China: Employment Law Update: New framework for dispatch services in China

Last Updated: 24 March 2014
Article by Maarten Roos and Victoria Lei

The Chinese legal framework is always in development, but no sector has received so much attention lately as that of dispatch services. The business of employing people and then dispatching them to another company for work has come under severe scrutiny, with a huge impact not only on foreign-invested companies that are engaging in this business, but also on their customers: subsidiaries of international companies who for one reason or another hire at least part of their workforce through dispatch service providers including FESCO (Foreign Enterprises Service Corporation) and CIIC (China International Intellectech Corp).

Rules for Labor Dispatch Service Providers

In late 2012, the PRC Labor Contract Law was amended to set new requirements on companies providing dispatch services. The amendments also established that dispatch could only be used for temporary, substitute or auxiliary positions, and disclosed that the State human resources administration would establish a maximum to the number of dispatched workers as a proportion of the total workforce. High penalties were introduced for companies that engage in labor dispatch services without the required license, at one to five times the income obtained from unlicensed labor dispatch services. The amendments took effect on 1 July 2013.

Another set of rules that went into effect on 1 July 2013 are the Implementing Rules for the Administrative Licensing of Labor Dispatch (published in June 2013). These mainly provide further detail to the labor dispatch provisions of the amended PRC Labor Contract Law, including specific rules on how a company can apply for the labor dispatch license, and what conditions are to be met. Among other things, the labor dispatch license requires newly-established companies and existing companies with labor dispatch in their business license before 1 July 2013 to have contributed CNY 2 million in registered capital.

This presents a particular challenge for foreign investors. As procedurally they can only contribute registered capital after the subsidiary has been established, there is no practical way for them to meet the capitalization requirements for newly registered entities to obtain the labor dispatch license at the time of establishment. As a result, government departments have grounds to refuse the granting of a labor dispatch license to any newly-establish foreign-invested companies. Whether or not the policies have been designed so intentionally, the result is that foreign investors need to be particularly creative in structuring their businesses if they want to legally engage in labor dispatch services.

Rules for Companies that Use Dispatched Workers

The legislative circle was completed with the Interim Provisions on Labour Dispatch Rules, which were promulgated in late January 2014 and came into effect on 1 March 2014. Applying to labor dispatch service providers as well as their customers, these provide important clarifications that can have an immediate impact on the business of many foreign-invested companies operating in China. And while further implementing rules are still expected, the most important provisions are already quite clear.

  1. When the Use of Dispatched Workers is Permitted

Dispatched workers are only permitted in temporary, substitute or auxiliary positions:

  • Temporary: Positions lasting for up to six months.
  • Substitute: positions for a certain period of time, during which direct employees are unable to work as a result of full-time study, leave, etc.
  • Auxiliary: Positions in non-core businesses that service core businesses, after discussions with the workers' general meeting or all workers, consultation with the labor union or workers' representatives, and an internal announcement.

The number of dispatched workers may not exceed 10% of a company's total work force, though a transitional period of two years is granted for dispatch already existing before the Interim Provisions became effective on 1 March 2014.

  1. Social Insurance Contributions

For dispatched workers, social insurance must be contributed at the place where the hiring company is registered, and according to the regulations of that locality.

This could have a huge impact. Many (foreign-invested) companies face the challenge of hiring staff in localities where they do not have a branch. These staff usually prefer to have social insurance contributed where they live rather than where the company is registered, and so a dispatch service provider is often used to hire the worker and pay social insurance. This practice is a clear violation of the Interim Provisions, and so companies that want to have staff operate outside their own locality are left with the following choices:

  • Convince dispatched workers to accept social insurance contributions at the place where the company is registered (which usually means that the benefits are less valuable);
  • Hire staff directly and convince them to accept social insurance contributions at the place where the company is registered; or
  • Establish a branch office in the place where the staff is located and make the branch the hiring company, so that social insurance can be paid locally.

Note that another practice, the direct hiring of staff but then using a service provider to assist with social insurance payments in another locality, is not covered by the dispatch framework because it does not involve labor dispatch. This approach involves payroll outsourcing. Strictly speaking the legality of this practice is arguable, though it is still widely spread and generally condoned, for now.

  1. Return of Dispatched Workers

The Interim Provisions provide companies with flexibility to return dispatched workers to the labor dispatch service provider in the following circumstances:

  1. Situations set out in articles 40(3) (change of objective circumstances on which the conclusion of the contract was based) and 41 (economic redundancy) of the PRC Labor Contract Law.
  2. Where the hiring entity is declared bankrupt, has its licence revoked, is ordered to close down or decides to liquidate,
  3. Upon expiry of the labor dispatch agreement.

If the dispatched worker has been returned but has no assignment, the service provider can pay him the minimum salary that is applicable in the locality of the service provider. As this is usually very low and the service provider can still require the employee to report to duty every day, this can be an effective way to force the employee to resign, thereby avoiding severance. Exceptions are only made for the conditions of Article 42 of the PRC Labor Contract Law (pregnancy, confinement or nursing period; work-related injuries and occupational disease, etc.); under these conditions, an employee cannot be returned and so continues to have the right to his or her regular salary.

