Moving Personnel from Third-party Hiring Agencies to your China WFOE

As China increases its restrictions on hiring personnel via third-party employment agencies (sometimes referred to as FESCO companies or staffing agencies), and as companies are increasingly deciding on whether to double down in China or just leave, our international employment lawyers are increasingly being tasked with helping clients move personnel from third-party hiring companies to newly formed or existing WFOEs.

The usual procedure for moving an “employee” from a third-party hiring company to a WFOE is as follows:

1. Terminate the contracts with the hiring agency. Terminate the contract between your (foreign) company and the hiring agency and terminate the contract between the hiring agency and your “employee”. Before doing any contract termination, it is critical you understand the repercussions of such a termination and it is also critical that you remember that the official contract between your company and the hiring agency (and between the hiring agency and your “employee”) is in Chinese, not English (or French or German or Spanish or any other language).

2. Upon resignation, the employee is immediately hired by the WFOE, pursuant to a Chinese employment agreement. There is NO time gap.

3. Normally, the third-party hiring agency will allow you to terminate your contract with them, so long as the employee voluntarily resigns and you pay any fees owed to the employee and to the third-party agency and you sign an agreement freeing the third-party hiring agency from any liability relating to the employee. In many cases, you will want to continue using the third-party hiring agency as your outsourced payroll department to take care of the administrative side of salary payments and employer taxes and benefits. If you keep the third-party agency on in this capacity, it will usually be delighted to terminate the employment agent relationship to move into a standard benefits processing arrangement.

The employee usually also prefers moving from being the employee of a third-party hiring agency to becoming the employee of a WFOE, but the following two issues typically arise:
  • The employee will not want to lose any seniority in their employment relationship. In other words, if your employee has worked indirectly for your company for the last three years, they will want to come into your WFOE with three years of seniority, along with everything that goes along with that level of seniority.
  • The employee will not want to be put into a probation period.
Normally, the second issue is always resolved in favor of the employee, as it makes little sense to put a good long-time worker under probation. The issue regarding seniority is less clear and typically is subject to negotiation. It makes sense to resolve both of these issues before starting the changeover process.