what we think

This article was written for, and first appeared in the January-February 2013 issue of Human Resources Magazine, a Thomson Reuters publication.

• There will be a stricter control on the deployment of staffing services in the Mainland.
• HR Professionals should ensure to appoint staffing firms with the required license so that employer’s rights are enforceable.

Chapter 5, Section 2 of the People’s Republic of China (PRC) Labor Contract Law (LCL), which altered the Mainland’s employment law landscape from 1 January 2008 onwards for the first time, provides strict rules on the dealings of staffing firms. The services of Chinese staffing firms are referred to as labor agents or by the acronym “FESCO” (Foreign Enterprise Service Corporation), after the most famous staffing organization in mainland China. Their services continue to be popular among foreign companies in particular, whether out of necessity, convenience or even in some cases ignorance.

This may not be the case for much longer. In December 2012, mainland China issued the Amendments to the LCL. These amendments could end the general use of staffing firms by foreign-invested companies: for most companies, the time has come to revisit the need for using staffing firms.

Current uses of staffing firms

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 mainland China: their employment relationships must be retained through a staffing firm.

Thus, the staffing firm officially employs those employees whom the representative office selected. These employees are then seconded (dispatched) to the representative office under a staffing or secondment agreement between the staffing firm and the representative office. The representative office can (and should) sign a supplementary agreement directly with the employees to detail certain conditions to their work, such as non-competition and confidentiality. This way, the obligation on the employee towards the representative office become legally binding, and their breach can be penalized as per the terms of this supplementary agreement.

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. Yet, it is different from traditional employment relations because the employment and the actual labor are separated. As per Article 59 of the LCL, this employment falls into the category of labor contract relationship. Under this article, 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 the staffing firm and the representative office are effective and binding on the respective parties. This means that the staffing agreement between the staffing firm and the representative office does not curtail an employee’s right of claim against 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 Articles 62 and 63 of the LCL, the representative office shall provide, among others, safe and healthy working conditions and work protection, benefits appropriate for the job position, a wage not lower than the legal minimum wage standard and ‘equal pay for equal work’ (i.e. the dispatched employee should get the same pay as a regular employee in a same or similar position). In breach, the staffing firm and the representative office shall assume joint and several liabilities by law. This responsibility cannot be mitigated.

Any commitment that the representative office makes, on the other hand, should be fixed in writing. To this end, the representative office will often sign a supplementary agreement with the employee. It deals with work discipline (working hours, reporting as well as the employee’s obligations on confidentiality, non-compete and nonsolicitation).

These terms are usually included in the employment contract in a direct employment relationship. As contractual terms agreed by the parties, these will be binding upon the parties as per the said contract. These could thus give the representative office a legal basis to terminate a secondment in case of breach or to claim against an employee for damages.

Many foreign-invested companies also use staffing firms, but not necessarily in the same way as representative offices. Some prefer to copy the representative office model to hire staff indirectly. One consequence is that, in litigation, the staffing firm would be involved as well. This can be helpful but it can also restrict the company in dealing with its staff. This model has other drawbacks as well. For example, if an employee is returned to the staffing firm based on a change of economic circumstances at the real employer (as per Article 40 Section 3 of the LCL), that real employer shall still pay remaining wages, social insurance and housing fund for the rest of the term. The staffing firm cannot terminate the employee’s contract on the same legal basis.

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 mainland China to engage in activities such as (after-) sales, liaison and quality control. Yet, 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 usually have to give up benefits in Beijing. One way to resolve this is to establish a branch but this is subject to 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 LCL) and to withhold individual income tax, pay social insurance and housing fund contributions. Under the despatch contract, the employee is seconded to the company but continues to work in the city of his/her registration.

2. Even if employees are hired directly, the staffing firm 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. In this context, only certain HR functions are sourced out. Yet, the employee relationships remain between the limited company and the employee, with due consequences for control and management.

Proposed amendments to the LCL

The most important change proposed in the Draft Amendments is that staffing firms can only be used for temporary, auxiliary and alternative posts. Although the LCL already has a similar clause, it has not so far been strictly implemented in practice. On the other hand, the Draft Amendments clearly reflect the intention of the government to limit the use of staffing firms, with detailed definitions of the crucial terms:

• “Temporary” means that the duration of a job is less than six months;
• “Auxiliary” means that the job is to provide services to the employer’s main business;
• “Alternative” refers to the filling of posts when regular employees temporarily leave their posts, for example for studies or parental leave.

If these new rules become effective and are strictly implemented, it will then become risky for companies to hire full-time employees through staffing firms. Thus, foreign-invested companies may be forced to hire their staff directly, though they may still enlist the support of staffing firms to arrange payroll and social insurance functions. For foreign-invested companies that hire through staffing firms out of convenience, this will require a simple change of employment structure. However, for companies that use staffing firms to hire employees in other cities, this may require a major overhaul of their business.

Meanwhile, how representative offices are to meet the new guidelines remains unclear. As yet, representative offices have no alternative but to hire their Chinese staff through a staffing firm. We will have to wait and see whether the final amendments, expected for 2013, will consider this issue.

Conclusion: what potential impact?

Staffing firms are, and are expected to remain, an important component of mainland China's HR landscape. By acting as the legal employer in a three-party relationship, they play a crucial role in facilitating the employment of Chinese staff by representative offices. Moreover, many Chinese subsidiaries of international companies use staffing firms to hire Chinese employees in other cities as well as pay social insurance.

The recently published Draft Amendments to the LCL, however, could ignite a revolution in the Chinese landscape of staffing firms:

• For now, it is the general expectation that representative offices may continue to use staffing firms for all their local employment needs. However, how this will work still needs to be clarified.
• For Chinese subsidiaries that do have the right to hire Chinese employees directly, the option of using staffing firms may become severely restricted. Under the amended law, only temporary, auxiliary and alternative posts may be filled by staffing firms, while all other posts must be filled by a company's direct hires.
• The amended law introduces stricter requirements on staffing firms which are likely to be enforced. Thus, when choosing a staffing firm, HR professionals should make sure that the organization is qualified with the license for such service so that the employer’s rights are enforceable under Chinese labor law. Working with an unlicensed agent will create uncertainty on such enforcement and may lead to additional risk and costs.