CWS 3.0: October 17, 2012

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China Tightens Labor Contract Law

On July 6, the Standing Committee of the National People’s Congress (NPC) of the People’s Republic of China (PRC) published a draft amendment to the Labor Contract Law (LCL), only four years after it first came into effect. The PRC will further discuss the Draft Amendments in their next session and it is expected that the amendments will be passed before the end of the year.

The intention of the changes is to prevent “casual” labor from becoming the main labor channel and to tighten the law to prevent instances of abuse. The new regulations require that all temporary workers should enjoy payments, including all welfare and benefits, equal to their permanent counterparts, in reality as well as in theory.

The government in Beijing has responded to concerns over the large increase in the number of workers that have signed labor contracts with intermediary employment agencies (we would more readily recognize them as outsourcing agencies) and not with the enterprises for whom they actually work. Because of this process many workers do not benefit from the stronger protections that were awarded to them when the LCL came into effect. Some estimates suggest that 60 million workers in China, or almost 20 percent of the total urban workforce, have contracts of this type.

Another aspect of the amended regulations is the requirement that temporary workers can only be employed in positions which are temporary, auxiliary or substituting in nature — and can last no longer than six months. This means that in the future, no Chinese employers will be allowed to use temporary workers for their principal business activities, nor for an extended term. While, on the face of it, the restriction on tenure might seem like a retrograde step, the current law requires that temporary workers have to be placed on assignment for a minimum of at least two years. Therefore, the change in tenure actually opens up the option of using temporary workers on short-term assignments for the very first time.

The law also tightened the rules regarding the registration and licensing of labor “dispatch” companies and increased the fines to be imposed on such companies that violate the law.

At this stage, it is not known whether or not there will be a transition period for the new regulations, nor how some aspects of the regulations will operate in practice. One area of concern is how this is intended to work for employees who are dispatched on longer term contracts to representative offices of foreign companies in China.  Foreign companies are not independent legal entities under PRC law and therefore, are not allowed to hire Chinese employees directly, but must hire them through a labor dispatch company.

The matter is further complicated by the fact that some local regions have passed additional rules that supplement the LCL. So in Guangdong, for instance, dispatched workers may not count for 30 percent or more of the total workforce of a labor accepting entity.

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