Under the pattern of global production, manufacturers must orient production to orders from seasonal international markets. For the electronics industry in City W, April to June is the slack season, during which the factories need fewer workers; August to October is the busy season when factories substantially increase their needs for labor. In this case, factories turn to labor service companies for recruitment, building a large labor force of temporary employment. Before 2014, the “dispatched workers,” who were hired into factories through labor service companies, received much lower pay than formal workers and can be laid off at any time. However, since 2014, the Interim Provisions on Labor Dispatch regulates that the number of dispatched workers must be within 10% of total labor in any factory.Footnote 5 Thereafter, the “outsourced workers,” also hired through labor service companies, have replaced the “dispatched workers” as the majority of labor for factories, accounting for approximately 70% of workers.
To clarify the concepts, the “outsourced worker” is distinguished from the “dispatched worker” in Chinese laws. From the perspective of management, the outsourced workers are directly supervised by the labor service companies, while the dispatched workers are managed by the factories. From the contract perspective, the object of labor outsourcing is the “project” that the labor service company should complete. A factory pays the company administrative fee according to the progress of the “project.” The object of labor dispatching is the “labor” needed in a project. The factory pays the company based on how much labor is used. Legally, labor outsourcing is subjected to the Contract Law, and accordingly, factories do not bear the responsibility for any problem of outsourced workers. Labor dispatching is subjected to the Labor Contract Law, and hence, factories assume joint liability with the labor service company for compensation if any damage is caused to dispatched workers (Liu 2014; Zhou 2012). As labor outsourcing has not yet been clearly defined in law, it is used as a disguised form of labor dispatching.Footnote 6
In addition to a regular payment, “cashback” is another important payment that serves as a profit-making mechanism of the intermediary chain and a key to maintaining the flexible production. Now, we explain the mechanism of “cashback.”
“Cashback”: a strong incentive for intermediary organizations
Labor shortages, in parallel with the fluctuating pattern of seasonal production, increasingly lead to difficulty in recruitment, especially during the busy season. It has become the major task for labor service companies to recruit temporary workers to meet the employers’ need for workforce flexibility. In this context, “cashback” has emerged as a prevalent incentive for labor service companies to attract workers.
“Cashback,” also known as the “returned money,” is a sum of money paid by the labor service company to workers as an informal reward aside from formal wages.Footnote 7 This incentive has three characteristics. First, the amount of “cashback” is highly related to the production season. As shown in Fig. 2, “cashback” fluctuates throughout a year, with the lowest in June, the highest in October, and a difference of 3500 Yuan. Since its fluctuation is directly linked to the seasonal production, “cashback” could be the strongest sign of labor demand. In this sense, the rise of “cashback” could foretell the coming of a peak season with increasing labor demand. Second, the amount of “cashback” varies from factory to factory, closely related to the characteristic of the factory itself. In other words, “cashback” is relatively lower in factories with relatively better employment packages for workers and higher in those without. Third, “cashback” is only given to eligible workers who meet specific requirements, such as working in a factory for more than 45 days without unexcused absence or rule violations. “Cashback” is a one-time payment.
The distribution of “cashback” goes through five steps, from the production line leader to the factory manager, to the labor service company, to scalper, and to labor agency, until the money, at last, reaches workers’ hands. First, the line leader checks everyone’s workload and hands in a list of names of qualified workers to the manager. Then, the manager gives the “cashback” and the list to the labor service company. Next, the labor service company pays the “cashback” directly into the scalper’s bank account. The scalper transfers the money to the labor agency’s account. Eventually, the labor agency distributes the “cashback” to every worker. With the “cashback,” labor service companies manage to attract enough workers and indirectly control their workloads in factories. At the same time, scalpers and labor agencies can also make a profit from hunting and organizing labor. In this sense, “cashback” becomes a mechanism by which the labor intermediary chain works and plays a vital role in shaping the labor market. Further questions to answer are as follows: Where do labor service companies obtain money to give the “cashback?” How could the intermediary organizations in the chain make profits?
