Transferring employees on an outsourcing in China: overview

A Q&A guide to outsourcing in China.

This Q&A guide gives a high level overview of the rules relating to transferring employees on an outsourcing, including structuring employee arrangements (including any notice, information and consultation obligations) and calculating redundancy pay.

To compare answers across multiple jurisdictions, visit the Transferring employees Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/outsourcing-mjg.

For the general rules relating to outsourcing, visit Outsourcing: China overview.

Gordon Milner, Jingxiao Fang and Eric Dickinson, Morrison & Foerster
Contents

Transfer by operation of law

1. In what circumstances (if any) are employees transferred by operation of law?

Initial outsourcing

An employee is not transferred by operation of law. Where employees are transferred to the transferee to provide services in relation to the outsourcing, the employees can be transferred either by:

  • Secondment (see Question 7).

  • Entering into a new employment contract with the transferee. In this case, the employment contract with the transferor must be terminated at the expense of either transferee or transferor (as agreed by the parties).

Change of supplier

See above, Initial outsourcing.

Termination

See above, Initial outsourcing.

 
2. If employees transfer by operation of law, what are the terms on which they do so?

General terms

Employees are not transferred by operation of law (see Question 1). In conventional outsourcing arrangements, the transferor is responsible for terminating the employee's employment contract, and the transferee is responsible for making an offer that would be sufficiently attractive to ensure the employee agrees to the transfer. As a matter of law, the transferor is primarily exposed to any liabilities arising on the initial employment termination. However, the customer and supplier can contractually allocate these liabilities as preferred. Key issues include the employee's accrued but unused leave and severance payments.

Subject to employee consent, legal recognition of the employee's period of service with the transferor is carried over to the new employment with the transferee, unless the transferor has already paid the appropriate severance amount for the prior period of service. An employee's period of service is used to determine the employee's:

  • Social insurance amount.

  • Entitlement to an open-term employment contract.

  • Other applicable employee benefits.

Pensions

The transferee must contribute to the mandatory social insurance (including pension) and housing fund for the employees, commencing from when the new employment contract is entered into.

Employee benefits

Whether or not the transferee assumes the seniority that an employee has accrued with the transferor can affect that employee's entitlement to employee benefits. For example, statutory entitlement to sick leave ranges from three months to 24 months, depending on the employee's:

  • Cumulative employment period for all employers (if more than one).

  • Employment period working for the transferee. 

Other matters

The representative of the transferee's labour union can enter into a collective employment contract with the transferee on behalf of the employee. A collective contract of this kind addresses terms relating to:

  • Payment.

  • Work time.

  • Leave.

  • Security.

  • Employee benefits.

 

Redundancy pay

3. How is redundancy pay calculated?

When the new employment contract terminates, the transferee must pay the employee compensation of no less than the statutory severance required under the PRC Labour Law promulgated by the Standard Committee of National People's Congress (NPC), which came into effect on 1 January 2008 (Labour Law) (unless a higher amount is agreed under the employment contract).

This compensation is calculated as follows:

  • One month's salary for each year's service. Any period between six months and one year is counted as one year. The compensation payable for any period of less than six months is half of one month's salary.

  • If the employee's average monthly salary during the 12-month period before the termination is higher than three times the local average monthly salary published by the local government for the previous year, compensation is calculated as if the employee's salary is the local published average. In these cases, the maximum compensation is 12 months' salary.

 

Harmonisation

4. To what extent can a transferee harmonise terms and conditions of transferring employees with those of its existing workforce?

There are no limitations on harmonising terms and conditions of transferring employees. Harmonisation can be achieved individually or through collective employment contracts (see Question 2, Other matters).

 

Dismissals

5. To what extent can dismissals be implemented before or after the outsourcing?

Prior notice and severance payments are required in connection with certain dismissal events, such as material changes to the conditions of employment and mass layoffs.

Under certain circumstances, an employer cannot dismiss certain employees. These circumstances mainly relate to employees who:

  • Have contracted an occupational disease.

  • Have suffered a work-related injury.

  • Have dedicated long years of service to the employer.

  • Are pregnant or nursing.

 

National restrictions

6. To what extent can particular services only be performed by a local national trained in your jurisdiction?

Restrictions of this type do exist in the PRC but are unrelated to the vast majority of outsourcings. For example, foreigners cannot be hired to conduct commercial research involving ciphers, or to perform certain operations relating to offshore oil drilling.

 

Secondment

7. In what circumstances (if any) can the parties structure the employee arrangements of an outsourcing as a secondment?

It is possible to second employees to the transferee as part of an outsourcing to the extent that the secondment does not constitute a "labour dispatch service", which only registered labour dispatch companies can provide.

PRC law does not distinguish clearly between a secondment arrangement and a labour dispatch service. In practice, the following factors are used to determine whether a secondment arrangement constitutes a labour dispatch service:

  • Whether the secondment of employees is the main business of the seconder.

  • The amount of employees involved in the secondment arrangement.

  • The frequency of secondment arrangements between the parties.

  • The length of the secondment arrangement.

  • Whether there are fees charged for the secondment arrangement.

 

Information, notice and consultation obligations

8. What information must the transferor or the transferee provide to the other party in relation to any employees?

PRC law does not require any disclosures to be made relating to an employee's transfer. However, the transferor can provide the transferee with information to facilitate the:

  • Preparation of an appropriate employment offer for the employee.

  • Maintenance of the employee's official personnel file.

  • Payment of social insurance on the employee's behalf.

 
9. What are the notice, information and consultation obligations that arise for the transferor and the transferee in relation to employees or employees' representatives?

Employees' prior consent must be obtained before any transfer. The transferor is typically responsible for obtaining this consent, with assistance from the transferee.

In addition, PRC law requires that the transferor discuss the proposed outsourcing with employee representatives if the outsourcing would materially affect the employees' welfare.

   

Contributor details

Gordon Milner

Morrison & Foerster

T +852 2585 0808
F +852 2585 0800
E gmilner@mofo.com
W www.mofo.com

Professional qualifications. England and Wales, Solicitor; Hong Kong, Solicitor

Areas of practice. Technology and outsourcing, PRC.

Jingxiao Fang

Morrison & Foerster

T +86 10 5909 3399
F +8610 5909 3355
E jfang@mofo.com
W www.mofo.com

Professional qualifications. PRC, Solicitor

Areas of practice. Corporate and technology transactions, PRC.

Eric Dickinson

Morrison & Foerster

T +852 2585 0812
F +852 2585 0800
E edickinson@mofo.com
W www.mofo.com

Professional qualifications. New York, Attorney-at-Law

Areas of practice. Corporate and technology transactions, PRC.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248033483506", "objName" : "Transferring employees on an outsourcing in China overview", "userID" : "2", "objUrl" : "http://uk.practicallaw.com/cs/Satellite/resource/6-578-6285?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "22e97be00:15b1badfc49:4ea7", "analyticsSessionCookie" : "22e97be00:15b1badfc49:4ea8", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }