By Allan Xu

Not so temporary

Labor Dispatch Laws Change the Makeup of Companies in China

Because it’s a flexible and cheap option, labor dispatch–when a company hires employees on a contract basis through an outside agency–is one of the most popular ways to hire employees in China. But as new labor regulations come into effect, companies in China need to understand the complexities of balancing the makeup of their labor force.

Dispatch agencies offer companies temporary workers for particular projects or for a certain period of time. This is especially beneficial for businesses in seasonal industries or with project-based work, where the labor need is not consistent.

Labor dispatch is attractive to employers because it lowers risks from potential labor disputes. Dispatched laborers are technically employed and paid by their agencies rather than the companies where they perform work, so workplace grievances are handled by the dispatch agency. This can make the workers more vulnerable to exploitation. As the regulations of labor dispatch have changed, companies are commonly seeking alternative hiring methods for temporary workers to avoid labor disputes and government penalties.

In an effort to limit companies from abusing labor dispatch, the Chinese government amended the Labor Contract Law in 2012 and created the Interim Provisions on Labor Dispatch in 2014. The two regulations restrict what types of positions dispatched staff can hold, the proportion of labor in a company that can be dispatched staff, and how they are returned to their agencies.

To ensure that labor dispatch is only used to supplement employment, the regulations limit the amount of dispatched staff the employer hires to 10 percent of its employees. Employers were given a two-year grace period to reduce dispatch staff to the threshold, which ended March 1, 2016.

Since that interim period just expired, many employers are facing juggling how to reduce their dispatch labor staff while maintaining their business scale. Generally, employers have three options:

Hire dispatched staff as formal employees with a direct relationship with the employer;

Continue using labor dispatch to hire workers for certain positions while returning others;

Use other employment approaches, such as outsourcing.

Consideration of alternative employment approaches – outsourcing in particular – is essential for to maintain business scale without increasing costs. However, employers need to understand the  distinctions between labor dispatch and outsourcing to avoid costly labor disputes. The table below illustrates the basic distinctions between labor dispatch and outsourcing.

Failure to comply with new regulations regarding labor dispatch can result in significant penalties from the government.

This article was first published on China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.
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Posted by By Allan Xu