Legal News & Analysis – Asia Pacific

Outsourcing practices have been prevalent across various Asian countries for some time, often providing a flexible and efficient way for companies to meet their manpower and business needs. Outsourcing can be divided into:

• business function outsourcing: where an “end-user” company outsources part of its work functions or activities to another company (outsourced services company); and
• labour dispatch: where a labour dispatch agency assigns its employees (dispatch workers) to work for, and be subject to the management of, an end-user.

Recently, there has been a shift towards increased regulation of business function outsourcing and labour dispatch in Asia. Most of the developments aim to provide more protections for workers by restricting the types of work that can be outsourced, imposing new licensing requirements, mandatory provisions for employment contracts and service agreements, and penalties where outsourcing laws are violated. Some developments are likely to have a significant impact on foreign and local companies engaged in outsourcing, and may result in a decline in outsourcing in countries such as China, Vietnam and Indonesia. The key developments in the region are outlined below.

China

Significant changes have been made to China’s labour dispatch laws as a result of amendments to the Labour Contract Law. The amendments, which took effect on 1 July 2013, are as follows:

• Licensing: Dispatch agencies must now have a registered capital of at least RMB2m, an “appropriate” permanent place of business, and obtain an operating licence.
• Permitted positions: Companies may now only use dispatch workers for auxiliary positions that provide auxiliary services to an end-user’s main business, temporary positions not exceeding six months, and substitute positions requiring temporary cover. Previously, labour dispatch was to generally be used for these positions. A limit will be placed on the number of dispatch workers that end-users can engage, to be advised in due course.
• “Equal pay for equal work”: Dispatch workers are entitled to the same pay as direct hires performing the same work. From now, dispatch workers’ employment contracts and service agreements between dispatch agencies and end-users must expressly refer to this “equal pay for equal work” principle.
• Penalties: Companies may now be fined between RMB5,000 and RMB10,000 per dispatch worker for violating the labour dispatch laws, and dispatch agencies may have their licences revoked. Dispatch agencies conducting business without a licence may have their illegal gains confiscated and be fined up to five times their illegal gains or RMB50,000.
• Transitional provisions: Service agreements entered into before 28 December 2012 will be valid until they expire, but must comply with the “equal pay for equal work” provision from 1 July 2013. Dispatch agencies established before 1 July 2013 have until 1 July 2014 to comply with the licensing requirements, but must not take on new business until obtaining a licence.

Indonesia

Labour dispatch and business function outsourcing are regulated under the Manpower Law Act No. 13 of 2003. Both functions can only be outsourced if they are separate from the end-user’s core activities. In 2012, the Government passed Regulation No. 19 of 2012, which takes effect on 19 November 2013 and imposes significant changes to the outsourcing regime including the following:

• Restrictions on outsourcing:

− Labour dispatch: Regulation 19 lists five supporting services that may be outsourced, i.e. cleaning, labour catering, security, mining and oil production and labour transportation. Although some media outlets maintain that labour dispatch is now effectively limited to the five services, Regulation 19 can arguably be read such that the list is not exhaustive.
− Business function outsourcing: To outsource an activity, end-users must show that the activity is a supporting activity under a “workflow chart”. This involves business sector associations devising a workflow chart outlining their industry’s core and supporting activities, and end-users using the chart to determine if an activity can be outsourced.

• Reporting: End-users must inform the local manpower agency of the types of activities they will outsource. If outsourcing proceeds before receipt of confirmation from the agency, the end-user may be deemed the employer of the outsourced services company’s employees.
• Service agreements: Outsourced services companies/dispatch agencies must now register their service agreements with end-users with the local manpower agency. Dispatch agencies that operate without registering may have their licence revoked. Service agreements must also contain certain mandatory provisions. Significantly, labour dispatch service agreements must confirm that the dispatch agency will receive the outgoing dispatch agency’s workers if the end-user replaces dispatch agencies and the work is ongoing.
• Employment contracts: Employment contracts between outsourced service companies/dispatch agencies and employees must contain certain mandatory provisions, including guaranteeing the employees’ statutory entitlements. Dispatch workers’ fixed-term employment contracts must also guarantee the workers’ legal entitlements and recognition of prior service where the dispatch agency is replaced. If not, their employment will be deemed to be for an indefinite term. Dispatch agencies must register employment contracts with the local manpower agency, or risk having their operating licence revoked.
• Licensing: Previously, dispatch agencies operating as Indonesian limited liability companies (perseroan terbatas) or co-operatives (koperasi) were issued with operating licences. Now, only limited liability companies are permitted to obtain operating licences.

On 26 August 2013, the Government issued The Circular Letter Of The Minister Of Manpower And Transmigration Number SE.04/MEN/VIII/2013 TAHUN 2013, which clarifies the outsourcing registration and reporting requirements, and sets out a process for implementing workflow charts.

Korea

Recent amendments were made to the Dispatched Workers Protection Act 1998, which took effect on 23 September 2013. The amendments prohibit dispatch workers from being treated disadvantageously on the grounds of their status compared to direct hires working in the same or similar field, in areas including wages, regular bonuses and performance-based incentives.

Japan

Last year, the Act for Securing the Proper Operation of Worker Dispatching Undertakings and Improved Working Conditions for Dispatched Workers 1985 was amended to take effect in two stages. The stage one amendments, which came into effect on 1 October 2012:

• prohibit end-users from hiring former employees as dispatch workers for one year following their termination of employment, except in limited cases;
• prohibit dispatch agencies from hiring dispatch workers on fixed-term contracts of 30 days or less, unless for a “specialised skill” (to be further clarified by Cabinet Order);
• provide that only up to 80 per cent of the total hours worked by a dispatch agency’s dispatch workers may be performed for the agency’s related companies; and
• implement protections for dispatch workers, such as requiring dispatch agencies to facilitate the workers’ permanent employment and provide training, and to consider the end-user’s employees’ salaries in determining the workers’ salaries.

From 1 October 2015, under the stage two amendments, end-users who knowingly enter into illegal dispatch arrangements will be deemed to have offered direct employment to dispatch workers on their existing terms. It may be a defence if the end-user is unaware of the illegality, although this exception will likely be interpreted narrowly. Further guidance on this is expected.

Vietnam

Vietnam’s New Labour Code introduced for the first time provisions regulating labour dispatch, which took effect on 1 May 2013. The Government also recently issued Decree No.55/2013/ND-CP containing detailed provisions on labour dispatch, which took effect on 15 July 2013.

Under the New Labour Code, labour dispatch is restricted such that it may only be used for 17 job categories, which include secretarial, sales support, cleaning, programming of production machine systems, security, driving positions, etc.

Service agreements between end-users and dispatch agencies may not exceed 12 months and must include details such as the dispatch workers’ workplace, job description and working hours. Dispatch agencies must enter into employment contracts with dispatch workers and inform them of the contents of their service agreement with the end-user. Dispatch agencies must also provide details to the relevant authorities of the number of dispatch workers and end-users receiving dispatch workers, and the labour dispatch fees. End-users must not assign dispatch workers to another entity or discriminate against the workers in favour of their direct employees.

For further information, please contact:

Sumin Ahn, Ashurst

[email protected]