Author: Jason Lu and Tony Shi

ABSTRACT:

After the new round of regulation on labor dispatch by the Amendment of Labor Contract Law and Interim Provisions on Labor dispatch, a large number of labor dispatch positions were transferred into outsourcing, hence leading to equal abundant labor disputes with regard to differentiating labor dispatch and outsourcing. This kind of disputes could easily arouse severe consequences and collective disputes, and the legal relationship behind them is difficult to distinguish. Concluded from a couple of typical cases, four parameters including subject, object, administration and name are considered in differentiating labor dispatch and outsourcing. The successful transition from labor dispatch to outsourcing is related to the relevant national reform policies' implementation. An interpretation or a guidance case from Supreme People's Court was suggested to be promulgated to differentiate labor dispatch and outsourcing.

KEY WORDS: Labor Dispatch; Outsourcing; Differentiator

Introduction

Originating from the 1980s' Reform and Open, evolving in the 1990s' SOE reform, labor dispatch, which is regarded as a flexible employment mode, becomes more and more "irrationally prosperous" even after the powerful regulation of Labor Contract Law in 2008. The Amendment of the Labor Contract Law in 2012 strictly defining labor dispatch as the supplementary employment mode,  together with Interim Provisions on Labor Dispatch issued by Ministry of Human Resources & Social Security, draw the new boundaries of labor dispatch, including administrative permit, position requirement, proportion restriction, the principle of equal work equal pay and administrative penalty. Such regulations fully picture our country's stringent-control attitude toward labor dispatch. Confronting the most stringent regulations regarding labor dispatch in history, and the deadline of two-year transition period,  some enterprises choose to return the worker, some hire them directly, some automate the working process or use robot, and other enterprises of considerable number choose to transfer the previous dispatch into outsourcing. This adjustment is so common and seems to be "an open secret".

Transfer from dispatch to outsourcing accords with the trend of social specialization, and deserves support and encouragement, but labor dispatch in the name of outsourcing shall be negated and punished contrarily. How to identify outsourcing and labor dispatch? Different person has different answers to this question and no consensus has been agreed upon. Meanwhile, the praxis is not waiting for us: a large number of dispatch positions have been transferred into outsourcing, along with the high occurrence of disputes regarding "true or false" outsourcing. Also, three features were demonstrated in this kind of disputes: first, because of the substantial differences in legal relationship between labor dispatch and outsourcing, the rights, obligations and responsibilities under labor law are faced with "all or nothing" consequence if such legal relationship is confirmed; second, a large number of people would be involved in the disputes because the transition is usually taken in a "batch processing"; third, because the units related to this transition have done enough work on the forms such as contracts or agreements, the false outsourcing is concealed and thus very hard to be distinguished.

Accordingly, considering the universality of phenomena, the frequency of argument, the severity of consequences, the collectivity of disputes and the concealment of false outsourcing, the longstanding problem about the vague identification boundaries of true or false outsourcing shall be solved from theory down to praxis from now on, which means practical criteria for guidance or examining factor for identification shall be promulgated as soon as possible. Such promulgation will not only unify the opinions among enforcement and judgment department from place to place, but benefit related units' lawful operation and trade union's early intervention, thus is propitious to the source control. Considering that such identification does not have local features, we suggest Supreme People's Court issue an interpretation or at least a guidance case to confirm these parameters. Based on the above reasons, we break the ice.

1. Three difficult cases with regard to differentiators between labor dispatch and outsourcing

The first case occurred among a dispatching agency, a receiving unit and the dispatched workers. A property management company has signed a Government Procurement Contract and a Property Management Contract with a state-owned hospital, upon which they agreed the hospital entrusted business including environmental cleaning, medical transportation, health assistance, washing, security, food compounding to the property management company, and the property management company dispatched over 500 workers who have signed labor contracts with it to the hospital. Later, the property company aroused a controversy about service fee with the hospital and thus terminated the Property Management Contract. However, after failing to recall the dispatched workers come back to vocational training, property company was asked for the severance pay, overtime pay, bonus and allowance for the reason of unilateral modification of labor contract and failing to provide labor protection or work conditions as stipulated in the labor contract. Based upon the fact that the employees were in their positions before and after the period in which the Property Management Contract performed, and the fact that service fee was charged by the number of people, the court of first trial held that a labor dispatch relationship established between the company and the hospital. After the procedure of second instance, the appeal court reconsidered the case based on the following four aspects, the qualification of the property company, the mutual consent, the substantial content of transaction and the final decision of employee administration, and held that an outsourcing relationship existed between them. Therefore, the property company shall undertake the severance pay, overtime pay, bonus and allowance of those 500 more people.

