Staffing temporary workers in China is highly restricted by the law, which can make compliance extremely difficult and may require using alternative strategies. “Labor outsourcing” has emerged as a popular circumvention technique, but one that is unlawful and increasingly being discouraged by regulators. Despite the challenging environment, there are legally compliant ways to staff temporary employees.
In this article, we’ll guide you through how to legally use contingent workers in China. Due to the restrictions on staffing, many business consultants will recommend using outsourcing as an alternative staffing method to fill variable requirements. However, this approach must be done carefully to avoid legal risks.
Contents
Outsourcing as an Alternative to Staffing
Illegally Disguised Temporary Staffing
Reducing Legal Risks when Outsourcing
Compliance Recommendations for Staffing
Using Outsourcing as an Alternative to Staffing
When looking at staffing solutions for your China operation, you will inevitably see “labor outsourcing” recommended as an alternative to temporary staffing, despite its lack of recognition under Chinese law. This circumvention technique was developed because Chinese law caps temporary staffing at 10% of your workforce, and any additional staffing legally has to be structured as outsourced services. While labor outsourcing in China is illegal, regulators encourage service outsourcing as a way to meet these needs.
There is nothing exotic or different about the Chinese concept of “outsourcing.” In most countries, outsourcing involves having another company provide services such as IT, payroll, or janitorial work. Using outsourcing instead of staffing in China simply means accomplishing the work in the same way that you would under an outsourcing contract anywhere else in the world.
You can get into legal trouble in China when trying to achieve workforce staffing through illegal “labor outsourcing” services because the courts and regulators view this as disguising temporary staffing arrangements. Moreover, they are willing to impose huge liability on companies caught doing it.
Clearing Up Confusion Around “Labor Dispatch”
You might have heard the word “labor dispatch” being described as a kind of employment system in China. Actually, that’s pure misinformation and there is no “labor dispatch” system distinct from temporary staffing. Historically, China’s concept of temporary staffing was localized from 1920s United States “labor leasing” into laodong paiqian, and then translated back to English again as “labor dispatch” using the rudimentary dictionaries available at the time. That is to say, “dispatch” is used in Chinglish because the word “leasing” sounds unnatural when directly translated into Chinese. In practice, China’s system mirrors ordinary temporary staffing arrangements like those in the United States or Europe, but with more rules to protect workers. Since this article is written in American English, “temporary staffing” is used and discussed, and not “labor dispatch.”
Temporary Staffing in China
In China, temporary staffing requires a permanent Employment Contract to be signed between the staffing agency and the worker on one hand and a Staffing Agreement between the agency and the client on the other. The employees are managed by the client, while the service fees are paid to the agency.
Unlike other jurisdictions, Chinese law does not consider whether there is a “joint employment” relationship but instead views clients as having managerial relationships with workers. Semantically, China uses a traditional labor lessor/lessee perspective with some Communist-era modifications. This can be summarized as one where the agency “employs people but not labor,” whereas the client “employs labor but not people,” thereby establishing the legal managerial relationship between the client and workers. Previously, this caused huge problems for workers because the staffing client had no obligations to workers, resulting in the widespread use of staffing agencies as a vehicle for abuse.
China’s 2013 amendments to temporary staffing laws vigorously protect worker rights, as embodied in §92 of the Employment Contract Act, which provides for joint and several liability between the staffing agency and client for any harm caused to employees. This joint and several liability provision thus achieves the same results as the joint employer and co-employer rules used in the United States and Europe respectively.
The rules also restrict the types of work that can be done and how many contingent workers can be used. For instance, Employment Contract Act §66 provides that an employment contract is a fundamental condition for working at a business, and staffing workers is merely supplemental, therefore limited to temporary, non-core, and auxiliary positions. Additionally, Staffing Agency Temporary Rules §4 provides that the number of temporary workers cannot exceed 10% of the employer’s total workforce.
Temporary staffing law in China is intended to balance socialist policy goals with market economy development, making it easier to scale operations while also minimizing costs. The law introduces extensive requirements designed to protect workers, with protections heightened above that of even joint employment jurisdictions. There are also specific labor law requirements for equal pay for equal work, pay transparency, work hours regulation, and social security contributions.
While “labor outsourcing” is often pitched by human resources services as a way to achieve temporary staffing, regulators and courts will label it “sham outsourcing” and impose employment law liability or regulatory penalties on you for doing so. While the terminology used by those providers may sound legitimate, they are selling high-risk services. To avoid wasting your time on misinformation, refer to CBL’s collection of employment & labor law materials written in clear American English and backed by real regulations and case studies.
