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Legal Update

Amendments to PRC Labour Contract Law Passed by NPC

9 January 2013
Mayer Brown JSM Legal Update

In our updates on 20 November 2012 (Proposed Amendments to the PRC Employment Contract Law - Impact on Labour Dispatch Companies (Part 1)) and 23 November 2012 (Proposed Amendments to the PRC Employment Contract Law - Impact on Labour Dispatch Companies (Part 2)) we reported on a proposal by the National People’s Congress (NPC) to change the PRC Labour Contract Law dealing with labour dispatch.

On 28 December 2012, the proposed changes on which we had reported were largely adopted by the NPC (the "Amendment"). The Amendment will become effective as of 1 July 2013. The NPC seeks, by means of the Amendment, to characterise the labour dispatch arrangement as an auxiliary mode to mainstream employment arrangements, and to limit the utilisation of labour dispatch arrangements to a defined reduced scope.

The Amendment focuses on four articles associated with labour dispatch, which mainly address the qualification of the labour dispatch service providers, the administrative licence for dispatch service, the principle of "equal pay for equal work" of the dispatched employees, and the definitions of "temporary, auxiliary and replaceable positions" to which the labour dispatch employment arrangement can only be applied.

The key changes introduced by the Amendment are:

  • A labour dispatch company must be licensed with the Labour Authority before registering with the local Administration of Industry and Commerce.
  • The minimum registered capital required to establish a labour dispatch company will increase from CNY500,000 to CNY2 million. (This has been increased from the CNY1 million mentioned during the proposal stage.)
  • A labour dispatch company which is in operation before the effective date of the Amendment must obtain an administrative licence and apply for a variation of AIC registration before 30 June 2014.
  • A labour dispatch arrangement is permissible only in respect of "temporary, auxiliary or replaceable positions". A "temporary position" refers to a position with a term of no longer than 6 months; while an "auxiliary position" refers to a position that serves the main or core business of the company. A "replaceable position" refers to a position that can be performed by a dispatched employee in place of a permanent employee during the period when that employee is away from work for study, vacation or other reasons.
  • A company using dispatched employees must ensure that the number of dispatched employees does not exceed a certain percentage of the total number of employees. (The percentage will be regulated by the Labour Administrative Department of the State Council.)
  • A dispatched employee will have the same right to "equal pay for equal work" as other regular employees. The remuneration specified in (i) the labour contract between the labour dispatch company and the dispatched employee, and (ii) the labour dispatch service agreement between the dispatch company and the host company must comply with the above principle.
  • Where any labour dispatch company or host company breaches the above law relating to labour dispatch, it may be ordered by the Labour Authority to rectify the situation within a certain time limit; if the order is not complied with, it will be fined at a rate of not less than CNY5,000 but not more than CNY10,000 per person dispatched. For the labour dispatch company, its administrative licence may be revoked; if any loss is incurred by any dispatched employee, the labour dispatch company and the host company involved will bear joint and several liability for his/her compensation.

In light of the above, companies should:

  • Carefully select the appropriate dispatch service provider and make sure it is in compliance with the relevant legal requirements.
  • Review and consider what changes are necessary to its current staffing arrangement in light of the Amendments. If adjustment to the current staffing arrangement is required, develop a transition plan. (This would deal with such questions as, is there a need to reduce the use of labour dispatch? Should the company change the status of dispatched employees to direct-hire employees, and introduce proper HR service outsourcing, where necessary?)
  • Review and revise relevant legal documents (as necessary), such as labour dispatch service agreements and engagement contracts, specifying the terms and conditions relating to issues such as early termination, and compensation for dispatched employees.
  • Bear in mind the principle of "equal pay for equal work" when structuring the new system of dispatched employees’ compensation and benefits.
  • Stay abreast of the implementation of the Amendment in local judicial practice and of any changes to labour dispatch requirements at both the national and regional levels.

Authors

  • Andy S. Yeo
    T +86 21 6032 0266
  • Duncan A. W. Abate
    T +852 2843 2203
  • Hong Tran
    Partner
    T +852 2843 4233

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