The second case occurred between a laborer and a receiving unit. A stockjobber signed a Security Service Contract with a security company, with the agreement that the security company dispatched 4 security guards (each of them has signed a Labor Contract with the security company) to the stockjobber to safeguard its building for 24 hours in shifts. Zhou was one of the security guard. Besides his 8-hour work, he was arranged on night duty, and was paid the overtime pay directly by the stockjobber. Later, a dispute regarding overtime pay happened between Zhou and the stockjobber. Zhou claimed that a labor dispatch relationship was formed and the stockjobber shall pay the overtime pay; the stockjobber claimed instead that an outsourcing relationship was established with the security company, which means Zhou was an employee to the security company and no factual employment relationship existed between them. After the arbitration, first and second instance, the appeal court finally held that a factual employment relationship was established between the stockjobber and Zhou, and the Security Service Contract was a Labor Dispatch Contract de facto, no matter whether the security company had the qualification of labor dispatch.

The third case occurred between the contractee and the contractor, and an infringed was involved in this case besides an employee.  In this case, a group enterprise has entered into a Security Service Contract with a security company, with the agreement that the security company provided security service for its factory and the group enterprise paid the security service fee accordingly. Later the security company dispatched Liu to work in the factory. During his working time, a quarrel happened between Liu and Cheng (the infringed) due to some trivial matter. Cheng suffered serious damage from Liu and Liu was sentenced to six years and nine month's imprisonment. This caused a dispute about Cheng's medical payment between the two companies. The court of first instance affirmed a labor dispatch relationship was established among the three parties, the security company, the group enterprise and Liu, and judged that the group enterprise, deemed as a receiving unit, shall assume the major liability of Liu's damage. Then the group enterprise appealed and the court of second instance affirmed that the security company administered Liu factually; an outsourcing relationship was established between the security company and the group enterprise; and no legal relationship existed between the group enterprise and Liu. Accordingly, the major liability of Cheng's injury should be assumed by the security company.

The above-mentioned disputes are just the tip of the iceberg among the numerous cases regarding transfer from dispatch to outsourcing, but we can still observe the whole picture of practical operation in microcosm. In fact, each two parties of the three parties, the sourcing firm, the labor-using company and the laborer, could arouse disputes, and the situation of each party may vary pursuant to different legal relationship. Accordingly, to clarify the boundary between labor dispatch and outsourcing throughout definite parameters, and to discover the factual legal relationship among the three parties, are the first and foremost questions before we solve these problems.

2. Four differentiators between labor dispatch and outsourcing

Comparative clarified understanding of the nature of both labor dispatch and outsourcing have been fostered in both theoretical and practice circle. Under a labor dispatch relationship, a dispatch contract is usually signed between the dispatching agency and the recerving company, and both parties administer the laborer. Under an outsourcing relationship, an outsourcing contract is usually signed between the contractor and contractee, and the laborer established the labor relationship with the contractor, without administration from the contractee. But the distinction between them is still a moot question in both theoretical and practice circle: several local rules are promulgated in Jiangsu, Shanghai and other districts;  some academic views like "administration theory" and "benefit theory" are also proposed in theoretical circle.  However, neither local rules nor academic views could completely be in accord with the complicated reality if we differentiate labor dispatch and outsourcing merely through a single or decisive parameter. Such distinction shall be analyzed by a couple of factors, and we generalize them into four as below.

