China Employee Dispatch and IP Protection

China places many restrictions on hiring employees using employee dispatch companies (a/k/a third party hiring agencies) and there are a number of legal issues foreign companies that go this route should consider, and IP is one of them.

Normally, the way this system works is the foreign company and the employee dispatch company sign a contract under which the dispatch company hires as its own employee(s) who will do work for the foreign company. The dispatch company usually will propose its own contract and the foreign company does not always get to propose significant changes to it. The contract between the dispatch company and the foreign company is very important since that contract will govern all aspects of the parties’ relationship — the relationship between the foreign company and the dispatch company and the relationship of the employees with both the dispatch company for which they are employees and the foreign company for which they are doing the work.

As the employer of record, the dispatch company will need to sign an employment contract with “your” employee. The dispatch company’s employment contract should and probably will accord with the relevant national and local employment laws and practices, and it will almost certainly protect the dispatch company as well. However, it will not do anything to protect your interests as the foreign company for which the employees will be working.

Though the interests of the foreign company in these situations typically will for the most part line up with those of the dispatch company, this is not true with respect to protecting your company’s trade secrets and other IP.  In other words, you cannot rely on the dispatch company’s contracts to protect your own IP. It is therefore crucial that you take necessary steps to protect your IP, including entering into a trade secrecy and IP protection agreement with each of “your” employees that (among other things) clearly mandates the employee’s confidentiality obligations. In addition, you need to make sure this agreement not only fits your overall situation but is also compliant with China’s applicable laws so you can actually enforce it.

Don’t make the mistake of leaving your IP protection to your third party hiring agency. That part of the employment arrangement is on you and if you want to prevent your workers from running off with your trade secrets and other IP, you need your own contract or contractual provisions to prevent this.