The Interim Provisions on Labor Dispatch were published by the
Chinese Ministry of Human Resources and Social Security on January
24, 2014, and came into effect on March 1, 2014 ("Interim
Provisions"). The Interim Provisions require that no more than
10 percent of a company's total workforce can be engaged
through labor-dispatch arrangements (akin to independent contract
workers in common law countries). Companies that are not currently
compliant with the Interim Provisions must adjust their employment
structure to comply with the 10 percent cap by March 1,
In order to comply with this cap requirement, many foreign
invested enterprises ("FIEs") are contemplating
outsourcing work originally undertaken by dispatch workers to
third-party service providers. FIEs should be careful outsourcing
work in this way as the Interim Provisions prohibit some forms of
outsourcing and provide limited guidance on how to distinguish
between legitimate outsourcing and prohibited indirect
A recent ruling issued by the Shanghai No. 2 Intermediate
People's Court on May 15, 2014 ((2014) Hu Er Zhong Min Yi (Min)
Zhong No. 408) provides us with some assistance to distinguish the
difference between a legitimate outsourcing arrangement and
indirect labor-dispatch arrangements prohibited by the Interim
Provisions. In this case, the court emphasized that the third-party
service provider was a true outsourcing arrangement because the
service provider had management power over its workers, controlled
the production process, and directly instructed, supervised, and
managed its workers. By comparison, a prohibited indirect
labor-dispatch arrangement would have arisen where the contracting
company did not exercise direct management over the service
provider's workers, nor did it instruct or control them.
Since the Interim Provisions are silent on how to distinguish
these two arrangements, it is possible that courts and labor
authorities of other jurisdictions in China may take into account
other factors on a case-by-case basis. The control and management
over workers, however, is likely to be one of the most important
factors to consider in Shanghai as well as in other locales of
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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