A Complete Guide on Labor Dispatch in China

For many foreign-invested enterprises in China, who are not so familiar with the HR regulations and having demanding deadlines, Human Resources management is a daunting issue.

Management of recruitment, hiring, handling labor contracts, payroll and all other administrative procedures for employee can take a toll at the project progress and involve operational risks.

For foreign entities in China looking to cut down cost and incorporating a flexible hiring process, labor dispatch is the most viable option to hire employees in China.

Labor dispatch is the most preferable option when it comes to employing temporary workers to support a business or to meet the needs of staffing a short term project with a demanding deadline. You can also call it PEO, EOR (Employer of Record) or employment solution.


Meaning of Labor Dispatch/PEO/EOR in China

Labor dispatch is also referred to as staffing, talent dispatch, employee dispatching, or employee leasing; is a triangular form of an employment relationship, where employees are hired by the host company from a dispatch work agency while they dispatched employees work for the host company.

In such service, the labor dispatch agency holds the employment contracts with the dispatched employees while the employees are still supervised and managed by the host company.

Labor dispatch service is very similar to HR agency with the core difference associated with the fact that the former deploys a contractual relation between itself and the dispatched employees while the services are used by the employees for the completion of the project of the end user.

The dispatching agency is the legal entity managing the administrative task of employees.

Foreign entities find this as the cost effective and reliable method of hiring employees due to the fact that there is no direct contract between them and the employees and therefore, they are protected from all the legal liabilities involved.

Labor Dispatch Law in China

In recent years, labor dispatch has gained popularity as a recruitment method among enterprises for doing business in China.

Employment through agency has become very common for having flexible labor and recruiting job seekers to cope up with the pressure of maintaining high employment.

There was a shift noticed with the amendment of the Labor Contract Law by the Standing Committee of the National People’s Congress on Dec. 28, 2012, which became effective on July 1, 2013 (Amended Labor Contract Law), and the Interim Regulations on Labor Dispatch (Interim Regulations) issued by the Ministry of Human Resources and Social Security and effective March 1, 2014.

Those two regulations provided new requirements on the use of dispatched employees in China.

The labor law in China is getting strict with each passing year as a consequence of some violations and imbalance in employment and this applies to the labor dispatch structure as well.

The strict laws are enforced to regulate violations relating to working of dispatched workers for the same company in a same position for more than 2 years and having more than the permitted number of dispatched employees in an organisation.

With the need to limit the overuse of agency workers and to have direct employment contracts with the actual employer, these amendments were established for changing the scope and application of labor dispatch.

To implement the provisions of Labor Contract Law (LCL) regarding labor dispatch, the interim regulations were intended.

It is required by the Both PRC Labor Contract Law and the Interim Provision that a dispatch agency and a dispatched employee enter into a labor contract for a fixed term for a minimum two-year period.

It is also required that the employment agencies were licensed and were inspected regularly regarding labor conditions.

Requirements for Agencies

An amendment to Labour Contract Law was introduced in 2012 to control the vast growth of the dispatching agencies. The dispatching agency requires to obtain a special labour dispatch license before providing the related services.

Following are the requirements that a dispatch agency need to satisfy for obtaining such license.

  • A registered Minimum capital of 2 million RMB;
  • Provision of fixed office premises and facilities;
  • A unified compensation scheme for its own staff and agency employees to implement equal pay for equal work.

Benefits of Labor Dispatch in China

One of the most attractive option to hire local employees in China is Labor Dispatch. Following are some of the benefits associated with it.

  • Compliance: As labor dispatch agencies are expert and experienced with the process to hire employees, it is an ideal way of assigning temporary workers to project with stringent deadline.
  • Flexibility: Labor dispatch can adjust the workforce according to changing business needs without the concern of employee termination.
  • Reduced liability: The Dispatch agency is the legal employer, so it is responsible for all the legal liabilities involved in case of any disputes.
  • Supplementary Headcount: Enable companies to hire additional employees through dispatch agency when the client’s current headcount is not allowed.

Limits of Labor Dispatch in China

Chinese government amended the Labor Contract Law in 2012 and put into effect the Interim Provisions on Labor Dispatch in 2014 as a measure to limit the companies from taking advantage of Labor Dispatch.

Government emphasis on direct hiring of employees as per the amended labor contract law and this should be stand as the primary means of employment in China.

