Nov. 13 – Foreign companies that have established a representative office (RO) in China do not have the ability to hire local staff directly. Instead, Chinese staff must be seconded from an agency that will take the title of official employer.

The reason for restricting the right of an RO to employ staff is quite simple, it is not a capitalized legal entity in China. An employee must have the right to claim against their employer, and an RO will not be a suitable entity to claim against. By forcing ROs to employ staff through an agency (which is a capitalized legal entity in China), the interests of the employee are protected.

Labor Dispatching Agencies
ROs in China must recruit their Chinese employees through labor dispatching contracts. A labor dispatching contract (secondment) describes the situation in which an agency dispatches an employer to work at another organization. In China, the market for labor dispatching services is a very large and lucrative one including many organizations using the name “FESCO,” which stands for Foreign Enterprise Service Company.

Many foreign investors assume that FESCO is a single organization, but in fact it is a generic term used by dozens of local HR companies around the country. There are often multiple competing “FESCO” organizations in each city; some subsidiaries or affiliates of companies in another part of the country, some partially state-owned, and some 100 percent privately-owned. Because of the widely-held misconception that FESCO is one company, the “brand” is a powerful marketing tool, and the term is often casually used to refer to companies providing similar services.

It is important that foreign investors realize that FESCO is not a single organization and that organizations using other names can also offer the same services. Also, many general managers operate under the misconception that their organization has no negotiating power with FESCOs, and simply accept the quoted price they provide without question.

Typically, an RO will sign a “contract for service” agreement with a FESCO. Under these types of contracts, the FESCO agrees to provide (and the RO agrees to pay for) employee hiring services and the administration of the employment relationship.

Once the RO has decided on a candidate, the FESCO will sign an employment contract with the employee. Meanwhile, a supplemental employment contract may be entered into between the RO and the employee to provide for detailed rights and obligations of the employee (for example, based on the company HR policy). It is commonly understood that the supplemental contract may not come into conflict with the primary service contract between the RO and the FESCO. Supplemental provisions typically include details of compensation, holidays, work duties, office rules and regulations, confidentiality, etc.

The FESCO will also handle the employee’s mandatory contributions for unemployment insurance, medical insurance, housing and retirement. It will also initiate, renew and terminate employment contracts with the employees. ROs must pay the FESCO fees for these types of services, which vary according to different locations.