Regulation of temporary staffing agencies is extremely strict now, requiring a license and substantial capitalization requirements. Thus, it’s often not a realistic choice for businesses.
Outsourced Services
You may need to consider using outsourced services as an alternative to using staffing to meet business needs. What does “outsourcing” mean in the China context? It means the same as anywhere else. It is very common for companies to outsource services like payroll, HR, IT, manufacturing, and translation to external providers. In this kind of arrangement, the provider directly controls and manages the staff that provide these services, and the value proposition to clients lies in solutions and results rather than the staff themselves. Outsourcing has become a popular business strategy because it enables businesses to focus on their core competencies while allowing other firms to do the rest of the work with higher quality and at lower cost.
Confusion mainly occurs because business in China need to make strategic decisions about whether to use outsourcing or staffing. In most countries, outsourced services are never directly compared to temporary staffing. However, the strict limitations placed on using temporary workers in China means that using temporary staffing may not be feasible, and human resources companies in China have marketed disguised temporary staffing services under the label “labor outsourcing.” Using such services is illegal and could get you sued.
In China’s courts, outsourced services are distinguished from temporary staffing by how they are managed, as outsourcing contracts call for outsourcing an operation or professional service in its entirety from the client to the provider. The service or results in themselves are the object of the contract being sold; the role of the workers in outsourced services is to perform work for hire for the outsourcing company, which then sells the results to the client. There is no legal relationship between the outsourcer’s staff and the client, and the client only has a contractual relationship with the outsourcing provider. A key similarity between this analysis and a joint employer or co-employer analysis in another jurisdiction is whether the client exercises managerial control over the workers.
The implication in China is that the outsourcing client has no joint and several liability for employment law obligations with the provider, which is similar to the United States where the client is not considered a joint employer.
The relationship between the outsourcer and client is not governed by labor law or temporary employment law at all, rather it is a contract law matter under the Civil Code and obligations to pay and provide adequate service are terms agreed upon by the two parties. Thus, using an outsourcer instead of a staffing agency will relieve the employer of all labor and employment law obligations under Chinese law. Nonetheless, it also creates a risk of being accused of using sham outsourcing to circumvent employment laws.
Legal Comparison Between Staffing and Outsourcing Services
There is a tremendous amount of Chinese judicial precedent analyzing and comparing the differences between temporary staffing and outsourced services as courts try to identify temporary staffing firms that attempt to circumvent joint employment law obligations. The analysis revolves around whether the client has a direct legal relationship with the worker.
In a temporary staffing relationship, the client has the right to manage and control the activities of the worker, whereas they have no direct control over the workers of the companies they purchase outsourced services from.
Temporary staffing involves sending workers directly to the client’s company under a staffing agreement, which typically lacks provisions for specific services or service levels. By contrast, outsourced services involve purchasing a specific service package that can include defined service levels, and contracts focus on service quality and quantity rather than hiring a specific person.
Under many service offerings, the line between the two can become blurred, but there are some fundamental differences. As Chinese policy sees it, staffing is still fundamentally an employment relationship, a 20th-century advancement in how to manage individual workers, whereas outsourced services divide up responsibilities based on the organization’s capabilities.
The Employment Contract Act governs all aspects of staffing arrangements in China, whereas contract law under the Civil Code governs outsourced services. Workers are party to the contract in temporary staffing arrangements, creating obligations running from the client to the worker. These obligations, however, are absent in service outsourcing, where employees are managed by the outsourcer.
In Chinese staffing agreements, the client will be billed for the number of persons staffed and the time they work, along with the required monthly social security contributions. In outsourcing, however, billing is tied to specific results or fixed amounts of work, such as a tax return, a month of website maintenance, or ten thousand words translated. Billable hours are less common in China than elsewhere.
In addition, both the staffing agency and the client are jointly and severally liable for any harm caused to workers, which extends to unpaid worker wages and social security contributions; meaning that the client would be jointly and severally liable with the staffing agency to make those payments. This approach creates a lot of liability for those using high-risk “labor outsourcing services,” but no such liability exists when lawfully outsourcing work.
Illegally Disguising Temporary Staffing Arrangements as Outsourced Services
Staffing Rules §27 provides that even if what is substantively a staffing arrangement is labeled as outsourcing, the rules governing temporary staffing nonetheless apply. Therefore, courts and regulators will treat a contract titled “Labor Outsourcing” as a temporary staffing agreement if the actual activities under the agreement are substantively staffing activities. Staffing Rules §20 makes it clear that penalties for violations can be severe, and can include an order for abatement, monetary fines, or revocation of business licenses, as provided by Employment Contract Act §92. Thus, companies using Labor Outsourcing agreements in China face significant legal risks if found to be disguising a temporary staffing agreement as an outsourced services agreement.