The profit-making model of labor service companies, labor brokers, and scalpers
Source of “cashback”: the profit-making model of labor service companies
The payment from factories to labor service companies includes two parts: management fees and rewards. Management fees refer to the overall charge for services, including advertisement, recruitment, training, payroll management, and dispute mediation. If the worker turnover rate is low, the management fee would be a fixed amount of money ranging from 100 to 500 Yuan per person per month.Footnote 8 In other words, the management fee is calculated partly based on the length of time someone works for the factory; the longer the workers continue, the higher the fee the labor service companies charge. In addition, the labor service companies receive rewards from factories as an extra incentive for recruiting workers, depending on what proportion of labor demand has been satisfied by the labor service company.
It is noteworthy that the detailed “labor demand” is never fixed in the contract between factories and labor service companies; instead, it is only vaguely expressed as “providing labor forces according to the market demand, and the rewards could be secured if the company provides a certain proportion of the needed workforce.”Footnote 9 Also, at the beginning of each year, the factories issue a sheet of labor demand to labor service companies, but the labor demand does not appear on the contract, just as a reference. Because the factories’ demand for labor is changing throughout the year, labor service companies have to adjust their recruitment accordingly based on the variation of turnover rate and production season. Therefore, the labor service companies act as a buffer for factories’ demand for flexible labor.
To balance the risks borne by labor service companies due to their fluctuating demand for labor, factories will reward labor service companies according to the extent to which the services meet the factories’ employment needs. In other words, the reward is not based on how many workers they recruit but on the extent to which the factories’ demand for labor force is matched by the recruitment of the labor service companies. A full reward would be given to a labor service company if the aggregate demand was entirely met. Otherwise, the reward would be calculated according to the ratio of the recruitment number to the total demand for labor.
In addition to management fees and rewards from factories, labor service companies also make profits from workers’ interview fees and social security contributions. Different from the intermediary fee (which is free of charge in many labor service companies), the interview fee refers to the money the workers have to pay for taking ID photos and buying pens when they are preparing for interviews with labor service companies. On the other hand, labor service companies also pocket their social security contribution for workers as extra profit. Two reasons make their misappropriation possible. First, since outsourced workers hardly have any chance to become formal workers, the labor service companies do not pay the social security contribution for them but ask them to sign a statement claiming that they voluntarily refused it. Second, for the dispatched workers, although the labor service companies are obliged to pay social security contributions for them, the workers have to go through 3-month probation, during which the companies often default on this contribution and secretly pocket it as profits. During the busy season, this sum of money could be convenient as a part of “cashback.”
In summary, labor service companies make profits from management fees, rewards from factories, interview fees, and social security contributions. These sources of profit are also the sources of “cashback”; the unpaid social security contributions account for almost half of the “cashback.”
Distribution of “cashback”: the profit-making model of labor agencies and scalpers
The labor agencies and scalpers earn three types of fees from labor service companies. The first is the agency fee for recruitment, which is a charge for the processes of recruiting, organizing, and transporting services. The second is the “head fee,” namely a charge that is calculated based on the number of workers provided by agencies and scalpers. The third is the “reward,” by which the labor service companies could make up for the price gap between the paid agency fee and the increased market price. This “reward” is very flexible and can change from day to day. Due to the competition between labor service companies, it is imperative for them to dynamically adjust the reward to win over those labor agencies and scalpers downstream of the intermediary chain.
From the above analysis, it can be concluded that the profit-making models of the labor service companies, labor agencies, and scalpers are tightly linked with each other, interlocking into a coalition of interest. In this sense, the intermediary industry for recruitment has become one interest group shaping the labor market.
Figure 3 shows the money flowing along with factories, intermediary chain, and workers. The income of the labor service companies mainly includes the management fees and rewards from the factories as well as the interview fees and social security contributions of workers. Then, the labor service companies pay the agency fees, “head fees,” and the rewards to the big scalpers. Likewise, the big scalpers pay the three kinds of charges to the small scalpers and then from small scalpers to labor agencies; however, the profit is diminishing along the intermediary chain. As a result, for workers who stand at the end of the chain, their share of “cashback” is determined by the length of the intermediary chain; the longer the chain, the less money they can get as “cashback.”
