China: Cooperating with Staffing Firms in China

Last Updated: 29 September 2011
Article by Maarten Roos

This article was written for, and first appeared in the March 2011 issue of China Law & Practice, a Euromoney publication.

One of the sections (Chapter 5, Section 2) of the PRC Labor Contract Law that altered China's employment law landscape from 1 January 2008 onwards for the first time provided strict rules on the dealings of staffing firms. The services of Chinese staffing firms, also referred to as labor agents or by the acronym "FESCO" after the most famous staffing organization in China (see below), continue to be popular among foreign companies in particular, whether out of necessity, convenience or even in some cases ignorance. Two questions need to be revisited from time to time to ensure that companies make the optimum choice in regards to using staffing firms: is using such a company still a good choice? And if so, what best practices can be applied to minimize costs and risks?

Selecting the Right Staffing Firm

Staffing firms are an important and even irreplaceable part of China's employment landscape. Originating from the time when under socialist principles foreign companies were not sought capable of selecting and employing their own staff, many companies continue to outsource part of or all their human resource functions to these agents. The most common staffing firm is the Foreign Enterprise Service Corporation (FESCO), a semi-state organization with independent branches all over the country including several in big cities such as Shanghai, Beijing and Guangzhou. Another big state-wide organization, albeit with less branches, is China International Intellectech Corporation (CIIC). In addition, an increasing number of private companies including even some foreign-invested companies are permitted to engage in staffing agency services.

A widely held misconception is that all these organizations provide the same level service. Some staffing agents try hard to provide high-quality services to the companies they serve, while others see their role in a more formalistic sense. It is therefore extrmelely important to choose a firm with a good reputation. Other conditions are flexibility on some of the terms and conditions (see below), and that they have the proper licenses. Many foreign-invested consultancy companies for example offer staffing services but do not have the proper licenses, which brings unnecessary risk to the staffing relationship and to the employees.

Considering Staffing Needs

Representative offices

Under certain circumstances, there is no way around using a staffing firm. The resident representative office of a foreign company, for example, cannot directly hire Chinese employees in China, and so their employment relationships must be retained through a staffing firm. The staffing firm officially employs those persons selected by the representative office, and these employees are then seconded (dispatched) to the representative office under a staffing- or secondment agreement between the staffing firm and the representative office. To close the triangle, the representative office can (and should!) sign a supplementary agreement directly with the employees to detail certain conditions to their work.

We analyze these relationships in more detail:

a. Rights and obligations between the staffing firm and the employee

The relationship between the staffing firm and the employee is one of employment, but it is different from traditional employment relations because the employment and the actual labor services are separated. As per article 59 of the PRC Labor Contract Law, this employment falls into the category of labor contract relationship, under which the staffing agent shall assume the obligations as employer according to law.

b. Rights and obligations between the staffing firm and the representative office

The staffing firm and the representative office have a civil contractual relationship, with rights and obligations agreed in the staffing agreement. In terms of actual legal activities, the rights and obligations of respectively the staffing firm and the representative office are effective and binding on these parties. This means that an employee's right of claim against either the staffing firm or the representative office is not curtailed by the staffing agreement between these two parties.

c. Rights and obligations between the representative office and the employee

There is no employment relationship between the employee and the representative office, even though the employee provides labor services to the representative office. According to the Article 62 and 63 of PRC Labor Contract Law, the representative office shall provide safe and healthy working conditions and work protection, equal pay for equal work, benefits appropriate for the job position, a wage not lower than the legal minimum wage standard, etc. In breach, the staffing firm and real employer shall assume joint and several liabilities by law, a responsibility which cannot be mitigated.

Any commitments of the employee to the real employer, on the other hand, should be fixed in writing. To this end, the representative office will often sign a supplementary agreement with the employee, which deals with work discipline (working hours, reporting etc) and the employee's obligations on confidentiality, non-compete and non-solicitation – terms that in a direct employment relationship are usually included in the employment contract. As contractual terms agreed between the parties, these will be binding upon the parties as per the said contract, giving the representative office a legal basis to terminate a secondment based on breach, or to claim against a (former) employee for damages.

Foreign- and Foreign-invested Companies

Foreign companies with no office in China also sometimes use staffing firms to avoid the legal prohibitions and impracticalities of hiring in China directly. While not illegal to work with a foreign company, few legitimate staffing firms are open to such arrangements. The most cited reason is that if the foreign company fails to compensate the staffing firm for expenses (e.g. at termination of an employment contract), it would be difficult and expensive to file a claim for damages. In some case, providing monetary guarantees to cover any potential costs may be persuasive. Usually however, a foreign company will have to choose either to hire through an informal agent, to hire directly without legal coverage, or to establish a representative office or limited company.

Many Chinese-registered, foreign-invested companies also use staffing firms, but not always in the same way. While some prefer to copy the representative office model to hire staff indirectly, this has clear drawbacks. For example, if an employee is returned to the staffing firm based on a material change of economic circumstances at the real employer, the latter shall still pay remaining wages, social insurance and housing fund for the rest of the term. The reason is that the staffing firm cannot terminate the employee on the economic circumstances of the real employer (as contemplated for direct employment relationships under Article 40.3 of the PRC Labor Contract Law).

