Why Third Party Hiring Agencies and PEOs Seldom Work for China

One of our China lawyers got an email that cited to a super old post we did on using third party hiring agencies in China. The writer then went on to essentially excoriate us for getting it wrong on China third party hiring. The email (modified a bit to protect the guilty) was as follows:

First of all congratulations for your blog, there is some great content on it. However I am very skeptical about the reasons you give for recommending labor dispatch services in China.

I have been studying this topic for quite a while as my company initially needed to dispatch a staff in China to set up supply chain management in a Shanghai factory.

On your blog you mention there is the possibility of doing third party employment in China. However after checking with two local China lawyers it appears this practice is illegal — it works so long as the government does not look into it.

A few companies like _____ and ________ are openly illegally providing these third party employment services (I spoke with them). They offered to hire my staff upon payment of a monthly fee under their company name  and in fact the hiring would not even be done through their company, but rather through some third party Chinese company bearing an unrelated Chinese company name.

If a foreign company wants to operate in China with a long term staff through a third party hiring agency the only “legal” way is with a WOFE or a Rep office or a Joint Venture, but even then it is limited to only Chinese staff and only for six months or less.

I would invite you to clarify this or modify your view on this.

I was a nice as I could be with this person, but it was difficult, for the following reasons:

1. The post cited was more than TEN years old and it did not recommend using a third party hiring agency. It merely mentioned doing so as a possibility.

2. Since that post, we have on many occasions written how China is cracking down on third party agency hiring. For instance, in early 2014, in Moving Employees from a Staffing Agency to a China WFOE we began with this: “As China inexorably continues increasing its restrictions on hiring personnel via third party employment agencies (sometimes referred to as FESCO companies or as staffing agencies), our international employment lawyers are increasingly being tasked with helping clients move personnel from third party hiring companies to newly formed or existing WFOEs.” Later in 2014, in China’s New Labor Dispatch Rules we reiterated the limitations on third party hiring agencies (again, in the very first sentence of the post): “China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing confusion for foreign companies doing business in China or seeking to do business there.”

3. I got the strong sense that the person who emailed me was mostly just trying to get us to give his company free legal advice on other options for his company.

In any event, our response to him was as follows:

Not sure even what you are talking about because we most certainly do not recommend that. Just the other day one of our China employment lawyers sent the following to a potential client:

We mostly stopped working with third party hiring companies at least five years ago when it became illegal 98 times out of 100 and half of the other two times it is ill-advised. Then when you add in that many of the companies that claim to do this are themselves operating illegally and are mere brokers, you can see why we stopped writing about this industry.

The big flaws in using even a legal third party hiring agency to do your hiring legally is the cost of making sure it is legal and the lack of intellectual property/trade secret protection. How will you protect the information you reveal to “your” non-employees hired by third parties? Chinese companies search out these non-employees and poach them specifically for the unprotected trade secrets they can reveal and no small percentage of the people that take these jobs do so to profit from selling your trade secrets.

Also, much of the time the cost savings from using a third party hiring agency are illusory, especially if you do everything the right way with them. I say this because in the rare instances when doing this makes sense, it is wise to have an attorney review your contract with your third party hiring agency and the third party hiring agency’s contract with its/your employee. At minimum, we like to revise both of hose contracts to provide our clients with some IP/trade secret protection and, in particular, to make sure that there will be some recourse if the employee does sell our client’s trade secrets. We want recourse not so much to have recourse, but to try to stop these IP thefts in the first place.

We now use various other work-arounds for our clients that want someone on the ground for them in China and yet want to avoid the cost and expense of forming a WFOE or a Joint Venture.Just to be clear, I do not know your situation and it is possible it is the two in one hundred. This area of China employment law is complicated and there is still room for third party hiring agencies to do this legally and the law can even vary depending on the locale in China. So it is impossible to know what is legal and what isn’t without digging deeply into the facts and the applicable laws to determine. Which is why I list this as another reason why using third party hiring agencies seldom makes sense, but sometimes it does.

In China Labor Dispatch Rules: Why Did You Ever Think It Would Be Easy? we set out the three categories of “dispatched” employees China still allows to be hired by a labor dispatch agency:

1. Temporary employees with a term of no longer than 6 months.

2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.

3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

This post then went on to describe the additional requirements for third party hiring within these three categories.

So, yes, it may still possible, but it is not easy and we never said it was.

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