Foreign companies operating in China often use hiring agencies to help them manage employees, minimizing risks but exposing themselves to the potential loss of valuable intellectual property (IP). This can be prevented by safeguarding the company’s IP through the proper protection mechanisms.
Due to strict employment regulations in China, foreign companies rely on dispatch firms (hiring agencies) to hire employees. Before considering this option, foreign enterprises must consider several legal issues, including the protection of IP.
In general, the foreign company and dispatch agency sign a contract that mandates the agency to hire staff as its own employees. These staff carry out work for the foreign firm.
It is crucial to have an adequate contract between the foreign company and the dispatch agency. This document sets the terms for the company’s relationship with the dispatch agency and determines the employees’ roles with both entities.
Unlike direct hiring, labor dispatch has a triangular form of employment relations. While dispatched workers work for and are supervised by the host company, the dispatch agency, which usually has considerable experience and knowledge of hiring local workers, is the de facto legal entity that is responsible for the administrative management of the employees.
Labor dispatch is regarded as an effective method to help businesses save hiring costs, avoid tedious administrative processes, and minimize risks and legal responsibilities for potential labor disputes.
Compared to direct hiring, labor dispatch is particularly preferred where:
Business is not allowed to hire employee directly, either because the business is in the process of setup and hasn’t got its business license or because the business is structured as a RO (representative office), which is legally required to recruit through dispatch agencies;
Business priority is given to revenue-generating activities over any other concerns, especially when the business is small and at its very early stage; or
There is an inconsistent workflow for businesses in seasonal and project-based industries.
Labor dispatch is only applicable for the following three types of positions:
Temporary position: A position with a duration of no more than six months;
Auxiliary position: A position that provides auxiliary services to the main or core business of the employer; and
Replaceable position: A position that can be performed by a dispatched employee in place of a permanent employee during the period when such an employee is away from work for study, vacation or other reasons.
The applicable position type must be specified within the dispatch contract.
The Interim Regulations stipulate that the number of total dispatched employees used by an employer should not exceed 10 percent of its total number of employees, including regular employees and dispatched employees.
ROs of foreign enterprises are not subject to this restriction.
Dispatch Companies and Intellectual Property
As the employer of record, the dispatch company will need to sign an employment contract with “your” employee. The dispatch company’s employment contract should and probably will accord with the relevant national and local employment laws and practices, and it will almost certainly protect the dispatch company as well.
However, it will not do anything to protect the foreign company’s interests for which the employees will be working, especially when it comes to protecting trade secrets and IP.
A foreign company cannot rely on the dispatch firm’s contracts to protect their own IP. It must actively protect IP by entering into a trade secrecy and IP protection agreement with each of the employees that (among other things) clearly mandates the employee’s confidentiality obligations.
In addition, this agreement must not only fit the company’s overall situation but it should also comply with China’s applicable laws so it can be enforced.
No company should leave the protection of IP to a third-party hiring agency. That aspect of the contract falls under the company’s responsibility and should be executed properly to prevent workers from running off with trade secrets and other IP.
It is not uncommon that foreign companies lose their IP to the people they used from these hiring agencies. In most cases, the foreign company’s contract with their third-party hiring agency did not protect them and their personnel had never signed anything that would protect them either.
Dispatch firms in China will simplify human resources, but they will not protect a company’s IP.
Foreign investors interested in operating in the country must understand China’s laws and regulations related to human resources and payroll management.
In principle, companies located anywhere in the world may hire a Chinese person to physically work in China. However, the labor contract will not be regulated by relevant Chinese legislation unless it is entered into via an invested entity on the Chinese mainland.
Hiring staff is one of the first key decisions a company will come across. Before employing significant numbers of people, a company should first consider the challenges, risks and employer obligations that may arise when opening or expanding a business.
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