Human Resources management and compliance is a daunting issue for many foreign-owned enterprises in China, especially those who are not familiar with the HR regulations and the monthly and annual filing deadlines. Management of recruitment, hiring, labor contracts, payroll and all other administrative procedures for employees can take a toll on a company’s progress and expose it to risks.
To overcome these challenges, labor dispatching (Often called PEO, EOR (Employer of Record) or employment outsourcing) is often used by companies of all backgrounds and sizes. Labor dispatching is the most viable option to hire employees in China to cut down costs and incorporate a flexible hiring process. Whether it is used for employing temporary workers to meet the needs of staffing a short term project or to hire someone overseas on a full-time and long-term basis, Labor dispatching is a perfect solution.
“Labor dispatch” (also referred to as staffing, talent dispatch, employee dispatching, or employee leasing) is the practice of hiring employees through an employment service provider third-party as opposed to direct employment through the active company. The labor dispatch agency holds the employment contracts with the dispatched employees while the employees are still supervised and managed by the active company.
A labor dispatching agency is very similar to an HR agency with the core difference being that the former deploys a contractual relation between itself and the dispatched employees while an HR agency typically assists companies with their HR operations but are not legally responsible for the client’s employees.
Labor dispatching is very common in China among foreign-owned and Chinese companies in order to manage their HR compliance duties. It is a cost effective and reliable method of hiring employees as there is no direct contract between them and the dispatched employees and therefore, they are protected from many legal liabilities involved.
Dispatched workers are protected by law in China and are entitled to the same benefits as directly hired employees, including minimum wage, social insurance, paid leave, and safety protections. However, despite these legal protections, there have been instances where dispatched workers have been treated unfairly or have not received the same benefits as their directly-hired counterparts.
In order to address these concerns, the government has implemented a number of policies and regulations related to labor dispatch. For example, in 2014, the Ministry of Human Resources and Social Security released guiding opinions that clarified the requirements for agencies that provide dispatched workers and outlined the responsibilities of companies that use dispatch services.
Despite these efforts, challenges remain in ensuring that all dispatched workers are treated fairly and receive the same rights and benefits as other employees. Moving forward, it will be important to continue to monitor this issue and take steps to ensure that dispatched workers are protected under the law.
In order to sustain its high employment and massive labor migration from rural areas to urban cities, China has had to ease and simplify its labor & residency laws. As a result, staffing solutions and 3rd party providers of labor dispatch & contingent workforce became extremely popular in demand.
However, China’s labor laws have simultaneously become more strict in response to loopholes and commonly exploited employer violations of worker rights. These new labor regulations affect labor dispatch and staffing agencies directly as new compliance and risk aversion practices needed to be implemented for continued compliance.
The first sign of change came with the Labor Contract Law by the Standing Committee of the National People’s Congress on Dec. 28, 2012, which became effective on July 1, 2013 (Amended Labor Contract Law), and the Interim Regulations on Labor Dispatch (Interim Regulations) issued by the Ministry of Human Resources and Social Security and effective March 1, 2014.
Those two regulations provided new requirements on the use of dispatched employees in China.With the need to limit the overuse of agency workers and to have direct employment contracts with the actual employer, these amendments were established for changing the scope and application of labor dispatch. To implement the provisions of Labor Contract Law (LCL) regarding labor dispatch, the interim regulations were intended.
It is required by the Both PRC Labor Contract Law and the Interim Provision that a dispatch agency and a dispatched employee enter into a labor contract for a fixed term for a minimum two-year period. It is also required that the employment agencies were licensed and were inspected regularly regarding labor conditions.
An amendment to Labour Contract Law was introduced in 2012 to control the vast growth of the dispatching agencies. The dispatching agency requires to obtain a special labour dispatch license before providing the related services.
Following are the requirements that a dispatch agency need to satisfy for obtaining such license.
- A registered Minimum capital of 2 million RMB;
- Provision of fixed office premises and facilities;
- A unified compensation scheme for its own staff and agency employees to implement equal pay for equal work.
One of the most attractive option to hire local employees in China is Labor Dispatch. Following are some of the benefits associated with it.
