Minter Ellison Alert | Draft Chinese Labour Contract Law amendments aim to improve worker protection

16 July 2012

On 6 July 2012, the Standing Committee of the National People's Congress of China (NPC) released the Draft Amendments to PRC Labour Contract Law (Draft) for public comments by 5 August 2012.

The current PRC Labour Contract Law took effect on 1 January 2008, leading to the steady growth of labour dispatch businesses, with numerous employers adopting labour dispatch as a way of utilising human resources. The term 'labour dispatch' refers to the practice of hiring employees through an employment service agency (eg, Foreign Enterprise Human Resources Service Co Ltd or China International Intellectech Corporation), as opposed to direct employment. However, the number of issues and concerns arising from the wide use of labour dispatch are also growing. For example:

  • far more companies are engaging in labour dispatch business with unsatisfactory quality
  • labour dispatch services are intended to be 'temporary, ancillary or alternative', but in reality many enterprises use dispatched labour for long term positions and some even take it as a primary source of labour, and
  • legitimate rights and interests of dispatched staff are not sufficiently protected, and plenty of workers are unequally paid for the same or similar work.

The abuse of labour dispatch services has not only jeopardised the legal rights and interests of the dispatched staff, but also undermines regular labour sources and labour contract regime. In this setting and with a view to improve protection of workers' rights and interests and further regulate the labour dispatch regime, the NPC Standing Committee made a decision to amend the Labour Contract Law.

The Draft primarily modified the labour dispatch regime in the following five aspects:

1. Stricter restrictions in use of labour dispatch services

Under the current Labour Contract Law, labour dispatch services are generally used for temporary, ancillary or alternative positions, while in practice some enterprises also use it for positions other than temporary, ancillary or alternative positions.

The Draft tightens the use of labour dispatch services by providing that it can only be used for temporary, ancillary or alternative positions. The Draft also specifies the definitions of 'temporary', 'ancillary' and 'alternative,' which are not clearly defined in the Labour Contract Law and become one of the main reasons why the labour dispatch is abused by some enterprises, being:

  • 'temporary' means a position which will last for no more than six months
  • 'ancillary' means a position providing services for those serving main businesses in the enterprise
  • 'alternative' means a position substituting a vacancy of an employee who is unable to work for a period of time because of taking leaves or full time study etc.

2. More requirements for despatch service providers (Staffing Firms)

Under current Labour Contract Law, the registered capital of a Staffing Firm shall be no less than RMB500,000. The Draft proposes increasing the minimum registered capital to RMB1,000,000 to raise the threshold for market entry and the firm's financial capacity for any legal liabilities.

In addition, the Draft further provides that Staffing Firms are subject to administrative approval for operating the labour dispatch business. For the purpose of obtaining the approval, the firms shall also have its internal administration regime consistent with the law apart from the minimum registered capital of RMB1,000,000.

3. Equal pay for equal work

'Equal pay for equal work' is already a principle for the compensation for dispatched employees under the current Labour Contract Law. In practice, less favourable pay and employment benefits to the dispatched staff are common.

In response, the Draft reiterates that compensation paid to dispatched staff shall be in consistent with the principle of 'equal pay for equal work', ie. same pay to a regular employee shall also be applied to a dispatched employee in a same or similar position.

4. More severe penalties

Violation of the provisions of the Draft will attract more severe penalties compared to current rules:

  • Companies that are not eligible for operating labour dispatch business will be deregistered, and subject to confiscation of illegal gains and fines.
  • In addition to labour dispatch companies, enterprises using dispatched staff are newly added as a party who will be subject to fines if in violation of the Labour Contract Law. The fines will be increased from RMB1,000-5,000 per person to RMB5,000-10,000 per person.
  • Staffing Firms' administrative permit to operate labour dispatch business could be revoked.

5. Application of the amendments

To ensure smooth transition of the new labour dispatch regime after this amendment, the Draft provides that:

  • enterprises who are currently using dispatched staff shall revisit their dispatch arrangements and make adjustments if necessary, and
  • Staffing Firms in operation must apply and obtain administrative permits for the purposes of continuing operation of labour dispatch business.

Possible impact

If the Draft is adopted, it will have a material impact on the current labour dispatch market.

Enterprises using dispatched staff must revisit their dispatch arrangement and cease to use dispatched staff in positions that are not temporary, ancillary or alternative. They may directly hire those staff or consider alternative solutions, such as outsourcing business which engages a large number of dispatched employees in the previous regime.

Some Staffing Firms are likely to lose their legal capacity to continue their businesses if they do not meet the new requirements for obtaining the administrative permits, particularly small or medium size firms. Even though some large firms may find it easier to obtain the permits, their businesses are likely to shrink significantly because the large numbers of employees who are no longer allowed to be under a dispatch arrangement will be removed from it.

Enterprises using dispatched staff and the Staffing Firms need to work out a solution to deal with those employees – by monitoring the progress of the Draft and being prepared for the change and consequences it brings.

Author(s) Nancy Sun