China’s New Labor Dispatch Rules

China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing confusion for foreign companies doing business in China or seeking to do business there. With this post we seek to clarify the current rules.

China permits only the following three categories of “dispatched” employees to be hired by a third party hiring agency:

1. Temporary employees with a term of no longer than 6 months.

2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.

3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

A company cannot have more than 10% of its workforce made up of dispatched employees. The denominator for calculating this 10% figure shall be all employees who have a labor contract directly with the employer and all dispatched employees. If your dispatched employees make up more than 10% of your workforce, you have until March 1, 2016 (two years from the date on which the Interim Provisions on Labor Dispatch were enacted) to get the percentage to 10% or lower. During this two year transition period you cannot take on more dispatched workers if your current number of dispatched workers exceeds 10%. There is no grace period for the other rules.

And as we always stress when it comes to China labor and employment laws, you must always be mindful of local rules. For example, in Shanghai, employers must file with the relevant labor bureau a plan detailing how they intend to get their percentage of dispatched workers to 10% or less.

There is one exception to the above. Employment agreements executed before December 28, 2012 (when the Standing Committee of the National People’s Congress issued the decision to amend China’s Labor Contract Law can be carried out to their full terms and even beyond March 1, 2016.

Bottom line: If you have not already done so, you need to start bringing your business into compliance with the applicable labor dispatch rules. For many WFOEs operating in China, this will mean terminating labor dispatch agreements and contracting directly with your employees. This also will mean many WFOEs cannot make any new hires unless and until they start complying with  the 10% rule.