International Law

A China HR No-no

By Stan

Dan at CLB, in discussing the dangers of hiring individual contractors over here, gives up prematurely on his post:

[I]f you are using Chinese nationals for your business in China and doing so by any method other than by using a third party company, you run a substantial risk of having these people be deemed to be your employees, with all of the attendant costs and risks. Turns out this guy’s company is using another foreign company to get into China by "stealth mode" and so my fears with respect to the "other Joe" were entirely unjustified. But hey, seems like there is a blog post here somewhere.

There was indeed a post in there, don’t give up so easily! (that’s what happens when you blog during the wee hours of the morning)

Here’s the problem, if I am getting the facts right. I’ve seen a lot of companies informally partner up with other foreign enterprises that are already in China.  The offshore company (Party A) and the company with operations here already (Party B) agree that Party B will essentially hire one or more staff on behalf of Party A and allow that person to use Party B’s facilities to run Party A’s China business. Party A doesn’t actually set up a company of their own here but can still coordinate deals, do marketing, etc. (i.e., things you would normally do with a Rep Office).

So Party A runs a stealth operation out of Party B’s facility. Any problems with this?

Yes. Party B is not in the business of renting out its office space and hiring staff on behalf of another company. It is therefore arguably operating outside of its business scope. Low risk of trouble with the government perhaps, but a violation nonetheless. One exception to this would be if Party B was some kind of consulting company and signed an agreement with Party A to provide general consulting services — this would probably cover this sort of activity.

OK, so what’s Party A’s relationship with "its" employee in China, the one that sits in Party B’s office? Legal relationship according to Chinese law? absolutely none. More than likely, the employee has been hired by Party B, and if the employee does something that Party A doesn’t like, it has no recourse unless Party B agrees to act. Not so good, even if Party A and Party B have a solid offshore contract that governs this relationship.

This gets even more complicated when we bring cross-border payment issues into the picture, but I think I better stop short of that.

Conclusion: Dan’s client may not have a classic individual contractor problem, but there could be other issues to deal with. Cutting corners never works in the long run.

Full post as published by China Hearsay on September 10, 2008 (boomark / email).