The Impact of China’s New Labor Dispatch Rules on FIEs

March 24, 2014 Posted by China Briefing Reading Time: 5 minutes

In this interview with China Briefing, Penny Li of Dezan Shira & Associates discusses China’s new labor dispatch law and its effect on labor costs, social insurance benefits and the “equal pay for equal work” principle.

What are the key changes to China’s new labor dispatch rules and how might they affect FIEs in China?

The new regulations may have a negative impact on FIEs, mainly due to the possible increase in labor costs for these enterprises. One of the key changes of the new regulation is the restriction on the number of dispatched employees an enterprise may hire. The new regulation stipulates that a host company’s total number of dispatched employees should not exceed 10 percent of its total number of employees, including regular and dispatched employees. Before, only dispatched employees used on auxiliary positions were limited to the 10 percent rule.

In fact, the number of dispatched employees in many FIEs currently have more-or-less exceeded this limit. In Dongguan, the workers of some manufacturing enterprises are all dispatched employees. This is especially true for FIEs in the manufacturing industry, where the seasonal cycle of operation creates large labor shortages for certain months of the year. The new regulations are forcing these FIEs to either cut business or increase labor costs.

What can FIEs do to moderate the possible negative impact caused by the “10-percent rule?”

There is really no perfect solution to this. Enterprises have been given a two-year grace period to gradually comply with the new rules. Specific plans are required to be drafted to describe how these companies will alter their employment structure. It is worth mentioning that the number of dispatched employees used by these host companies may only decrease over the two-year period, meaning they cannot add to their staff of labor dispatched employees.

If the company still wants to maintain its current number of regular employees, instead of conducting all the business operations itself, it may choose to outsource some of its non-core business to other companies, maybe one of its suppliers.

Another option is to outsource its accounting or payroll management. Assuming the company does decide to hire more regular employees to replace the dispatched labor, this will generate more workload for the human resource and accounting departments, which may require more hires in human resource personnel, as well as accountants, to take care of the extra payroll and social insurance management. Outsourcing payroll or accounting may relieve this burden.

Could you explain the changes in cross-region labor dispatch?

In the past, if a dispatching company sent employees to a host company located in another city, the dispatched employee could choose to which city the social insurance is paid, be it from his or her original living city, the city of the dispatching company, or the city of the host company.

However, because the rate and standard of social insurance payment vary a lot in different cities, and most of the time the bargaining power of the employer is greater than the employee, sometimes the dispatching or host company would choose to pay the social insurance at the city of the lowest rate to save on payroll outlays. Under this circumstance, the dispatched employee may have no social insurance if they suffer from work injury or illness in the city they are actually staying. It could also affect the retirement benefits that dispatched employees may enjoy.

According to the new regulation, the social insurance accounts of dispatched employees should be created in the city of the host company and the rates and standards of social insurance payment should be in compliance with the actual work location. It protects the benefits of the dispatched employee, but to some extent increases the labor costs for the host entity.

What do you think of the principle of “equal pay for equal work” stipulated in the new regulation?

Actually, this principle has been raised before without specific enforcement. The new regulation reemphasizes the principle, stating that host companies should apply the same remuneration standards to both dispatched employees and regular employees working in similar positions, including overtime salaries and bonuses. Since the government is taking this principle more seriously, I believe that detailed rules will be implemented, which would again result in an increase in labor costs for FIEs.

Penny Li is the Manager of Dezan Shira & Associates’ Shenzhen Business Advisory Service team. She specializes in the areas of FDI, M&A, contract review and visa application and holds a Bachelor’s Degree in Law from South China Agricultural University of China and a Master’s Degree in International Law from Aberdeen University in the United Kingdom.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download our brochure.

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