Risk of loss and flexible adjustment of labor service companies, labor agencies, and scalpers
For labor service company: “gambling probability” and “adjusting social security”
Despite their proven profit-making model, labor service companies are still exposed to the risk of profit shrinking, even the risk of loss when agency fees downstream go up during the busy season. During the busy season, although the labor service companies earn much more in management fees, the cost of recruiting one worker soars strikingly, sometimes higher than 5000 Yuan, which is far above the factory-paid management fees and rewards. However, to compete for reputation and market share, the companies have no alternative but to pay for the seasonal premium.
How then could labor service companies avoid losses and secure profits? Flexible profitability is the key, which is built on two strategies of labor service companies: gambling probability and adjusting social security. The first strategy is that under the constraints of the seasonal production, labor service companies attempt to compensate for the deficit in the busy season by increasing profits in the slack season. This strategy is possible because, on the one hand, the hiring cost in the slack season is much lower, and labor service companies are able to provide one worker at the cost of approximately 1500 Yuan, nearly one-third of that in the busy season. On the other hand, assuming an equal length of employment for all outsourced workers, even though labor service companies receive less management fees in the slack season than that in the busy season, the rewards in slack season are not necessarily less. The reason is that the reward is calculated based on the proportion of workforce demand that has been satisfied by labor service companies in the current quarter. Thus, while the management fees are low in the slack season, labor service companies can still earn profits with the much lower hiring cost and nearly equivalent rewards, which can even out their deficits in the busy season. However, it is still a game of “gambling probability” because it is difficult for labor service companies to bargain prices with factories and the downstream intermediaries. In the meantime, labor service companies cannot control management fees because of high worker turnover. Considering the considerable uncertainty in the hiring cost, management fees, and rewards, no labor service companies can forecast with confidence whether they are facing a loss or will “even-up” in this business. They must gamble probability.
The second strategy is that the labor service companies adjust their social security contributions for workers, thereby indirectly adjusting the “cashback” that they have to pay. As mentioned before, the primary sources of “cashback” are management fees, rewards, and social security contributions. Among the three, labor service companies can only control social security payment, and so use the social security contributions for workers as the means to adjust profit margin. In the busy season, labor service companies do not pay social security contributions for outsourced workers. Moreover, they prolong the probation of dispatched workers to reduce the total cost of social security, by which they could offer a higher “cashback” while avoiding the risk of loss due to the high cost of it.
For labor agents and scalpers: maneuver for “cashback”
Scalpers and labor agencies downstream of the chain are also exposed to the risk of loss because, in the busy season, despite their promise of a large sum of payments, labor companies tend to delay payment due to difficulties in capital turnover. Aiming to “grab off” as many workers as possible in the busy season, scalpers and labor agencies have to pay part of the “cashback” out of their own pockets in advance to secure their relationship with workers successfully. In some cases, however, they are facing deficits when money paid by the labor service companies afterward is far less than the “cashback” they have paid in advance. Then, what adjustment do these scalpers and labor agencies make to secure their share of profits? Their maneuver for “cashback” is the key.
If “cashback” is to blame for the shrinking profits of the labor service companies, it is the primary source of increasing profit margins for scalpers and labor agencies. For labor service companies, “cashback” functions as an expediency to recruit the workforce and reduce the turnover rate in the busy season. For scalpers and labor agencies, it is a way of making money. Because each time a worker returns to the labor market, he or she creates a potential opportunity for new income. Labor agencies and scalpers often encourage workers to quit once they reach the minimum requirement of the length of employment, and the workers who return to the labor market once again could be priced and sold.
Therefore, the scalpers and labor agencies manage to earn twice the agency fee on the same worker. Also, by this maneuver, they create an illusion of labor shortage in the market, which becomes an opportunity for them to drive up “cashback” and make more money. For seeking more profits, some of them even embezzle the “cashback” that should be distributed to workers and flee.
Worker’s role and action under the temptation of “cashback”
Game of making “cashback”
High “cashback” attract workers to engage in the game of making “cashback” with intermediaries. Some of these workers become the winners of the game by acutely identifying the means of access to higher “cashback” and implementing certain strategies of flexibility to earn it.
