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Selecting The Right Staffing Firm For Foreign-and Foreign Invested Companies

Foreign companies with no office in China also sometimes use staffing firms to avoid the legal prohibitions and impracticalities of hiring in China directly. While not illegal to work with a foreign company, few legitimate staffing firms are open to such arrangements. The most cited reason is that if the foreign company fails to compensate the staffing firm for expenses (e.g. at termination of an employment contract), it would be difficult and expensive to file a claim for damages.

In some case, providing monetary guarantees to cover any potential costs may be persuasive. Usually however, a foreign company will have to choose either to hire through an informal agent, to hire directly without legal coverage, or to establish a representative office or limited company.

Many Chinese-registered, foreign-invested companies also use staffing firms, but not always in the same way. While some prefer to copy the representative office model to hire staff indirectly, this has clear drawbacks. For example, if an employee is returned to the staffing firm based on a material change of economic circumstances at the real employer, the latter shall still pay remaining wages, social insurance and housing fund for the rest of the term. The reason is that the staffing firm cannot terminate the employee on the economic circumstances of the real employer (as contemplated for direct employment relationships under Article 40.3 of the PRC Labor Contract Law).

More generally, most companies see the benefits of transparency and control to having a direct employment relationship with its employees, but even then, a staffing firm may be useful in two circumstances:

1. Companies that are established in one place but have employees (especially sales people) in other regions, also turn to staffing firms. The law does not restrict companies from sending people to other cities in China to engage in activities such as (after-) sales, liaison and quality control, but a practical challenge is that a company registered in one city cannot pay social insurance premiums for an employee in another city. Thus if a Shanghai company wants to hire a Beijing employee, the latter will have to give up existing benefits in Beijing. One way to resolve this is to establish a branch, but this is subject to further procedures and cost. A more popular alternative is that the company engages a staffing firm to employ the person in the other city (as specifically permitted under Article 61 of the PRC Labor Contract Law), which can then withhold individual income tax, pay social insurance and housing fund contributions. Under the dispatch contract, the employee is seconded to the company, but continues to work in the city where the staffing firm is registered.

2. Even if employees are hired directly, the staffing agent can still be retained for payroll services. Managing payroll, including withholding and contributing individual income tax, social insurance contributions and housing fund payments, can be complicated and time-consuming. Private staffing firms in particular are increasingly focusing on this market. Note that in this context, only certain HR functions are sourced out; the employment relationship remains between the limited company and the employee, with due consequences for control and management.

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