- Compliance: As labor dispatch agencies are expert and experienced with the process to hire employees, it is an ideal way of assigning temporary workers to project with stringent deadline.
- Flexibility: Labor dispatch can adjust the workforce according to changing business needs without the concern of employee termination.
- Reduced liability: The Dispatch agency is the legal employer, so it is responsible for all the legal liabilities involved in case of any disputes.
- Supplementary Headcount: Enable companies to hire additional employees through dispatch agency when the client’s current headcount is not allowed.
Chinese government amended the Labor Contract Law in 2012 and put into effect the Interim Provisions on Labor Dispatch in 2014 as a measure to limit the companies from taking advantage of Labor Dispatch.
Government emphasis on direct hiring of employees as per the amended labor contract law and this should be stand as the primary means of employment in China.
The following are the regulations for Labor Dispatch in China
- Headcount Limit: The Interim Regulations establish that the total number of dispatched workers used by a host enterprise should not exceed 10 percent of the total number of employees. The limit stands not only for the numbers but for positions as well.
- Position limit of supplementary: This measures emphasize that labor dispatch can only be used as a supplementary employment approach rather than a regular one. Under this LCL permits that labor dispatch is permitted only for the following three categories:
- Temporary employees: For a position of no more than 6 months.
- Auxiliary employees: For positions to support services not central to the core business of employer.
- Substitute employees: For positions taken by the dispatched workers in replacement of permanent employees away from work and need replacement.
- Equal Treatment: This implies that employer should be paying the same amount to the dispatched employee that is paid to the directly hired employee including al the bonuses and overtime payments.
- Representative Office in China
Labor dispatch, a triangular form of employment relationship was first used in representative offices of foreign companies in the late 1970s.
Hiring through licensed employment agency is the only viable option for the representative offices to hire local Chinese staff as Rep office is not a legal entity in China and has a limited business scope.
The dispatching agency will take in all the legal obligations of hiring employees as it is a registered legal entity in China. They can hold the labor contracts for client’s employees and manage the employee payroll and benefits.
- Foreign investors who has no registered company yet in China
Hiring employees through a dispatching agency is the best option to employee candidates for foreign companies without a legal entity or in the process of setting up the WFOE but would like to hire Chinese employees or foreigners working for them in China.
These agencies have the license for employee leasing; therefore, the local candidate is employed by the Employment agency and he/she is dispatched to work for a foreign entity in China.
In the meanwhile, the HR agency is going to handle each employees’ monthly payroll, mandatory benefits, tax to ensure the employment compliance in China. This is the safest and the most cost effective method to for foreign companies without legal entity in China to hire employees.
- Companies with no/limited headcounts to hire employees
The labor dispatch agency can also help to fill temporary vacant positions at a company in case of unforeseen situations such as the absence of employee due to maternity leave or sick leave.
This can lead to empty positions with no provision of having headcount to fill it on temporary basis. In such a scenario, the company can utilize the services of the Dispatch agency to fill in the vacant positions with alternative employees on a temporary basis.
With the increasing use of flexible labor by enterprises and facilitated by labor market deregulation and business process outsourcing, there has been a growth in the private employment agencies.
People and industries looking for a more flexible work-life balance is also another driving factor for such employment agencies.
Below you can see some of the roles that employment agencies has with labor dispatch:
- Employer of record & Sign employment contract with the employee
The main objective of these companies is to sign employment contracts with the employee and have them working for companies that do not have a legal presence in China.
In this situation. The dispatching agency will be the employer of record or nominal employer for these employees in China, in the meanwhile, companies who using these employees will be the actual employers and managing their daily work.
- Monthly Payroll, Mandatory Benefits & Tax
The dispatching agency assumes all the legal responsibilities of the employer and handles the employee payroll, individual income tax and statutory benefits and social security for all the employees under their employment.
The social insurance of the dispatched employees is provided according to the policies and standards of the region where the employer is located.
If the agency has the branch in the region of the employer’s location, then the social insurance should be paid by the local branch to the dispatched employees.
- Employment relationship management & handling labor dispute
As the employment agency signs the employment contract with the dispatched employees, therefore the employment relationship related issues are managed by the agency, any labor dispute arising from the employment is handled by the employment agency as all they are held responsible for all the legal obligations.
