How global employment outsourcing works in China

This has led to the growth of global employment outsourcing (GEO) companies, which act as legal employers of record for a client company in a country where the client company is not registered.

How do GEO companies work?

A GEO arrangement involves three parties: a client company, an employment company and a dispatched employee.

The employment company will sign a labour dispatch service agreement with the client company and an employment contract with the dispatched employee. The employment company will be the employer of record and perform all employer’s duties such as paying the salary, social insurance and other benefits, withholding and paying the individual income tax (IIT).

The dispatched employee will be assigned to work for the client company during the dispatching period. The client company will be liable to pay not only a service fee but also the costs of employment of the dispatched employee under the labour dispatch service agreement. 

Is GEO subject to China’s labour laws?

GEO is not a recognised concept under Chinese laws, but the structure of GEO service is very similar to labour dispatch service defined under law.

A labour dispatch is subject to various legal restrictions, among others, include: 

• the employment company must hold a labour dispatch service permit issued by Chinese government;
• the client company may place the dispatched employees only on jobs that exists for no more than six months, plays a supporting function, or a short-term replacement role;
• the number of the dispatched employees shall not exceed 10% of the total employees of the client company;
• if the client company decides to swift to a labour dispatch workforce solution for the supporting function of its business, which will be discussed with the employee representative congress or all the employees of the client company. The proposal for the dispatch arrangement shall be finalised through equal consultation with the trade union or employee representatives, and then be publicised in the client company.

However, should GEO satisfy all the requirements for the labour dispatch? The answer is not crystal clear. The labour laws do not specifically explore a scenario where the client company is a foreign company without any registration in China. It is tended to believe that GEO falls into the concept of labour dispatch and should be subject to such requirements as are applicable to the labour dispatch under law. That said, some of the requirements above such as the latter two seem in lack of enforceability when the client company is a foreign company.

What are the advantage and disadvantages for GEO in China?

As the most well-known benefit of the GEO, the client company can quickly enter new markets without establishing local entities. And the labour dispatch provides certain flexibility for a client company to terminate the service of an employee.

Under a labour dispatch, the employment contract will typically be signed for an employment period of two to three years. The service term of the dispatched employee will be the same as the contract period. Upon the expiry of an employment contract, if the client company does not want to renew the contract, the client company may terminate the service by paying the severance as required under law.  

On the employee’s side, employees are mostly happy with a GEO solution. The employment company will ensure the punctual and full payment of the salary to dispatched employees regardless of the implications of the foreign exchange control which may sometimes cause delay in transferring money from abroad to China under the labour dispatch service agreement between the client company and employment company.

The employment company will also make the social insurance and housing fund contributions for the dispatched employees, which allows dispatched employees to receive benefits from the government where there occurs a special circumstance, such as work injury and childbirth. In many cities in China, without proper payment records for the social insurance and housing fund, employees may encounter inconvenience in their life such as being unable able to purchase an apartment or send children to public schools.

There are also disadvantages. Under Chinese laws, strictly speaking, if a foreign company wants to hire a Chinese employee to carry out any business-related activities in China, the foreign company will need to have a legal presence in China by setting up either a company or a representative office. Not following such legal presence requirement could potentially trigger an illegal office risk under the China market entry laws, and a permanent establishment risk to the foreign company from a tax perspective.

Therefore, under a GEO model, sales and marketing activities of the client company in China are strictly restricted. If the dispatched employee for and on behalf of the client company, carries out any sales activities including before sales and after sales activities or any marketing activities to promote the sales in China, this increases risks of deemed illegal office and permanent establishment. Using a dedicated office could also increase the risks.

Besides, contracts for local procurement may present difficulties due to the restriction on transferring the money from offshore to China under the China foreign exchange control rules. Also, some local suppliers may charge a higher standard fee or request a deposit for their service in case the client is a foreign company.

Under a GEO arrangement, the labour dispatch service agreement is an important document to determine the respective rights and obligations of the client company and employment company arising from or in connection with the employment arrangement. 

Very often, the costs and liabilities for the employment of the dispatched employee will be shifted from the employment company to the client company according to the terms and conditions of a labour dispatch service agreement. In addition to the termination restrictions, the employer’s liabilities would cover various case scenarios, including the sick leave, maternity leave, work injury. It is usually difficult to negotiate with the employment company the terms of a service agreement, as the employment company usually charges only a small amount service fee and is reluctant to undertake the risks in association with the employment of the dispatched employee.

The employment contract will very often include only very basic information of employment of the dispatched employee, such as the job position, salary, service period, and some other boilerplate clauses of an employment contract. Such a contract is very often not sufficient for the people management purpose. The client company is advised to reach an agreement with the employee on such terms and conditions as supplementary to the employment contract which is prepared within the client company’s own human resources management system.

The supplementary terms and conditions may include the bonus and allowance payments, working hours and overtime approval mechanism, holidays and leave approval mechanism, duties and reporting lines, travel policies, working disciplinary rules. The supplementary terms and conditions may increase the work efficiency as well as decrease the chance of an employment dispute in the future.   

In practice, among others, GEO is often viewed as a practical workforce solution for foreign companies when their activities in China are within a very limited scope and not intended for revenue generation, which requires only very few employees to support in China. However, there are risks and limitations of this solution.

If a foreign company is planning to enter into a labour dispatch arrangement with a Chinese employment company, it is very important for the foreign company to:

• check whether the employment company holds a proper permit for offering the labour dispatch service, and whether it has the sufficient experience and capability to handle the payroll, benefits, tax and compliance requirements for employees in China;
• check the terms and conditions of the labour dispatch service agreement to fully understand its liabilities and obligations in connection with the employment of the employees in China; and
• make sure necessary documents are put in place for employees’ management which may cover the matters including but not limited bonus and incentives, approval of holidays and leave, duties and reporting lines, travel policies and reimbursement, working disciplinary rules.