Hiring a Chinese Employee Without a Chinese Entity, Part 2: Still Not Good at All

A couple years ago, we did a post on the difficulties in using “independent contractors” in China, entitled, Hiring A Chinese Employee Without A Chinese Entity: Not Good at All We wrote that post (and this post too) because forming a WFOE in China can be so difficult, expensive, and time-consuming, and because so many companies are looking for some way to hiring a Chinese employee without a China company.

This is our even grimmer follow-up.

In our first post, we listed out the following ways to “employ” someone in China without forming an entity there:

The U.S. company could have its proposed employee hired by a Chinese company and then pay the Chinese company the equivalent of the Chinese employee’s wages and taxes, plus an administrative fee. The problem with this is that if the “employee” is not going to be doing at least some work for its Chinese employer, it is not legal and if your client gets caught, it may never be allowed to conduct real business in China again. If the “employee” does not actually do work for the Chinese company, it is nothing more than an attempt to get around China’s laws requiring foreign companies that do business at a level where they need an employee to have a legitimate Chinese entity — a WFOE, JV, or Rep. Office.

And if your client’s goal is to have its own person on the ground for it in China, how much of “its own person” is someone employed by and paid by another company? And how will your client protect its trade secrets from this Chinese company that employs its “employees”. There are situations where this can work, but not many.

Then there are all the issues for the Chinese company, which is likely going to have to lie to the Chinese government about the monthly foreign currency payments it receives from your client, if it is your client that is actually the one paying this employee.

Since writing the post, our China lawyers have received calls from a  couple foreign companies kicked out of China for doing this and from a couple other foreign companies that were doing this until the Chinese company they were using for this stopped for fear of getting caught. This has led us to conclude that this is, at best, a very temporary remedy, if that.

2. Your client can hire the Chinese “employee” directly and just wire that “employee” his or her paycheck every month. Years ago, this sort of arrangement was pretty common, but it is becoming far less so as word is spreading that the Chinese government and tax authorities are on to this scheme and quashing it all the time. The problem with this set-up is that your client’s “employee” is at some point going to have to explain to the Chinese government why he or she monthly deposits foreign currency into their bank account and why they are not paying taxes on this.

We have received a number of calls in the last year from companies seeking our help in keeping their Chinese “employees” after they were told by their “employees” that the existing relationship must be discontinued. We told them that their best solution would be to form a China WFOE, but that we were very concerned about their WFOE application being rejected because of what they had already done. We also have seen a big uptick in foreign companies getting caught for these payments and then having to pay back taxes, plus interest, plus penalties. We are even hearing of arrests for this.

Your client should NOT risk this.

Since we did our last post, we have heard from many more foreign companies that have gotten into trouble with Chinese authorities for having used this option. We are also finding that the trend is for Chinese prospective employees (particularly those with a high level of experience or skill-set) to flat-out refuse this sort of arrangement.

3. The third and maybe best option (at least from a legal standpoint) is to have your client’s Chinese “employee” form his or her own domestic Chinese company and then your client simply contracts with that Chinese company for the services you are seeking from this Chinese person. This is going to require a fair amount of initiative by the Chinese employee and the downside of this is that when all is said and done, your client has an independent Chinese company out there with which it is conducting business, and not an employee.

 We are unaware of anyone having tried this option as every foreign company has either deemed it too risky from the perspective of protecting its intellectual property or the prospective employee has been been unwilling to go through this convoluted process for the “job.”

Here is another option, not mentioned in our previous post.

Have your potential employee hired by a China-based third-party staffing agency.  Under Chinese law, Representative Offices are not allowed to directly employ anyone; they must do so via a third party staffing agency. Because of this, there are plenty of such staffing agencies in China and up to a few years ago, many of them were (for a somewhat reasonable fee) willing to hire someone for a company based overseas. Today, we know of only one such agency that will do that for  foreign companies without their own China entity in China (be it a WFOE a Joint Venture or a Rep Office) and that agency charges a 15% monthly commission on the salary to do so. On top of that, come July 1, 2013, all of this will almost certainly be impossible because China’s labor law will be revised to make third party hiring for anything but “temporary, supplementary and backup jobs” illegal. For more on this, check Newly amended PRC Labor Contract Law imposing stricter control over the use of seconded employees.

At this point, I am skeptical that the one remaining agency that will employ someone for a foreign company without an entity in China will remain willing to do so.

For years, China has sought to force foreign companies to form a company in China if they want anyone to work for them in China. It appears that come July 1, it will have achieved this goal, which really is part of its two much larger goals of increasing its tax revenues, particularly from foreign companies, and improving the lives of its working citizens. There is not going to be any going back on any of this. If you want someone working for you in China, you are going to need to form an entity — almost certainly a WFOE — to accomplish this.

What do you think?

Read More

Legal News