Labor Authorities of China’s Yangtze River Delta Region Clarified Differences between Labor Dispatch and Labor Outsourcing

On July 26, 2022, the Departments/Bureau of Human Resources and Social Security of Jiangsu Province, Shanghai Municipality, Zhejiang Province and Anhui Province of China published online the Compliance Guidelines on Labor Dispatch in the Yangtze River Delta Region (“Guidelines”). In the Guidelines, the labor authorities of those three provinces and one municipality have among others made a clear distinction between labor dispatch and labor outsourcing, which is of great guiding significance to avoid the “fake labor outsourcing and real labor dispatch” that often occurs in practice.

Basic Definitions and Features

“Labor dispatch” refers to a form of employment, in which the labor dispatching entity operates a labor dispatch business, hires employees and dispatches those employees to host entities. The host entity directly manages the work process of the dispatched staffs.

Labor dispatch has the following main features:

• A labor dispatching entity must obtain the Labor Dispatch Operation License in accordance with the law before it can operate a labor dispatch business. If a host entity enters into a labor dispatch agreement with an entity that has not yet obtained the Labor Dispatch Operation License, this may cause the legal risk that labor relationships between such host entity and the dispatched staffs may be deemed established. Therefore, the host entity shall check and verify at first whether the labor dispatching entity has duly obtained the Labor Dispatch Operation License.
• The labor dispatching entity hires employees and establishes labor relationships with the dispatched staffs by signing written labor contracts. If a host entity uses dispatched staffs without labor contracts with the labor dispatching entity, this may result in the legal risk of the host entity being found to have labor relationships with such dispatched staffs. Therefore, the host entity shall also check and verify whether the labor dispatching entity has duly signed labor contracts with the dispatched staffs.
• A labor dispatch contract shall be signed between a labor dispatch entity and a host entity to establish a labor dispatch contract relationship.
• The host entity uses the dispatched staffs, but does not conclude labor contracts with the dispatched staffs and does not establish labor relationships with them. The dispatched staffs are subject to the direction and management of the host entity in the course of work, forming actual labor-use relationships. In practice, the host entity may conclude supplementary agreements with the dispatched staffs to regulate the work content, conditions and discipline for the period of the labor dispatch.
• The dispatched staffs may only be used in temporary, auxiliary or alternative positions in accordance with the law. Temporary positions refer to jobs that have a duration of not more than six months. Auxiliary positions are non-main business jobs that are determined through the internal democratic process of the enterprise and provide services to the main business positions. Alternative positions are jobs where employees of the host entity can be replaced by other employees for a certain period of time when the former are unable to work due to taking study sabbatical or taking leave etc. In addition, the number of the dispatched staffs used by a host entity shall not exceed 10% of the total number of the staffs used by such host entity. The total number of the staffs used by the host entity refers to the sum of the number of employees who have entered into labor contracts with the host entity and the number of the dispatched staffs used by such host entity. If a host entity uses the dispatched staffs in violation of the above mandatory provisions, the host entity might need to assume relevant legal liabilities towards the dispatched staffs.

“Labor outsourcing” refers to a labor-use pattern, in which the principal contracts out its certain businesses to a contractor, who arranges its own staffs to complete the corresponding assignments as required by the principal.

It has the following main features:

• The principal concludes an outsourcing contract with the contractor, forming a contractual relationship for services or works under the general civil law. Therefore, the outsourcing contract is not subject to the special laws and regulations relating to labor dispatch.
• There are usually no mandatory requirements regarding the qualification of the contractor and the type, nature and quantity of work to be outsourced.
• The principal and the contractor agree that certain work will be assigned to the contractor for completion and that the contractor will be paid by the principal based on the amount of work and its completion.
• The contractor establishes labor relationships with its employees as well as manages and directs them.
• In the course of work, the principal does not directly manage and direct the contractor's staffs.

Labor Dispatch vs. Labor Outsourcing

1. Qualification: A labor dispatch entity must obtain the Labor Dispatch Operation License in accordance with the law before they may operate a labor dispatch business. In a labor outsourcing relationship, unless the outsourced project involves content to be licensed as required by law, the contractor is not required to apply for an administrative permit and there are no special qualification requirements.

2. Position and quantity requirements: Labor dispatch can only be carried out in temporary, auxiliary or alternative positions in accordance with the law, and the number of the dispatched staffs used by a host entity shall not exceed 10% of its total number of staffs. For labor outsourcing there is no such special restrictions or requirements on positions and quantity.

3. Legal relationships involved: Labor dispatch involves three legal relationships: the labor dispatch contract relationship between the labor dispatching entity and the host entity, the labor contract relationship between the labor dispatching entity and the dispatched staffs, and the actual labor-use or service relationship between the host entity and the dispatched staffs. Labor outsourcing involves two legal relationships: the general civil contractual relationship between the principal and the contractor, and the labor contract relationship between the contractor and its employees.

4. Direction and management: In a labor dispatch relationship, the host entity directly commands and manages the daily work of the dispatched staffs, and the dispatched staffs shall follow the rules and regulations of the host entity. In a labor outsourcing relationship, the principal does not participate in the direction and management of the staff, and the contractor directly commands and manages its staffs. In practice, if the principal is responsible for the actual management of the contractor’s employees, instead of a labor outsourcing but a labor dispatch might be deemed established. If the contractor also has not concluded labor contracts with its employees or is not qualified to operate the labor dispatch business, the actual direction and management of the contractor's employees by the principal may even result in the principal being found to have de facto labor relationships with the contractor's employees.

5. Measurement of work achievements: In a labor dispatch relationship, the host entity pays the labor dispatching entity for its services based on the number of the dispatched staffs, the content and/or hours of work, and other elements directly related to the dispatched staffs. In a labor outsourcing relationship, the principal pays the contractor for the outsourced services based on its completion, which is not directly related to the number of staffs used by the contractor or their working hours, etc.

6. Applicable laws:

Labor dispatch is mainly governed by the Labor Contract Law of the People's Republic of China, the Measures for the Implementation of Administrative License for Labor Dispatch and the Interim Provisions on Labor Dispatch. In contrast, labor outsourcing is mainly subject to the Civil Code of the People's Republic of China.