The experienced players of the game first choose a labor agency which has a good reputation in the business and offers higher “cashback.” To secure the “cashback,” the workers would ask the labor agency to provide a certification for the “cashback.” If the labor agency does not pay the “cashback” in time as promised, these workers will threaten to expose this deceit on the Internet and pressure the labor agency to give back the money. Once obtaining a factory job, these workers only work there for the minimum required length of time to get the “cashback.” Then, these workers quit and repeat the whole process again and again to earn more “cashback.” In this way, these workers set up a collaborative relationship with labor agencies who offer a higher “cashback” to these regular clients.
However, new job seekers are not lucky. Uninformed about the rules behind the game, they often choose a labor agency at random and try their luck there. At first, the high “cashback” promised by the labor agency can be very tempting for the new job seekers, but when they return to the labor agency to demand the “cashback,” they may confront two possible situations: first, the labor agency is closed, and the agent has fled; second, they receive only a small part of the “cashback.” In the latter case, some of the unlucky workers insist on the full payment of the “cashback,” but they may not get their money back, and some may receive retaliation.
Workers’ actions of right assertion
Upon failing to get the “cashback,” an experienced worker would neither “make trouble” with the labor agency nor seek to defend their rights but choose to leave away. They learn a lesson and become more circumspect when choosing from labor agencies next time. The reason why the experienced worker will not “make trouble” is that there are usually a few gangsters who garrison at the store of labor agency as a deterrent to troublemaking job seekers. It is also fruitless to safeguard their rights in most cases because the remediation procedures are often arduous and ineffective.
Generally, workers defend their rights by appealing to the authority, which requires workers to go through a set of procedures. The first step in the proceedings is to file a complaint with relevant materials, and the labor inspectorate will decide if they would take the case within 5 days. If the case is taken, the documents are supposed to be uploaded onto the system, and then an investigation would be launched. The worker would be notified of the result. If the worker is not satisfied with the result, he or she could request another administrative review by the supervisory commission. As sound as the procedures seem, the safeguarding of workers’ rights is often blocked by these procedures because of the irregular or incomplete materials a worker provides. Mainly two aspects result in the flaws with these materials. First, “cashback” is given as only a verbal assurance, not appearing on the contract between the workers and labor service companies. Second, the “cashback” certification given to workers does not have any legal standing, and the invoice does not mention in detail that this money is used for “cashback” either. The authority has proven ineffective in defending workers’ claims of “cashback.” It can only serve as a mediator in the negotiation between the workers and labor agencies, and the workers are disappointed with the result.
Even if the workers reveal that the “cashback” actually comes from the misappropriation of social security contributions, the government still has difficulties in enforcing justice. On the one hand, labor agencies and scalpers distribute “cashback” to workers, and there is no evidence that “cashback” comes from labor service companies which expropriate social security contributions. Moreover, their business flexibility makes it difficult for the government to supervise them adequately. On the other hand, there is no explicit legal provision to regulate the social security contribution for outsourced workers, not to mention the difficulty in distinguishing between labor outsourcing and labor dispatching, which jointly create a gray area for supervision. For labor service companies, one way to avoid supervision is to sign an agreement with the factories to rent workshops and equipment; thereby, labor service companies run production in name, while factories are still in control. Law fails to regulate labor outsourcing. An inspector told me the following:
Social security contributions of labor outsourcing cannot be supervised; rewards indeed come from social security contributions. Before, our front-line law enforcement is easy to monitor on labor dispatch, but after the dispatch control changes to 10 percent, it becomes outsourcing, there is no need to distinguish the bonus on the invoice clearly. All in a muddle, it is difficult to supervise. Now it becomes true dispatch and fake outsourcing.Footnote 10
The workers have been put in a disadvantaged position in such circumstances. After the failures of arguing with the intermediaries and requesting intervention by the supervisory authority, the workers who have been stuck in a difficult situation start to lose hope. In extreme cases, desperate workers even choose to commit suicide.