How can a foreign company "employ" someone in the PRC?
This depends on the manner in which you structure your business in the PRC. More particularly, it depends on whether or not you have established a PRC entity (i.e., a PRC representative office or a PRC company).
What if I have a PRC representative office?
Representative offices are permitted to employ individuals after obtaining their business licence from the competent registration authority. However, they are not permitted to employ PRC individuals directly (even if the PRC individual is to act as the Chief Representative/Representative). Instead they have to recruit PRC individuals through a qualified labour service agency which is designated by the PRC government for providing service to foreign companies. The most well known labour agencies are FESCO and CIIC.
In such a scenario the labour agency acts as the employer and seconds the PRC individual to work in the representative office. The representative office and the labour agency typically enter into a labour dispatch service agreement. Under such a service agreement, the labour agency typically seeks to shift all of its obligations and potential liabilities as the employer of the PRC individual (i.e., contractual and statutory obligations) to the representative office and, unless your entity is very large, your bargaining power for resisting this arrangement will be limited (although it is always worth negotiating).
A representative office is also not permitted to employ non-PRC individuals directly or indirectly. A non-PRC individual can only be employed by your overseas entity first and then be assigned to work in the representative office as the Chief Representative/Representative. In addition, the headcount for Representatives is limited to four, including one Chief Representative.
What if I have a wholly foreign owned enterprise (WFOE) or a joint venture company (JV)? Does that change the position?
If you have established a WFOE or JV in the PRC, then that PRC company can enter into labour contracts directly with PRC individuals. In these circumstances the WFOE or JV is the employer and is subject to all the employer’s obligations under the PRC law.
It is not uncommon for some WFOEs and JVs to continue to use a labour agency to employ individuals for them. However, the types of job position open to individuals through such arrangement (i.e., dispatched employees) are limited to "temporary, auxiliary and replaceable" positions; in addition, the principle of "equal pay for equal work" also applies to dispatched employees. Furthermore, in some cities (e.g., Guangdong), the percentage of labour dispatch workers that a company uses must not exceed 30 percent of the total number of employees.
What if I don't have any PRC entity?
If you have not set up a PRC entity at all then you can attempt to engage a PRC individual in the PRC as an independent contractor. PRC law has not developed any specific regulations concerning the "independent contractor" concept. However, in practice, the relationship between the foreign company and the PRC independent contractor may be treated as a civil relationship and if so, PRC employment law should not apply. This is still risky as the Court may see this kind of relationship as one of employment.
During the short transitional period before you set up a representative office or WFOE/JV in China, you may try to persuade a labour agency to employ PRC individuals on your behalf, so that they can work for you in the PRC temporarily. Some labour agencies are prepared to adopt this approach but they typically require the foreign company to pay a special deposit or to make payment in advance. As this route enables the individuals to be treated as "employees" under the PRC law, this option is generally preferred by the individuals. Such an arrangement does not apply to non-PRC individuals.
If you are interested in receiving our "PRC Labour Law - Bitesize" articles, or if you have any questions on PRC employment law, please email to email@example.com to register.