More generally, most companies see the benefits of transparency and control to having a direct employment relationship with its employees, but even then, a staffing firm may be useful in two circumstances:

  1. Companies that are established in one place but have employees (especially sales people) in other regions, also turn to staffing firms. The law does not restrict companies from sending people to other cities in China to engage in activities such as (after-) sales, liaison and quality control, but a practical challenge is that a company registered in one city cannot pay social insurance premiums for an employee in another city. Thus if a Shanghai company wants to hire a Beijing employee, the latter will have to give up existing benefits in Beijing. One way to resolve this is to establish a branch, but this is subject to further procedures and cost. A more popular alternative is that the company engages a staffing firm to employ the person in the other city (as specifically permitted under Article 61 of the PRC Labor Contract Law), which can then withhold individual income tax, pay social insurance and housing fund contributions. Under the dispatch contract, the employee is seconded to the company, but continues to work in the city where the staffing firm is registered.
  2. Even if employees are hired directly, the staffing agent can still be retained for payroll services. Managing payroll, including withholding and contributing individual income tax, social insurance contributions and housing fund payments, can be complicated and time-consuming. Private staffing firms in particular are increasingly focusing on this market. Note that in this context, only certain HR functions are sourced out; the employment relationship remains between the limited company and the employee, with due consequences for control and management.

Negotiate the Right Terms

If the staffing firm only provides payroll services, negotiations will simply be about price: against what cost can a company outsource this HR function. In the case of representative offices that must work with staffing firms and in those cases where foreign-invested companies use a staffing firm to employ people, getting the best deal is more difficult. In practice it is common that the terms are dictated by the staffing firm. One important reason is that the arrangements with the staffing firm are often portrayed as standardized, which implies there is little for the company to negotiate. Another is that because using a staffing firm is compulsory for representative offices that want to retain Chinese staff, the choices that the representative office has in selecting the staffing firm and structuring the staffing relationship are frequently overseen.

Both reasons are misleading. The principle to a staffing arrangement is clear – the representative office or company should take on the staffing firm's liabilities towards the employee in accordance with the law. However it is very common to see staffing firms include terms in their standard contract which go beyond this standard to provide additional protection and benefits to the staffing firm. If the staffing firm insists on unreasonable terms, it may be time to select a staffing firm which takes a more reasonable position.

Based on our experience in negotiating staffing agreements, we summarize some of the key points that can sometimes be negotiated:

a. Wages Upon Employee Return

Because the relationship between the enterprise and staffing firm is a civil contract, the staffing agreement is the legal basis for both parties' rights and obligations. While staffing agreements generally include clear and fair stipulations on the use of the employee, the responsibility for an unexpected return of the employee to the staffing firm is more controversial. Where a company or representative office returns an employee to the staffing firm before expiry of the agreed term based on a material change of circumstance, the staffing firm often asks assumption of liabilities to pay for full wages (and other costs, see below) until expiry of the employment contract between the staffing firm and the employee. In practice however, if the employee is returned on this basis,, the staffing firm will often pay him only the minimum legal salary as wages, and not his previously-agreed salary.

b. Extra compensation

Standard contracts often include a clause on return compensation, which should be calculated according to law, and extra compensation, which is introduced by the staffing firm to cover its own liabilities. In standard contracts, the staffing firm usually demands that if an employee is returned but there is not sufficient legal reason for the staffing firm to terminate his (her) employment contract, then the enterprise shall pay the staffing firm, usually in lump-sum, all the wages, social insurance, housing fund contribution, severance pay, as well as corresponding management fee (due to the staffing firm) that would be due if the employee was not returned. This is unreasonable to the enterprise as it does not take into account a very common situation: that a settlement is reached with the employee on termination or that the employee leaves himself as he does not want to continue working for the staffing firm at minimum wage.

c. Others Matters

Standard agreements include many clauses that have only limited consequences to the enterprise, but could still impact their position in case the relationship with the employee sours. One example is a clause under which an employee, after having signed two fixed-term employment contracts, has the right to an open-ended employment contract, with the dispatch contract between the enterprise and the staffing firm also open-ended. While this reflects a well-known principle of the PRC Labor Contract Law, it also conflicts with Article 58 of the same law, under which a contract with a staffing firm must be a fixed-term contract of at least two years. While it is unclear how this conflict would be resolved in practice, there is no good reason for the enterprise to compromise on this matter to its disadvantage in advance.

Conclusions

When confronting the staffing firm with the above and other issues during negotiations over a dispatch agreement, the principle that an enterprise can fall back upon is that the staffing firm provides a service for which it is paid. Any negative impact from that service – especially as a consequence of the enterprise's return of the employee before expiry of the term – should be the liability of the real employer, i.e. the enterprise. However sometimes staffing firms insist on compensation for damages that do not exist, or which can or may be mitigated. Although not always easy, where the damages are unclear or even arguable it is more reasonable to simply make reference to the staffing principle and the law: the enterprise should cover all liabilities due by the staffing firm to the employee as required by law.

This works most effectively if the staffing firm also tries (and if possible, is obligated) to mitigate those damages. One of the reasons that companies turn to a staffing firm is that it should have more knowledge, experience and resources to manage employees and deal with disputes. The enterprise, which after all is the staffing firm's customer, may reasonably expect that such resources are utilized to resolve problems as effectively as possible and mitigate damages to itself and to its customer (i.e. the enterprise). Including a term to this effect in the dispatch agreement is one option, but more important is to use a staffing firm that agrees with this in principle. A good staffing firm can offer tremendous support in managing staff and HR-related problems, whether in a dispatch relationship (mainly for representative offices) or only as a payroll services provider. On the other hand, depending on a staffing firm that offers poor services, or entering into a disadvantageous agreement, can only cause more problems. In that case, a direct employment relationship is preferred, even if it means replacing the representative office with a wholly-owned subsidiary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Maarten Roos
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions