Labour dispatch: a legal update


Labour dispatch is simply not a tool that can be used to achieve flexibility of workforce and headcount as it is European countries.

Dr Iris Duchetsmann, Partner at Clyde & Co, explains how new regulations have further restricted labour dispatch in China. Duchetsmann specialises in labour law and has previously served as Vice Chair of the European Chamber’s Human Resources Working Group in Shanghai.

As of 1st March, 2014, China has implemented the new Interim Regulations on Labour Dispatch (Regulations) and further regulated labour dispatch practices, followed by local regulations. A number of companies have reportedly reorganised their employment structures to ensure compliance with the stricter rules.

Restriction on positions

The Regulations re-affirm that dispatched employees may “only” (instead of “mainly” as was the situation before the initial change of the Labour Contract Law in 2013) be used for three types of positions:

  • Temporary positions, which refer to those existing for a period of no more than six months;
  • Auxiliary positions, referring to positions which serve for non-primary business and support positions conducting main business; and
  • Substitutable positions, meaning positions which may be taken by other employees during the period when an employee of the labour accepting entity is absent for study, vacation or other reasons.

While the above definition of the positions in the Regulations repeat the provisions of the Labour Contract Law, the Regulations further require a labour accepting entity to conduct collective consultation when it defines its auxiliary positions. The collective consultation procedure includes gathering comments and suggestions raised by the employee representative congress or from all the employees, confirming the positions with the in-house trade union or employee representatives and publishing the final decision.

If the company fails to complete the collective consultation procedure, the labour accepting entity may have an administrative warning and a rectification order imposed upon it. Additionally, in any case where a dispatched employee suffers damage, the labour accepting entity will be required to pay compensation.

Cap on dispatched employees

The Regulations cap the number of dispatched employees at 10 per cent of the total headcount of the labour accepting entity (including non-dispatched and dispatched employees). A grace period of two years is provided to labour accepting entities to reduce the current ratio down to the cap. Before reaching the cap, a labour accepting entity is not allowed to accept new dispatch employees.

Social insurance

Social insurance contributions must be made at the place where the labour accepting entity is located. If it is a case of cross-region dispatch, and the labour dispatch firm has a branch at the location of the labour accepting entity, this local branch will be responsible for the relevant formalities; otherwise, the labour accepting entity is in charge of handling the formalities.

Return and termination

In general, only under the limited statutory situations, a labour accepting entity may return dispatched employees to the labour dispatch agency. The Regulations adds some new scenarios to those provided by the Labour Contract Law for clarification.

Under the Labour Contract Law and the new Regulations, a labour accepting entity may return dispatched employees in any of the statutory situations which would allow individual or mass dismissal in the case of direct employment. The Regulations now clarify that also in case of closure of the labour accepting entity (due to bankruptcy, liquidation or revocation of business license etc), substantial change of objective circumstances, statutory situations for mass lay-off and expiration of a labour dispatch service agreement, return is possible. However, if any of the statutory situations prohibiting dismissal as provided by the Labour Contract Law applies to a dispatched employee (e.g. a female employee during maternity leave), the same protection applicable to termination applies to the return of dispatched employees; the labour accepting entity has to retain the employee until such a situation ceases to exist.

For risk and cost analysis it’s important to note that the return by the accepting entity does not necessarily justify a following dismissal by the labour dispatch firm (e.g. closure of a labour accepting entity). Any costs the labour dispatch firm will incur to maintain the contract with the early-returned employee will be part of the service agreement between the dispatch firm and the accepting entity.


The overall structure and reasoning of the laws related to labour dispatch show that direct employment is further promoted and labour dispatch is supposed to only play a minor role in personnel structures. Companies are advised to conduct internal checks in order to ensure that positions taken by dispatched employees and staffing arrangements conform to the new rules. Direct employment provides for a clear structure as well as minimises risks of de facto employment claims. If a company does not have a delegated human resources (HR) department, outsourcing HR work to a service provider may be an alternative solution.

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