New amendments to China's Employment Contract Law (ECL) severely limiting the use of dispatched workers by employers in China took effect last month. The amendments potentially affect thousands of employers and tens of millions of workers. If a company is using dispatched workers, this is an issue that needs its attention. But what is required, what issues need to be considered and what is happening on the ground?

“Dispatched workers” are employed by authorized labor dispatch agencies and sent to out to work for employers on a contract basis. There is no employment relationship between the companies and the dispatched workers. There are various reasons companies use dispatched workers, chief among them being to reduce labor costs or get around headcount restrictions.

The ECL previously stated that employers should generally use dispatched workers for temporary, auxiliary or substitute positions. It did not define these categories and employers have interpreted the wording to mean that they can also use dispatched workers for positions that fall outside these parameters. As a result, employers have been able to use dispatched workers indefinitely and for a significant portion of their full-time workforce. This was not intended under the ECL.

The amended ECL now stipulates that dispatched workers can only be used for temporary, auxiliary and substitute positions, now defined as:

• A “temporary” position is one that will last for no more than six months
• An “auxiliary” position is one that provides a supporting role to an employer's core business
• A “substitute” position is one where workers are hired to temporarily replace employees who take time off to study or go on leave

Employers will also face limits on the proportion of dispatched workers that can make up their total workforce—likely 10 percent but it could be even lower for some locations and industries.

Employers can be fined up to approximately $1,600 per dispatched worker for violating the new rules.

This new restrictions will not affect the use of dispatched workers by foreign representative offices, which due to their special status are legally required to use dispatched workers. Representative offices “represent” foreign companies in China and are not separate legal entities. They are often used by companies as an initial form of entry into China, but they are very limited in terms of what they are allowed to do.

Companies have a few choices if their use of dispatched workers does not comply with the amendments. They can take on the workers as direct hires, try to make do without these workers or outsource the work that the dispatched workers were doing. Some dispatch agencies have indicated they have a new “outsourcing” service, but in reality this is the same dispatch arrangement under a different name. This is unlikely to be viable going forward once detailed implementing regulations are issued.

The Shanghai Human Resources and Social Security Bureau issued guidance indicating workers dispatched prior to Dec. 28, 2012 can continue to work until the end of the current dispatch term. However it might be easier for companies to transition all dispatch workers to direct hires at the same time.

Most dispatched workers should view the transfer to a direct hire as a positive change. There is a possibility that employees would take this opportunity to ask that their statutory severance be cashed out on the transfer, as opposed to having their years of service recognized by the company and carried forward. Companies need the consent of a dispatch worker to complete the transfer, so workers could withhold such consent to use as leverage to negotiate the payment of their accrued statutory severance entitlement.

In the month since the amendments became effective, small- to medium-sized companies have been at the forefront of making the transition. These employers have a smaller number of dispatched workers so transitioning them to direct hires is much easier and less costly.

There remain, however, tens of millions of workers that will potentially be affected, and this has been challenging for local governments as they implement the new rules. They must strike a delicate balance between compliance and the potential for mass layoffs . This is likely the reason most local governments have yet to issue implementing regulations or take action to actively enforce the new rules. Many larger corporations with a significant number of dispatch workers are taking a wait-and-see approach until such regulations are issued. In any event, whatever approach companies choose, they must have a plan. The situation will change as local governments begin to enforce the amendments and a lack of planning could be very costly.