What is Labor Dispatch in China and How Does it Work

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What is Labor Dispatch?

According to the International Labor Organization (ILO), the term “labor dispatch” refers to the practice of hiring employees through an employment service agency as opposed to the traditional legal labor relationship referred to as direct employment.

This form of atypical employment is extremely popular in China and is used by both foreign and national entities to manage and supply their workforce demands.

How Does it Work?

Labor dispatching involves three parties, commonly known as;

  • Dispatched work agencies
  • End Users or user enterprises
  • Dispatched laborers

The workers sign employment contracts with the Dispatched work agency, rather their ultimate employer (that is, the enterprise they will be working for – de facto-).

Consequently, these dispatched laborers work for and are supervised by the end user/ client/user enterprise. Even though the dispatched workers are working for the user enterprise, due to the fact that there is no direct contract between them and the former, the user enterprise is protected from a series of liabilities.

What is Labor Dispatch China
Source: Sector Working Paper No. 293, ILO, 2014

The figure above shows what is commonly referred to as the triangular relationship between the agencies, workers and the user Enterprises that exists in labor dispatch structures. The figure also describes a loophole that lacks both labor inspection and social protection which is commonly used in China.

Employers are constantly trying to get around the regulations of the comprehensive labor protection measures that accompany the implementation of the Labour Contract Law and its amendments regarding labor dispatch.

The new modus operandi is for private employment agencies to recruit workers and send them as temporary employees to factories according to the factories requirements. Because of this, Dispatched workers are usually paid less than contract workers even though they are doing the same tasks.

When said workers are no longer needed by the end users, they can swiftly return to their recruitment agencies. Since the implementation of the Labour Contract Law in 2008, the increasing use of dispatched labour has become a controversial issue in China.

The Employment Agencies

According to the ILO’s Conditions of Work and Employment 64th issue, in China, employment agencies (initially known as labour service companies) first emerged in the late 1970s following the aperture of the Chinese economy.

This was done at first to make it easy for foreign firms to hire staff in China and to help unemployed youth to find jobs.

In the 80s and 90s, the number of employment agencies grew exponentially and started to change depending on the industry and region. The local governments started to suspect the agencies were violated labor rights to provide services at the lower end of labour market costs.

As of 2001, 70% of the employment agencies were funded by the local governments at various levels as part of the multi-level employment services network. The ILO reports that the rapid increase of the number of employment agencies was in response to the large-scale downsizing in the state sector, the continuous inflow of rural migrant workers to urban areas to seek employment and the growing number of unemployed school leavers and college graduates.

Benefits of Labor Dispatch in China

Labor dispatch has long been a popular option in China to hire domestic employees. Some of the impressive benefits that are available through labor dispatch include:

  • Compliant way to hire seasonal workers
    Labor dispatch is ideal for temporary workers who will be working on a project for a limited amount of time. This is particularly beneficial for seasonal businesses or who have primarily project-based work. 
  • Greater flexibility
    Labor dispatch allows companies to scale up or down their production force as the demands of their business change. This option allows them to avoid concerns regarding severance pay and the early termination of employees.
  • Limited liability
    The employment agency is the official employer in this scenario, so if a dispute arises, the business is generally insulated from liability stemming from the dispute. 

Changes in Chinese Legislation Regarding Labor Dispatch

With the constant pressure in China to maintain high employment and massive labour migration in certain regions, mostly rural areas to urban cities/townships, deregulation and flexibilization have become the driving force of China’s labour markets.

In this context, agency work has become very common for enterprises seeking to have labour flexibility and recruit job seekers, especially rural migrants.

However, as we have often commented in our articles, China’s labor law is becoming stricter every year, and this of course also applies to structures such as labor dispatch.

The stricter regulations are a consequence of some obvious violations, such as dispatched workers working in the same work positions for more than 2 years (which clearly cannot be classified as “temporary” workers) or when more than 80 percent of employees of an enterprise are dispatched workers (a clear violation of the “auxiliary” or “substitutional” nature that dispatched workers should have in an enterprise).

According to the ILO’s Sector Working Paper No. 293, the organization reported that in 2012, the Standing Committee of the National People’s Congress issued amendments to the Labour Contract Law of 2008, which came into effect on 1 July 2013.

The Amendments were established due to the need for limiting the overuse of agency workers. The legislation reiterates that the primary form of employment is the hiring of staff through direct employment contracts with the ultimate employer rather than through labour dispatch structures.

The amendments drastically changed the scope and application of labor dispatch in China and focused on three fronts:

  • Slowly reducing the use of labour dispatch to “temporary, auxiliary and substitute” positions in the user enterprises;
  • Achieving the effective application of the “equal pay for equal work” principle for dispatched employees in comparison to employees who have a direct labor contract; and
  • Establishing a stricter administration of the private employment agencies through licensing and annual reports, as well as inspection parameters regarding labour conditions.

Labor dispatch is regulated by the Labor Contract Law and the amendments we mentioned before and by the “Interim Regulations on Labor Dispatch”. In January of 2014, China’s Ministry of Human Resources and Social Security approved these specific rules regarding labor dispatch in the country (Order No. 22) to prevent companies from taking advantage of the liability loopholes that the triangular relationship provides.

Both sets of regulations limit the types of positions dispatched workers can be in, the percentage of workers in a company that can be dispatched employees, and how said workers are transferred back to their respective agencies.

The new Interim Regulations limit labor dispatching frameworks to the following three types of positions:

  • Temporary positions
    This refers to a position with a duration of no more than six months.
  • Auxiliary positions
    This refers to a position that provides auxiliary services to the core business of the employer/user enterprise.
  • Replaceable positions
    This refers to a position that can be performed by a dispatched worker which takes the place of a permanent employee during a specific period of time during which said permanent employee is away from work for any reason and needs to be substituted.

Equal Pay for Equal Work

The regulations also establish a principle of “equal pay for equal work” which must be applied to all labor dispatching contracts or agreements.

This means that employers should have the same payment standards for dispatched employees as they do for employees hired directly and who hold similar positions.

This, of course, includes overtime salaries and bonuses. In the special case of an employer who has not hired any employee holding a similar position, payment must be determined via a comparison of similar positions and tasks in the employer’s same location.

The Headcount Limit

A significant turn in dispatch labor practice was what is now known as the “headcount limit”. The Interim Regulations establish that the number of total dispatched workers used by a user enterprise must not exceed 10 percent of its total number of employees.

This calculation includes regular, permanent and direct employees as well as dispatched employees. Something important to mention, however, is that regional operations of foreign enterprises are not subject to this restriction on dispatched employees’ positions.

A Limit on Employment Agencies

The Amended Labor Contract Law also established a set of new requirements on human resources agencies in the labor dispatch business. As of July 2013, any company wanting to provide labor dispatch services must have:

  1. a minimum registered capital of 2 million yuan
  2. fixed office premises and facilities
  3. relevant management rules regarding dispatched employees.

The bottom line is that labor dispatching in China has drastically changed in the last decade, from a free for all flexible and deregulated environment, to a stricter and more structured business.

The Chinese authorities are serious about continuing to reduce the loopholes that companies find around dispatch regulations and are cracking down on agencies that are not complying with the new rules.

NH Global Partners is committed to keeping constantly up to date with new regulations and to make sure that our clients use labor dispatch in China in compliance with local laws. You may want to contact us to receive detailed information on how your company can benefit from labour dispatch in China.

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