The above reasons are an addition to the hiring companies' rights to return dispatched workers in case of situations set out in article 39 and 40(1) (2) of the PRC Labor Contract Law. The main difference is that under latter situations, the service provider may terminate the labor contract with the dispatched workers instead of keeping the employee on minimum salary until a new position has been found.

With the Interim Provisions, it now is clear that a return for any other reasons (incl. unlawful return) is not permitted, and could result in severance pay, economic compensation or even reinstatement of the employee with the hiring entity.

  1. Other Challenges

Other points of attention for labor dispatch service providers and their customers under the Interim Provisions include:

  • Various mandatory clauses are to be included in the Labor Dispatch Agreement between the service provider and its customer;
  • The labor dispatch service provider bears liability for work-related injury insurance, but the hiring entity has the obligation to investigate accidents and verify injuries, provide information on possible occupational diseases in the workplace; compensation may be shared if agreed;
  • Where an employees is retained under the name of hired work, outsourcing etc. but the relationship is in fact one of dispatch, then the provisions of the Interim Provisions will apply (Article 27).

What the Interim Provisions do not clarify, is whether the dispatch service provider is obliged to enter into an open-ended labor contract with its employee after two fixed terms (Article 5), as would be required by a regular employer. Subsequent issues to consider include what kind of contract should be signed (open-ended or fixed-term) and how to calculate the service tenure when the hiring entity transfers the employment into one of direct hire.

  1. Penalties

The Interim Provisions set out various different legal consequences for violation of its provisions thereof. The most important are:

  1. Unlawful use of dispatched workers: If the human resources authorities discover the use of dispatched workers beyond the legal scope (i.e. in positions that are not temporary, substitute or auxiliary), they can warn the hiring entity, while suffering employees can claim for damages. The Interim Provisions do not clarify whether the human resources authorities can also issue penalties in case of a hiring entity's continued violation, nor do they provide specifically that the dispatch service provider can be penalized. Practice will tell how this is to be resolved.
  2. Violation of the PRC Labor Contract Law and implementing rules is subject to Article 92 of the same law, namely (i) conducting labor dispatch business without a license may result in a penalty of one to five times illegal income, and (ii) other violations of labor dispatch provisions will result in a warning, and if correction is not made, both the service provider and the hiring entity can be fined at CNY 5,000-10,000 per employee while the service provider can also lose its dispatch license.
  3. Dispatched workers that suffer from violations should be compensated by the dispatch service provider and the hiring entity jointly and severally. If the license of a labor dispatch service provider expires, is withdrawn or revoked, it shall continue to perform the employment contracts until their expiry, unless the employee agrees to termination.
  4. Unlawful return of dispatched workers will trigger employer liabilities under the PRC Labor Contract Law, namely reinstatement or economic compensation. Moreover, this can also result in a warning from the human resources authorities, and a fine if the hiring entity does not correct its behaviour within the specified period.
  5. It is unclear how violations of the rules on social insurance will be penalized (e.g. payment of social insurance in place other than where the company is located), nor is it clear whether the hiring entity can be penalized for.

Rules for Representative Offices

Since representative offices of foreign companies are unable to hire Chinese employees directly, they have always had to hire based on the dispatch model. This has often been seen more as a disadvantage than an advantage, as the use of intermediary dispatch agents complicated relations and made it more difficult to control employees. It has even been a contributing factor to foreign investors replacing their representative office with a consultancy (though other factors, such as taxes and liabilities, arguably have played a greater role).

An unexpected consequence of the new framework on labor dispatch, however, is that the representative office may become more attractive for some foreign investors. The rules specifically allow representative offices of foreign companies to use dispatched workers for positions that are not temporary, substitute or auxiliary. Further, the representative office remains an investment-light vehicle that can be used to hire local staff in places where the company does not want to establish a branch or independent legal entity.

Preliminary Conclusions

Step by step, it is becoming clearer what kind of legal framework the Chinese government wants to put in place for dispatch services. For now, we can draw the following conclusions:

  1. Foreign-invested companies that engage in labor dispatch services without the proper licenses must reconsider their structures to legalize operations. The new penalties, and the additional scrutiny that the industry is receiving, will make it difficult and very risky to try to operate and develop dispatch businesses "under the radar", as many companies have done in recent years.
  2. Companies that hire a large proportion of their workforce through labor dispatch will have to review their policies, and gradually reduce this proportion. They should also carefully review whether dispatched workers really fall under the temporary, auxiliary, or substitute categories, and be aware of the potential penalties if they violate the rules.
  3. Companies that use dispatch services providers such as FESCO and CIIC to hire employees in places where they do not have a registered company or branch, should review their practices. Even if these employees can be considered temporary, auxiliary or substitute, social insurance for dispatched workers must be paid at the place where the hiring company is located.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Maarten Roos
Victoria Lei
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions