Labor Dispatching and Outsourcing in China: Choosing the Right Strategy

By Allan Xu and Vivian Mao
Editor: Dorcas Wong

As China’s economy slows and labor costs rise, businesses need to be more strategic about the allocation of their resources.

Labor dispatching and service outsourcing are two methods that can help businesses in China circumvent tedious administrative processes and still match workforce needs.

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Both strategies enable firms to procure temporary and specialist talent from outside the company. It means saving on hiring costs, time, resources, and minimizing the risks and legal responsibilities.

For foreign-invested enterprises (“FIEs”) in China, these two labor sourcing methods are particularly attractive where:

• there is an inconsistent work flow (due to the small size of the business, or in seasonal and project-based industries);
• the business is structured as a representative office (which are legally required to recruit through dispatch agencies); or
• priority is given to revenue-generating activities over recruitment.

To choose the right strategy, the employer must be clear on three major fronts – legal liabilities, scope of work, and points of distinction to avoid costly corrective measures and labor disputes.

Labor dispatch: a form of supplementary employment

With the enactment of the Labor Contract Law in 2008, it became increasingly common for employers to regard labor dispatch as a cheap and flexible alternative to hiring regular employees.

In 2011, there were 37 million dispatched employees in China, accounting for 13.1 percent of total employees. This was more prominent in large manufacturing plants, which employed the bulk of their workers – temporarily – and under the guise of a dispatch relationship.

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This was partly a way for employers to evade higher social insurance obligations and abscond non-fixed contract requirements (usually eligible for employees who sign their third consecutive labor contract agreement).

In 2012, the surge in this practice prompted two key legislative amendments that changed the conditions allowing recruitment through labor dispatch in China.

Firstly, the PRC Labor Contract Law Standing was amended, with effect from July 1, 2013, to strictly define labor dispatch as a form of supplementary employment only.

Secondly, the Interim Regulations on Labor Dispatch (“Interim Regulations”) was issued and came into effect on March 1, 2014 – tightening the use of dispatching, remuneration, termination, and performance of labor contracts.

Since these changes, employers have increasingly used the outsourcing method a substitute to dispatching, and as another alternative to avoid directly hiring employees.

However, many enterprises remain unclear on the distinction between the different labor relationships, which have triggered a rising number of labor dispute cases.

Hiring through labor dispatch in China

Labor dispatching is the temporary supply of an employee through an intermediary human resources agency that is specifically licensed to provide such employees.

The client enterprise does not have a direct labor relationship with the dispatched employees, but can engage them for work based on service contracts with the dispatch agency.

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The dispatching agency, on the other hand, assumes the legal responsibility of an employer and in most instances, will handle the employee payroll, individual income tax (IIT), mandatory benefits, and social security. This may serve as a cost-and-time-saving advantage for the client enterprise, but ultimately depends on the agreement that exists between the client enterprise and dispatching agency.

Additionally, the Interim Regulations stipulates that dispatching can only be used where:

• the position is temporary, auxiliary, or replaceable (that is, non-essential staff)
• dispatched staff do not exceed 10 percent of the total number of a company’s employees, and
• the term of contract cannot be less than two years.

While these changes curb the abuse of dispatching as a hiring policy, it remains an attractive option for businesses looking for a simplified and temporary hiring strategy. This is particularly so in the case of hiring blue-collar laborers who usually work on a project basis, and transfer between businesses frequently.

Service outsourcing in China

In practice, service outsourcing usually involves the temporary supply of a service or project. Responsibility for the behavior of the outsourced service is typically borne by the company contracted for outsourcing. The outsourcing company usually retains a high-level of autonomy to direct whichever resources it feels are best for each project.

Traditionally, employees engaged in providing an outsourced services are not required to work full-time and on-site, however, recently, more companies have begun requesting them to do so.

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Service outsourcing differs from dispatching in that the client enterprise receives a service, rather than a specific employee, to perform a given task. Put another way, the agreement does not refer to specific employees or performance criteria, but rather defines the work that needs be done.

Additionally, unlike dispatching, outsourcing is usually used exclusively for roles that require a high level of specialization, confidentiality, or defined scope.

Choose the right labor sourcing strategy for your business

While there are some clear markers that distinguish a typical outsourcing service to that of labor dispatching, in practice, there is often some overlap between the two different labor sourcing strategies.

Businesses should clearly assess the scope and relevant restrictions of direct-employment, labor dispatching, or service outsourcing relationship – before selecting the option that matches best their workforce needs.

A failure to choose appropriately may result in employers mislabeling a legal relationship, and risk exposure to labor disputes.

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