To understand how judges in China decide on whether you are hiring workers through a sham outsourcing arrangement, consider the following cases.
Legitimate Outsourcing Arrangement Found
In Nanjing Lower Court of Appeals case 01-cv-1209 (2021), a management company provided its client with a translator to work onsite, but the agreement’s pricing was based on total words translated rather than hours worked. The translator had a high degree of autonomy in how the work was done because the client lacked expertise in the field.
The court of appeals in its opinion held that the arrangement constituted ordinary, legitimate outsourced services and not temporary staffing. Particularly dispositive was how the management company, not the client, directed the translator’s work and managed their performance. Additionally, the parties rigorously followed the service outsourcing provisions of the agreement and did not treat the translator as an employee of the client’s organization.
Sham Outsourcing Found
For an example of where the court found that the parties were disguising a temporary staffing arrangement as an outsourced service, in Jiangxi Appeal 07-cv-448, the court considered whether a service outsourcing agreement was disguised as temporary staffing. In this case, the companies used a contract titled “Business Outsourcing Contract,” which required the outsourcer to provide services for picking up, sorting, and delivering packages. The outsourcer, however, did not provide these as services but merely signed employment contracts with workers and provided them to the client, who used their labor to do those tasks. The court held this was a temporary staffing arrangement.
Similarly, in Shanghai case 0115-cv-90296, the worker was directly managed by the client company rather than the outsourcer, notwithstanding superficial characterization as labor outsourcing. Therefore, the court held this to be a temporary staffing arrangement.
As is typical of temporary employment dispute cases in China, judges in such cases give the following facts considerable weight:
- Whether the agency is licensed to provide temporary staffing services.
- How the services are paid for.
- Which party pays wages and determines wage rates.
- Which party makes social security contributions.
- Which entity directly manages the worker.
- Whether the worker is required to follow the client’s company policies.
- Whether the contract obligations being performed are staffing or service in nature.
- Whether the value delivered is based on solutions/results or on time worked.
Reducing Legal Risks When Using Outsourcing as an Alternative to Staffing
Due to China’s 10% cap on temporary employees throughout a business entity and local registration requirements, managers in China are often compelled to outsource services rather than use temporary staffing. This poses a risk because China’s full range of employment law liabilities apply to agreements characterized as staffing arrangements. Clients found to be hiring sham “outsourcers” would thus be held jointly and severally liable for all employer obligations, including unpaid wages, overtime, social security, double wage penalties for not signing an employment contract, and statutory severance payment liability.
Entities offering sham outsourcing services are fully aware of these risks but take them anyway, knowing that the client would be picking up the tab. Despite the significant risk, local management will nonetheless deliberately use this method to achieve business goals, such as hiring employees in regions without a local entity.
We will cover some effective compliance strategies later on in the article. In China’s current labor law climate, it’s especially important that businesses perform reasonable due diligence to reduce risks of “sham outsourcing” allegations, covering at least the following.
Review the outsourcer’s employment contracts and social security contributions to ensure that all contracts are signed and genuine and that social security contributions are being made for the agency’s employees. Failure to do so could mean that Chinese courts find you jointly and severally liable to pay double damages for not having signed a contract and social security nonpayment.
Check the outsourcer’s business license to verify that it includes the required permitted business activities as approved by the market regulator. Oftentimes, temporary staffing agencies in China will acquire secondary permitted business activity approvals, such as for business management or process management, and misuse these as a basis to claim they are licensed to provide the outsourced service. In some precedents, courts used the permitted business activities listed on the license to determine whether arrangements qualified as staffing or outsourcing.
Ensure that all tasks, work instructions, and requests come from a manager employed by the outsourcer and they are the ones assessing all worker performance evaluations and KPIs. Work attendance and performance must be entirely based on the outsourcer’s work instructions, company policy, and management requests; and vacation policies, overtime, and performance evaluations must follow the outsourcer’s policies and be administered by their own staff. However, on-site life safety and occupational safety can be managed directly by the client.
Review contracts to ensure that they structure the rights and obligations of each party in line with Chinese temporary staffing laws. Specifically, provisions on payment need to be tied to the service itself, not merely to hours worked, and describe things like quantity and quality inspections, deadlines, delivery, and events of default. An outsourcing client using their own premises and equipment should ensure that contract provisions specifically describe how the outsourcer will independently direct and control the work activities. Sham outsourcing arrangements often erroneously break down costs for wages, social security, and management fee percentages, so ensure that the contract explicitly avoids describing billing in that way.