1.1 Subject: Necessary Qualification

Either a labor dispatching company or a contractor have necessary qualification for engaging in their business. On the one hand, formally speaking, all dispatching agencies shall obtain an administrative license from the labor bureau. Meanwhile, General Principles of Civil Law, Company Law, the Administration of the Registration of Enterprise Legal Persons and other laws and regulations also require a contractor to perform within the threshold of its business scope, and some contractors also need their administrative licenses. On the other, besides such registration or license, judging necessary qualification of the subjects shall rely on substantive materials, which is to say, such judgment must be confirmed by combining several components, including whether the contractor has the necessary work place, facilities, rules and procedures, management ability and capacity of responsibility.

However, acquirement of such necessary qualification doesn't mean what they are doing is a dispatch or outsourcing business, on the contrary, performing such business without corresponding qualification may cause imperfections in rationality, which deserves attention from judges and should be listed as one of the differentiators.

1.2 Object: Specific Threshold

From the perspective of legal relationship, labor dispatch and outsourcing have different objects: the object of dispatch is "person", or say, labor force; the object of outsourcing is "service", or say, product. Since the objects differ, we could see the nature of legal relationship through observing the objects, therefore object should be considered as one of the differentiators. For instance, in the first case, the court confirmed that the services agreed between the hospital and the property management company, such as environmental cleaning, medical transportation, health assistance, washing, security and food compounding, are not major business of hospital……the object they agreed upon is the service rather than the labor force.

Specific threshold of objects shall be emphasized upon when we observe, which is to say, labor dispatch relationship shall be emphasized on definite "person", specifically speaking, the identification of a person's nature (name, gender, qualification, skills required, etc.), of a person's expiration (dispatching period), of a person's price, payment period and method; and outsourcing shall be emphasized on definite "service", specifically speaking, the identification of a service's nature(service scope, product, quality requirements, etc.), of a service's expiration( service period or term of delivery), of a service's price, payment cycle and method.

In praxis, "person" often has close connection with "service". "Person" has to do service, otherwise its value could not be seen, while "business" must be done by "person". Therefore, it is a challenge for arbitrators and judges to tell one from the other in such intricate circumstance. The method, we think, is to differentiate the main point and the auxiliary one, which is to say, while considering the specificity of object, "person" ranks first if these "person" things play dominate role, and vice versa.

1.3 Administration: Substantial Control

In theory, the laborer is administered mostly by the receiving company in a labor dispatch relationship, and by the contractor in an outsourcing relationship. Therefore, the administration should be an important factor to differentiate labor dispatch and outsourcing, and this factor was even regarded as a unique or decisive differentiator by some judges or arbitrators. However, based upon the multiple levels and transferability of administration, we regard this factor as not being judged as the mere differentiator, and also, we focus on the core of administration--substantial control.

In praxis, administration could be divided into three levels while managing laborer. First is the administration behavior in work place. The administration in the factory or the office for the reasons of fire control, security and sanity, work order such as the entrance and exit of the place and other aspects, is correlated to the workplace itself, and we often call this phenomenon "While in Rome, do as the Romans do". The correlation degree of this differentiator is the lowest therefore. Second is the administration of daily work, which concludes daily work arrangement, statistics, attendance checking, quality control, etc., and this daily work is related to laborers' supply. In praxis, based upon efficiency-improving and cost-saving consideration, the relevant parties usually transfer this right to management through negotiation. For instance, while a laborer is sent to the contractee's work place, the management of daily work is usually passed along from the contractor to the contractee, in order to save cost and improve efficiency. This kind of behavior is in the interests of both parties. Considering such transferability of administration, the correlation degree of this differentiator is not high therefore. Third is administration of core benefit, which is to say, the core benefit or disbenefit of a laborer, including pay rise and cut, welfare increase and decrease, reward and punishment, position transfer, renewal and dismissal, etc. This management is called substantial control. In praxis, this kind of administration is hardly transferable, otherwise the whole part of management would be taken over. Therefore, the correlation degree of this differentiator is extremely high.

