China: “Employee Sharing”- is it a new solution for retailers impacted by COVID-19?

The outbreak of the novel coronavirus (officially abbreviated as “COVID-19”) took place in China in January 2020. Since then, due to the grim situation of epidemic prevention, the Chinese government has taken a series of measures to curb the virus spread, including city closedown, road closure and centralized or home-based quarantine. The epidemic prevention measures aim to minimize the people flow and gathering which, combined with the lingering shadow of the COVID-19, have resulted in an unprecedented adverse impact on the service industry.

The most badly hit should be the traditional brick-and-mortar stores (the “Traditional Retailers”) and catering providers which are struggling to earn any income but having to bear human cost during the epidemic period. On the contrary, while most people in China are still unwilling to leave their homes, the outbreak caused a surge of business for retailers that combine online shopping with offline real-time delivery (the “New Retailers”). The New Retailers have been experiencing substantial manpower shortage due to the booming demands.

In view of the labor surplus of the Traditional Retailors and the manpower shortage of the New Retailors, a new mode called “Employee Sharing” has emerged to optimize the manpower allocation between retailors. Hema, an Alibaba-affiliated grocery store and a typical New Retailer in China, took the initiative to adopt the Employee Sharing mode in early February. Under the Employee Sharing Mode, Hema collaborated with department stores and restaurants, engaged their idle employees to conduct product processing, delivering, packaging and storage management for Hema and correspondently covered the human cost for them (the “Employee Sharing Mode” or the “Mode”).

With the Employee Sharing Mode, the Traditional Retailers could relive the human cost, the New Retailers could solve the urgent manpower shortage, and the shared employees could find a way to earn normal income during the epidemic period. Indeed, the Employee Sharing Model received great praise from the Chinese society and was viewed as beneficial to all involved parties, and conducive to stabilizing employment for the whole society.

Though the Mode could be an exciting innovation for the Chinese labor market, many doubts still arise as to whether it is legally safe to implement this Mode. This piece is prepared to discuss the legal basis of the Employee Sharing Mode, its relevant legal risks and challenges and practical advice to launch the Mode.

The Legal Basis of the Employee Sharing Mode

The Employee Sharing Mode involves three parties, i.e. the Traditional Retailers (the “Legal Employers”), the New Retailers (the “Service Receivers”) and the shared employees. As original employment will be remained when employees provide labor to a third party, the legal structure of the Employee Sharing Mode most fits with the concept of employee secondment under the current PRC employment laws and regulations. The former Ministry of Labor stipulates the employee secondment as that employers shall enter employment contracts with long-term seconded employees and relevant standards for employment may be changed based on mutual consent during the secondment period[1]. The said provision shall also be viewed as the legal basis for the new Employee Sharing Mode.

Although the former Ministry of Labor recognized the employee secondment, the said provision was promulgated over 2 decades ago and is still widely doubted whether it could be the sufficient legal basis for the new Employee Sharing Mode. As response to the doubts from the Chinese society, the Ministry of Human Resource and Social Security (the “MOHRSS”) openly commented on the Employee Sharing Mode on February 21, 2020 mainly from the following perspectives: (1) employee sharing between companies that need manpower and those have not resumed work improves the efficiency of labor allocation; (2) companies in cooperation may prescribe their respective rights and obligations by entering into civil agreements; and (3) employees shall not be shared to other companies on a profitable basis. With official confirmation from the MOHRSS, the debate on the legitimacy of the Employee Sharing Mode is set to rest, at least for the moment.

The Legal Risks and Managerial Challenges Intertwined with the Employee Sharing Mode

We do not see PRC employment laws and regulations stipulate arrangement of employee secondment other than the said provisions provided by the former Ministry of Labor two decades ago. Regardless that the Employee Sharing Mode may have been recognized by the MOHRSS, legal risks and managerial challenges are inevitable when implementing this novel Mode. The main concerns on the Employee Sharing Mode include:

• The shared employees are not legally hired by the Service Receivers, thus there is a barrier for the Service Receivers to directly apply their internal rules and regulations, especially when the employees have committed misconduct during work.
• The shared employees only follow the instructions from the Service Receivers during the secondment period. The employees may assert that they have established de facto employment with the Service Receivers and may claim for employment related rights and interests against the Service Receivers.
• The Legal Employers bear a general vicarious liability for their employees’ performance of service that infringe upon the interests of any third-party. However, as the Legal Employers have no control over the employees’ work at the Service Receivers under the Employee Sharing Mode, there may not be a straightforward answer as to whether the vicarious liability on the Legal Employers will remain during the secondment period.

In addition to the above, the Legal Employers and Service Receivers also need to specifically arrange quite many other employment related matters under the Employee Sharing Mode, otherwise labor disputes could easily arise and jeopardize the further launching of the Mode.

To mitigate the legal risks and overcome managerial challenges, Hema adopted the solution by entering into labor service agreements with the shared employees and secondment agreements with the Legal Employers (collectively the “Secondment Agreements”). As MOHRSS also suggested companies in cooperation on the employee sharing shall prescribe their respective rights and regulations through civil agreements, the Secondment Agreements are now known to play an indispensable role in launching the Employee Sharing Mode in practice.

Advice for the Secondment Agreements

The Employee Sharing Mode is an attractive idea for both Traditional and New Retailors. However, without the well-thought-out Secondment Agreements, this new Mode could easily breed labor disputes and defeat the purpose of efficient manpower usage between companies. The followings are key elements that we highly advise to be reflected and included in the Secondment Agreements.

