Employment Solutions vs Company Formation
There are many reasons why a foreign company may want staff on the ground in China, and many ways to make this happen! we will article the differences between employment solutions and company formation.
To fully employ staff independently a company would need to open a WFOE in China – possible of course, but a long and costly process. For a company that needs contract staff to handle early market exploration or ongoing company representation, the alternative is to use an agency / Employer of Record in China to hire staff on their behalf.
This article will explain and compare the options, discussing:
- What is a Chinese Employer of Record?
- The advantages of using an employment agency in China
- The WFOE alternative – more options for employment but a complex setup
- Our thoughts on the options
What is an Employer of Record?
One of the simplest and fastest ways to get contract staff working for you in China is to use an Employer of Record. This is a company which acts as an employment agency, and can hire one or more staff on behalf of another company in China. A foreign company without its own legal entity presence in China cannot hire directly, so must use such a company.
Advantages of using an Employer of Record?
As well as being the simplest option for a company to get staff working for them on the ground in China, there are other advantages of using a Chinese employment agency.
- No legal entity presence required in China. Any company, or individual, can hire contract staff to work for them.
The agency will offer full HR solutions and employment services. They will handle all contractual, legal and administrative tasks related to employees.
Companies pay a simple, single service fee to the Chinese employment agency, and the agency will handle all staff costs – including salary, taxes, insurance and social / welfare payments in China.
- Can hire both domestic and foreign staff, and agency will deal with visa etc. where necessary.
- Many agencies can hire and base staff in the Greater China region, not just the mainland.
Using employment solutions
Hiring staff through an agency / Employer of Record is very straightforward. Domestic employees can often be brought on within a few days, foreign employees will take longer when visas are required (approximately two months).
The normal procedure would be for the agency to sign an employment contract with the new employee, and hence to take legal responsibility. A service contract would then be signed between the agency and the foreign company for provision of this employee’s services. It is common too to sign a tripartite agreement between all parties, specifying working terms and responsibilities etc.
Employees can in theory be located anywhere in China. Office arrangements can be made through the agency or separately through a serviced office provider, or staff are able to work independently / from home.
Hiring staff using a WFOE
For a company to hire staff itself a legal entity is needed. The most common, and flexible, independent setup for a foreign company is a WFOE structure (Wholly Foreign Owned Enterprise).
A WFOE has the most flexible possible ability to operate in China and hire staff. There is significant investment and time required to set up however. A summary of the main points here:
The setup time for a WFOE is around 5 to 6 months, and can be longer. Interaction with several different government departments is required (with detailed applications and paperwork), which will need significant company input.
A WFOE structure of course provides much more than the ability to employ staff. It gives full ability to conduct business, issue invoices in local currency and derive profit from activities in China (in line with defined business scope). Whether this is needed, and at what stage, depends on individual situations.
As part of setup, WFOE capital requirements should be considered. Although there are now no specific required minimums, capital is still required and the amount and injection timescale will have to be defined as part of company incorporation.
How to setup a company in China is often confusing for those new to the market. It is certainly a complex and often frustrating task, but with the right advice and assistance though the process it is not so difficult. For full details on WFOE setup, challenges and considerations see our service guide and separate WFOE articles.
Our thoughts – employment agency or WFOE?
From our experience, there are several situations where we see foreign companies looking to use an employment agency in China. These include:
Companies needing local staff to handle on the ground operations, client meetings or supplier management. But the workload or company strategy does not lend itself to the setup of a representative office or a WFOE.
- Those new to the China market who wish to hire local staff to carry out early market research or exploration.
- Companies with an overseas based contractor that they want to base in China.
Companies which intend to open a China presence (e.g. rep office or WFOE) but want to hire staff in the interim period whilst this is setup.
Companies choosing a representative office structure to give them a stronger presence in China, but still not the ability to hire staff direct.
Using a WFOE will be more common when:
- Companies look to employ a greater number of staff.
- A company has the ability and resources to handle their own contracts, payroll and employee management / administration
- Companies are looking to hire for the longer term, and offer permanent contracts or other benefits.