China: Executive Summary of the Modification of the Employment Contract Law

Last Updated: 7 May 2013

On December 28, 2012, the Decision regarding the Modification of Employment Contract Law (the "Decision") was passed by the 30th Session of the Standing Committee of the 11th National People's Congress, which is to take effect on July 1, 2013. This Decision amends the section in the Employment Contract Law relating to dispatched personnel, which provides rules on the qualifications of the dispatch service provider, the administrative license requirements for the dispatch service provider, the concept of "equal pay for equal work" as it applies to dispatched personnel and the company's direct hire counterparts for the same job position in the same location, and the job descriptions of the positions for which companies are permitted to hire dispatched personnel.

Qualification of the Labor Dispatch Service Provider

The Decision amends the qualification requirements of a dispatch service provider, which essentially include the following: (1) the registered capital requirement of the dispatch service provider has been increased from RMB 500,000 to RMB 2,000,000; (2) the dispatch service provider is required to apply for and obtain an administrative license from the competent labor administrative bureau prior to providing labor dispatch services. A company already engaged in providing labor dispatch services prior to the implementation of the Decision must obtain the administrative license and apply for the change of business registration before June 30, 2014.

KWM Recommendation: When engaging the dispatch service provider for the relevant dispatched personnel, the company should review the relevant qualifications of the dispatch service provider to ensure that the above requirements have been met. If the accepting company fails to do so which renders the labor dispatch agreement invalid and accordingly causes damages to the dispatched personnel, the company and the unqualified dispatch service provider will be jointly liable.

Job Description of the Position for Dispatched Personnel

Before the Decision, the Employment Contract Law only required that dispatched personnel be generally permitted to fill vacancies for temporary, auxiliary or substitute positions; however, it did not provide any specific definitions for the terms "temporary", "auxiliary" or "substitute" positions. The Decision supplements the Employment Contract Law on this point by providing definitions for these terms and explicitly stating that labor dispatch services are only to be considered as a supplemental method of hiring to that of a direct-hire using an employment contract and dispatched personnel are only permitted to fill vacancies for temporary, auxiliary or substitute positions.

As for the definitions of "temporary", "auxiliary" and "substitute" positions, the Decision defines each of these terms in turn. A "temporary" position means a position existing for no more than six months, an "auxiliary" position means a position which relates to a non-essential business and provides certain services to the essential business positions, and a "substitute" position means a position which can be performed by another employee when one employee cannot perform his/her duties for a certain period of time due to absence as a result of full-time study, leave or other reasons. In addition, a company using dispatch services must strictly control the number of dispatched personnel. The ratio of the number of dispatched personnel versus the number of total employees (direct hires plus dispatched personnel) of the company must not exceed a certain ratio threshold. Such ratio threshold will be published by the Ministry of Human Resources and Social Security before July 1, 2013.

KWM Recommendation: The Decision effectively narrows the relevant scope in which a company may hire dispatched personnel. The explicit definitions of "temporary", "auxiliary" and "substitute" positions limit a company's choice in using dispatched personnel for only those positions which have been defined by the Decision. Therefore, in order to minimize the risk of violating the amended Employment Contract Law, we advise companies to revise their hiring policies and procedures so as to accommodate this change in law.

Other Issues

In addition to the above issues, the Decision emphasizes the concept of "equal pay for equal work" between the dispatched personnel and the direct-hire employees. The remuneration agreed upon in the employment contract between the dispatch service provider and the dispatched personnel, and the remuneration agreed upon in the labor service agreement between the dispatch service provider and the company using the dispatched personnel, must comply with the "equal pay for equal work" requirement stated in the Decision. Specifically, in accordance with this principle of "equal pay for equal work", the same method of labor remuneration distribution must be carried out in relation to the dispatched personnel as for a regular staff member who takes a similar position. If a similar position is not available at the accepting company, the remuneration should be comparable with the remuneration of the same or similar position at the place where the accepting company is located.

At the same time, the Decision increases the legal liability of the dispatch service provider and the company for breach of relevant regulations. For example, the Decision increases the administrative penalty imposed upon the labor dispatch service providers and the accepting companies for violating the relevant labor dispatch regulations from the range of RMB 1,000 to RMB 5,000 to the range of RMB 5,000 to RMB 10,000 for each dispatched personnel. Furthermore, the Decision adds that any unauthorized labor dispatch service in violation of the Employment Contract Law shall be ceased, the illegal gains shall be confiscated and a fine between one and five times the amount of the illegal gains shall be imposed by the labor administrative department.

KWM Recommendation: We advise companies to keep a close eye on these amendments and any changes to relevant local judicial practices going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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