• Salary Payment

Salary Payment is one of the typical characteristics to find existence of de facto employment. In order to avoid the de facto employment, the Service Receivers shall refrain from making any direct payment to the shared employees. The advisable financial arrangement is for the Service Receivers to pay service fees to the Legal Employers and the Legal Employers use the same to pay salary to the employees.

• Social Insurance and Housing Fund Contribution

According to the PRC Law on Social Insurance and Regulation on Housing Fund Management, the Legal Employers remain obliged to contribute for employers’ social insurance and housing fund regardless the launch of the Employee Sharing Mode. But from business perspective, the Legal Employers may negotiate with the Service Receivers on allocating the financial burden related to social insurance and housing fund contribution. If it is agreed that the Service Receivers also bear this part of cost, the relevant amounts could be included in the service fees payable to the Legal Employers as described under the section (1).

• Return of Shared Employees

The Service Receivers do not establish employment with the shared employees and their internal policies and regulations will not automatically become binding on the employees. To fill this gap, it is highly advisable for the parties to agree (1) the shared employees recognize to comply with internal rules of the Service Receivers regarding safety, environment and hygiene and labor disciplinary rules; (2) any violation shall be viewed as violation of Legal Employers’ internal rules and policies and (3) upon the violation, the Service Receivers are entitled to return the errant employees back to their Legal Employers who will impose disciplinary measures on the employees.

• Safe and Healthy Working Conditions

To prevent occupational harm to employees’ health, the Service Providers shall provide safe and healthy working conditions. Pursuant to Article 38 of the PRC Employment Contract Law, employees are entitled to claim constructive termination of employment if the employers fail to provide safe and healthy working conditions. As such, from the perspective of the Legal Employers, to avoid this kind of claim on constructive termination, it is important to obtain the covenant from the Service Providers that they will provide safe and healthy working conditions.

• Work-Related Injury

In accordance with Article 43 of the PRC Regulation on Work-related Injury, where an employee suffers work-related injury during the secondment period, the Legal Employers shall assume liabilities stemming from the work-related injury, but the Legal Employers and the Service Receivers may enter into agreement on specific compensation. With this legal basis and the fact that employees only work under instructions from and at the place of the Service Receivers, it seems more reasonable for the Service Receivers to indemnify the Legal Employers for any expenses or cost related to employees’ work-related injury suffered during the secondment period.

• Tort Liability Owed to Third Party

Pursuant to the Article 34 of the PRC Tort Law, when an employee causes damage to others due to performance of work duties, the employer shall bear the tort liability, and during the labor dispatchment period, if an dispatched employee causes damage to others due to performance of work duties, the dispatchment receiver company shall bear the tort liability and the dispatching company only bears the supplement liability when it has fault.

Since the Legal Employers are not qualified labor dispatchment agency, the employee secondment under the Employee Sharing Mode shall not be defined as labor dispatchment. Nonetheless, the cited provision of the PRC Tort Law is a good reference for the Legal Employers and Service Receivers to negotiate and allocate the compensation liability arising from the situation where employees cause damage to others due to performance of work and tort liability is owed to any third party.

• Term of the Secondment Agreement

The emergence of the Employee Sharing Mode is highly connected with the background of COVID-19 outbreak. It is unclear whether the MOHRSS or other authorities will recognize this Mode after the impact of COVID-19 comes to an end. That said, from a conservative stance, the term of the Secondment Agreement may not be too long. Also, considering the service market may rebound at a certain point and demands for New Retailers may fluctuate, it is advisable that both the Legal Employers and Service Providers are granted with the right to terminate the Secondment Agreements upon notice in advance.

• Exclusion of De Facto Employment

It is a high priority for the Service Receivers to avoid de facto employment with the shared employees. To mitigate this kind of risk, it is important to have covenants in the Secondment Agreements that the employees will remain legally employed by the Legal Employers during the whole secondment period and have no intention of establishing employment of any kind with the Service Receivers.

• The Non-Profit Nature

The MOHRSS has clearly commented that the Legal Employers shall not share employees on a profitable basis. The legitimacy of the Employee Sharing Mode heavily relies upon its non-profitable nature. The Legal Employers shall refrain from any intention to earn profit by sharing out their employees. If the Legal Employers make any profit through the Employee Sharing Mode, it is quite likely that the Legal Employers will be found as practicing labor dispatchment business without approval and subjected to administrative penalties.

Under the Employee Sharing Mode, the Legal Employers are unable to shift their statutory obligations to the Service Receivers in the respects of social insurance, housing fund, work- related injury and tort liability against third party. But with the Secondment Agreements, parties involved could negotiate on the sharing of financial liability in connection with the said statutory obligations.

Though many aspects of the Employee Sharing Mode remain controversial and need careful documentation to mitigate legal risks and overcome practical challenges, it is undeniable that this new Mode is an impressive innovation for short-term manpower re-allocation. For the moment, there is no further legislative or judicial momentum known to the public regarding detailed regulation on the new Mode to be promulgated. As such, it will still take more time for China to see whether this Employee Sharing Mode will become a permanent solution for flexible use of staff， or it is just a flash in the pan during the epidemic period.

[1] Article 7 of the Several Opinions on Enforcement of the PRC Employment Law

For more information on these articles or any other issues involving labour and employment matters in China, please contact Carol Zhu (Partner) of Zhong Lun Law Firm at carol.zhu@zhonglun.com or visit www.zhonglun.com.