This frees up of any burden from the shoulder of the actual employer. Companies shall realize that if the employment relationship issue cannot be solved properly will bring more side efforts to the companies for example employee will go arbitration or lawsuit.
Since the employment agency has the HR expertise and has rich experiences in handling such employment related issues like termination, labor dispute, they will be more professional in handling such cases, which help the actual employer to save the cost and efforts.
HROne has hired more than thousands of dispatched employees working for clients in China, till now the lawsuit or arbitration is 0, which means all the employment relationship issue or labor dispute has been all smoothly solved by HROne for the clients.
- Work-related injury
The whole employment relationship including the work-related injury is managed by the employment agency who has the contract with the dispatched employees.
Therefore, partnering with an experienced employment agency is the best method to have employees for completion of projects.
Such agencies can conduct extensive and thorough research to find the right candidate that fits the job ranging from a sales associate to a professional manager with the right assessment technique.
How to engage in labor dispatch in China
A. Steps to set up a labor dispatch agreement
Setting up a labor dispatch agreement in China can be a complex process that involves navigating legal and regulatory requirements. Here are some general steps that foreign companies can take to engage in labor dispatch:
- Choose a reputable labor dispatch company: It is important to select a dispatching company that is authorized and has a good reputation.
- Sign a labor dispatch agreement: The dispatching company and the foreign company should sign a written agreement that outlines the terms of the labor dispatch, such as the job responsibilities, compensation, and working hours.
- Obtain necessary approvals: The labor dispatch agreement must be registered with the local labor authorities and obtain relevant approvals before the dispatched workers can begin their work.
- Provide necessary documents: The foreign company should provide the dispatching company with necessary documents such as company registration certificates, business licenses, and other legal documents.
- Pay dispatching fees: The foreign company is responsible for paying the dispatching fees, which may include fees for labor dispatch service, social insurance, and other expenses.
By following these steps and ensuring compliance with labor dispatch regulations, foreign companies can effectively engage in labor dispatch in China.
B. Common pitfalls to avoid
While engaging in labor dispatch in China, foreign companies must navigate complex legal and regulatory requirements, which can pose various challenges. Here are some common pitfalls that foreign companies should avoid:
- Using unregistered labor dispatching companies: It is important to select a reputable and authorized dispatching company to avoid legal and financial risks.
- Not complying with local regulations: Foreign companies must follow the local regulations and obtain necessary approvals before dispatching workers.
- Lack of transparency in labor contracts: The labor dispatch agreement should be clear and transparent to avoid any potential disputes or misunderstandings.
- Not providing adequate training: The dispatched workers should be provided with necessary training and instructions to ensure that they can effectively carry out their job responsibilities.
- Non-payment of mandatory social insurance and benefits: The foreign company must pay mandatory social insurance and other benefits for the dispatched workers to avoid potential legal and financial risks.
By avoiding these common pitfalls, foreign companies can effectively engage in labor dispatch in China and mitigate potential risks.
C. Best practices for effective labor dispatch
To ensure a successful labor dispatch agreement in China, foreign companies should follow these best practices:
- Conduct thorough due diligence: Before engaging in labor dispatch, it is important to thoroughly research and vet the dispatching company, as well as the local regulations and requirements.
- Clearly define job responsibilities: It is important to clearly define the job responsibilities and requirements for the dispatched workers to ensure they have the necessary skills and experience.
- Provide adequate training: The dispatched workers should be provided with adequate training and instructions to ensure they can effectively carry out their job responsibilities.
- Ensure compliance with local regulations: The foreign company must comply with all local regulations and obtain necessary approvals before dispatching workers.
- Maintain open communication: Regular communication between the foreign company and the dispatching company is crucial to ensure a successful and productive working relationship.
By following these best practices, foreign companies can effectively engage in labor dispatch in China and minimize potential risks and challenges.
In conclusion, having an employment agency to reduce the administrative burden is the best option for majority of companies or businesses looking to expand their presence in China.
This will not only free them from the legal obligations involved in employment but will also provide the time and resource to focus on core business activities.