Any attorneys reviewing contracts and compliance should be independent of local management control. In addition, have all memoranda translated into English by experienced, professional translators to avoid serious misunderstandings and legal risks.
Compliance Recommendations for Using Temporary Staffing Solutions
If you decide to use temporary staffing to meet some of your labor needs, care is needed to ensure your operations comply with Chinese law and to manage legal risks effectively.
Comply with Licensing Requirements
Due diligence into whether the staffing agency has the appropriate license is necessary since entities that provide temporary staffing must get regulatory approval or risk fines or their income being seized. So, an entity that does not have staffing listed among its permitted business activities on its business license cannot lawfully enter into a temporary staffing agreement. An employer that signs a staffing agreement with an improperly licensed entity also faces significant legal risks, such as being deemed the actual employer of the worker.
This result is mandated under some local laws, such as the East China Temporary Staffing Guidelines, which specify that a constructive employment relationship should be found if the agency is unlicensed. The policy aims to protect workers if the agency’s license is entirely revoked and can’t pay workers.
Another potential consequence of relying on an unlicensed agency is that the temporary staffing agreement is voided. This rule is in tension with the Temporary Staffing Rules § 11, which provides that if the agency’s business license expires or is revoked, the employment contract between the employee and the staffing agency will remain in force.
Chinese courts have generally held that a business organization entering into a temporary staffing agreement with an unlicensed agency is nonetheless bound by the regulations governing employment obligations between the client, agency, and employee. However, a “client” entity contracting with an unlicensed agency is clearly at fault, and therefore liable to staffed employees for any detriment they suffer. Local government ordinances in some places, such as Qingdao, also explicitly provide that a business contracting with an unlicensed staffing agency is also liable to employees for all employer obligations under the China Employment Contract Act.
Review the Total Number and Type of Temporary Employees for Legal Compliance
The Temporary Staffing Rules require that temporary staffed workers account for no more than 10% of the client’s workforce. While parties rarely prove violation in a dispute, this nonetheless remains a significant regulatory compliance risk to control.
In particular, recent local judicial and regulatory conferences in regions such as Shanghai have concluded that regulatory orders to cease and desist violations must be issued to companies violating basic temporary staffing position requirements, i.e., temporary, non-core, and auxiliary, and no more than 10% being staffed workers. However, an employee’s dispute as to whether their temporary staffed position satisfies the basic requirements under the Rules is not eligible for a hearing in employment arbitration, because compliance with the basic position requirements for temporary staffing is not considered an essential employment contract law issue. In some other regions such as Liaoning and Chongqing, assigning a temporary worker to a position that does not meet the basic requirements for temporary staffing creates an employment contract directly between that worker and the staffing client.
What Provisions the Staffing Agreement Should Contain
Under a typical temporary staffing agreement in China, the client pays the staffing agency, which in turn pays the employees. The agreement needs to be very specific about the rates charged for basic wages, overtime, and performance bonuses. The contract should describe how workers are provided and paid for, and those terms should be reasonable and reflect the business’s needs.
Apportionment of liability under the agreement will center on payment liability. In general, the staffing agency will require that the client be jointly and severally liable with it for wage payment obligations to workers if clients default on their payment obligations. Additionally, an agency will usually ask for the client to assume liability for work injury costs.
A major legal risk in the contractual provisions is that the staffing agency’s own business entity must be responsible for making social security contributions, The client could be jointly and severally liable for social security contributions in some cases, for example, where the staffing agency’s entity doesn’t contribute to social security because it is not registered in the local region. Problems with social security due to lack of local registration are covered in a separate explainer here.
Ending Worker Assignments
A major difference between North American temporary staffing law and Chinese law is the absolute requirement for a permanent employment contract between a worker and a temporary staffing agency. Thus, at the end of an assignment, the worker must be returned to the staffing agency, and there are specific rules and judicial precedents governing when this return may be completed. While the staffing agency has the ultimate authority over terminating employment contracts, the client can provide reasons and evidence to support returning workers.
The staffing agency can claim damages in situations where returning the workers violates the contract or law, and other penalties may apply. For example, the Temporary Staffing Rules §24 provides for a ¥5,000 to ¥10,000 fine for returning workers in violation of the rules.
Local governments also have their own guidelines and rules, the most influential being the East China guidelines, which enumerate the circumstances under which temporary workers can be returned to the agency. Moreover, the guidelines specify that hiring from an unlicensed agency, exceeding the 10% cap, or hiring for positions inappropriate for temporary work are not valid grounds for returning workers.
FURTHER READING
Get authoritative insights about this topic from a official government guidance translated by CBL:
For a general overview of this topic, see also CBL’s China Employment Law FAQ.