The following are the regulations for Labor Dispatch in China

  • Headcount Limit: The Interim Regulations establish that the total number of dispatched workers used by a host enterprise should not exceed 10 percent of the total number of employees. The limit stands not only for the numbers but for positions as well.
  • Position limit of supplementary: This measures emphasize that labor dispatch can only be used as a supplementary employment approach rather than a regular one. Under this LCL permits that labor dispatch is permitted only for the following three categories:
  • Temporary employees: For a position of no more than 6 months.
  • Auxiliary employees: For positions to support services not central to the core business of employer.
  • Substitute employees: For positions taken by the dispatched workers in replacement of permanent employees away from work and need replacement.
  • Equal Treatment: This implies that employer should be paying the same amount to the dispatched employee that is paid to the directly hired employee including al the bonuses and overtime payments.

Types of Company Using this Service

  • Representative Office in China

Labor dispatch, a triangular form of employment relationship was first used in representative offices of foreign companies in the late 1970s.

Hiring through licensed employment agency is the only viable option for the representative offices to hire local Chinese staff as Rep office is not a legal entity in China and has a limited business scope.

The dispatching agency will take in all the legal obligations of hiring employees as it is a registered legal entity in China. They can hold the labor contracts for client’s employees and manage the employee payroll and benefits.

  • Foreign investors who has no registered company yet in China

Hiring employees through a dispatching agency is the best option to employee candidates for foreign companies without a legal entity or in the process of setting up the WFOE but would like to hire Chinese employees or foreigners working for them in China.

These agencies have the license for employee leasing; therefore, the local candidate is employed by the Employment agency and he/she is dispatched to work for a foreign entity in China.

In the meanwhile, the HR agency is going to handle each employees’ monthly payroll, mandatory benefits, tax to ensure the employment compliance in China. This is the safest and the most cost effective method to for foreign companies without legal entity in China to hire employees.

  • Companies with no/limited headcounts to hire employees

The labor dispatch agency can also help to fill temporary vacant positions at a company in case of unforeseen situations such as the absence of employee due to maternity leave or sick leave.

This can lead to empty positions with no provision of having headcount to fill it on temporary basis. In such a scenario, the company can utilize the services of the Dispatch agency to fill in the vacant positions with alternative employees on a temporary basis.

The Role of Employment Agencies

With the increasing use of flexible labor by enterprises and facilitated by labor market deregulation and business process outsourcing, there has been a growth in the private employment agencies.

People and industries looking for a more flexible work-life balance is also another driving factor for such employment agencies.

Below you can see some of the roles that employment agencies has with labor dispatch:

  • Employer of record & Sign employment contract with the employee

The main objective of these companies is to sign employment contracts with the employee and have them working for companies that do not have a legal presence in China.

In this situation. The dispatching agency will be the employer of record or nominal employer for these employees in China, in the meanwhile, companies who using these employees will be the actual employers and managing their daily work.

  • Monthly Payroll, Mandatory Benefits & Tax

The dispatching agency assumes all the legal responsibilities of the employer and handles the employee payroll, individual income tax and statutory benefits and social security for all the employees under their employment.

The social insurance of the dispatched employees is provided according to the policies and standards of the region where the employer is located.

If the agency has the branch in the region of the employer’s location, then the social insurance should be paid by the local branch to the dispatched employees.

  • Employment relationship management & handling labor dispute

As the employment agency signs the employment contract with the dispatched employees, therefore the employment relationship related issues are managed by the agency, any labor dispute arising from the employment is handled by the employment agency as all they are held responsible for all the legal obligations.

This frees up of any burden from the shoulder of the actual employer. Companies shall realize that if the employment relationship issue cannot be solved properly will bring more side efforts to the companies for example employee will go arbitration or lawsuit.

Since the employment agency has the HR expertise and has rich experiences in handling such employment related issues like termination, labor dispute, they will be more professional in handling such cases, which help the actual employer to save the cost and efforts.

HROne has hired more than thousands of dispatched employees working for clients in China, till now the lawsuit or arbitration is 0, which means all the employment relationship issue or labor dispute has been all smoothly solved by HROne for the clients.

  • Work-related injury

The whole employment relationship including the work-related injury is managed by the employment agency who has the contract with the dispatched employees.

Therefore, partnering with an experienced employment agency is the best method to have employees for completion of projects.

Such agencies can conduct extensive and thorough research to find the right candidate that fits the job ranging from a sales associate to a professional manager with the right assessment technique.

In conclusion, having an employment agency to reduce the administrative burden is the best option for majority of companies or businesses looking to expand their presence in China.

This will not only free them from the legal obligations involved in employment but will also provide the time and resource to focus on core business activities.

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