Take the second case as an example, although what the stockjobber bought was the security service from the security company, it directly administered the working hours and place of the four safeguards through systems like attendance checking and overtime pay. Besides, both parties agreed in the Security Service Contract that the stockjobber had the right to inspect and examine the work done by the safeguard; the safeguard must abide by the bylaws of the stockjobber; the stockjobber could transfer the positions of those who disobeyed the rules or was proved incompetent. This agreement means the transition of the main part of core benefit and thus is confirmed as a labor dispatch de facto. On the contrary, the appeal court held in the first case, that the hospital only had rights to examine and advice on management of attendance checking, reward and punishment, remuneration and dismissal, etc.; the Property Management Contract stipulated explicitly the acceptance degree of hospital's advice; the property management company had the final decision and enforcement power, and thus overruled the judgment of labor dispatch de facto which the first trial court had awarded . In the third case, the laborers of the contractor were not applicable to the rules of the contractee, and they did not get any pay from the contractee also, therefore no substantial control can be taken by the contractee and an outsourcing relationship shall be confirmed.

1.4 Name: External Observation

The name observed externally is a parameter often ignored while differentiating labor dispatch and outsource. In a labor dispatch relationship, the name laborer use is "an employee to the receiving unit"; whereas in an outsourcing relationship, laborer seldom uses the name "an employee to contractee" even if he/she is accredited to the contractee. Otherwise, apart from the reason that it lacks the basic legal relationship, on the one hand, it will increase the risk of the contractee pursuant to Article 34 of the Tort Law, where an employee causes any harm to another person in the execution of his work duty, the employer shall assume the tort liability; where, during the period of labor dispatch, a dispatched employee causes any harm to another person in the execution of his work duty, the receiving employer shall assume the tort liability; and the dispatching agency, if at fault, shall assume the corresponding complementary liability. The name externally observed is judged usually by a subject outside the three parties concerned. Factually, a rational person who is unaware of the real circumstance would often decide the subordination through an employee's appearance, like self-introduction, work uniform, name card, time card, etc. On the other, this would cause misunderstandings between the laborers and employees to the contractee, and accumulate legal risks caused by different pay for same work or work injury.

Therefore, rationally speaking, the contractee would not allow the laborers accredited to its place to work on its behalf, otherwise there exist imperfections in rationality. It is far from provability that some contractees merely claim it as for unified management. This imperfections in rationality shall be followed especially and considered comprehensively as one of the differentiators.

The last point needed to pay attention to is that the four differentiators mentioned above often interact with each other but point to different directions. Any single differentiator can hardly play the determinative role, and the final nature shall be decided through a comprehensive judgment, or say, the most closely linked differentiator. For instance, in the second case, we can still conclude a "labor dispatch in the name of outsourcing" through a comprehensive examination on subject, object, administration and name, even though the security company did not have a qualification of labor dispatch and sign a Labor Dispatch Agreement; also, in the first case and the third case, the appeal court change the original labor dispatch judgment into outsourcing through a comprehensive consideration of four differentiators.

3. Conclusion

Accompanied by the termination of the two-year transition period, labor dispatch, which is regarded as a crucial employment mode, will finally step down from the stage of history due to its high standard and stringent specification regulated by the laws; meanwhile, faced with the fourth industrial revolution, the state council has promulgated a series of reform documents since 2014, and service outsourcing is involved in some important documents, including Opinions on Further Efforts Relating to Employment and Business Startup under the New Conditions, Made in China (2025), Outline of Actions Improving the Development of Big Data Analysis, etc. Under the policies of "Industry 4.0", "Internet +" and "Popular Entrepreneurship and Innovation", service outsourcing is bound to become the main direction of enterprise business development.

At the present when "Comprehensively Deepen Reform" was put forward, the successful transition from labor dispatch to outsourcing will not only concern the skills upgrading of laborers, but concern the restructure of human capital in traditional industries and human resource management in emerging industries, and furthermore affect relevant national reform policies to be implemented. Accordingly, clarifying the boundary between labor dispatch and outsourcing has profound practical meaning for promoting true outsourcing, containing false outsourcing, and the smooth landing of this employment mode adjustment for labor dispatch.