such illegal income has been generated. Previously, potential fines had been much lower.

Points for companies

Companies should note the following when determining how these changes may affect their human resource structures in China:

  • Companies should analyse all positions staffed with dispatch staff, and may have to offer direct employment contracts to some or all dispatch staff.
  • Check whether the staffing agency is properly licensed, since otherwise the hire of staff through that agency may be deemed unlawful and the host company may potentially be subject to the above-mentioned fines.
  • There is a risk that dispatch staff may potentially claim de facto employment with the host company, if the host company cannot prove that their positions permit dispatch. The first labour disputes reportedly have already been filed in early January.
  • For temporary positions (which are now limited to six months), companies should renegotiate their service contracts with staffing agencies that traditionally insisted on two-year dispatch terms.
  • Pay attention to local developments in this area, since absolute limits on the use of dispatch staff and potentially other terms and conditions are regulated at the local level.
  • The amended ECL is silent on representative offices. Currently, representative offices are required by law to hire all PRC staff through a staffing agency, and therefore the new restrictions on labour dispatch presumably will not and cannot apply to representative offices. However, the Supreme People’s Court is currently working on a new guiding opinion on labour disputes, the latest publicised draft of which implies that representative offices may be able to sign direct employment contracts with staff. If the finalised guiding opinion maintains this provision, the labour authorities will need to decide whether to impose the new restrictions on use of labour dispatch against representative offices.

It remains to be seen whether the local labour bureaus and the courts will actually enforce the new rules. Implementing regulations regulating the licensing requirements of staffing agencies will need to be drafted, as will regulations placing absolute limits on the use of labour dispatch arrangements. Some of the terms used in the amended ECL are vague, and transitional and grandfathering rules also leave room for interpretation. Since the stakes are high for host companies, staffing agencies, millions of employees, and governments at all levels, it is likely that labour dispatch will continue to be a battlefield for some time in the future.

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