Rep Office Ceilings and the Month They Start Costing Money
Representative offices incur deemed expense taxes up to 13.2% from inception; cumulative tax drag and dispatch fees make WFOE conversion optimal by month 18.
Labor Dispatch Agency
Meaning
Licensed intermediaries that employ staff on behalf of a third-party organization manage the legal and administrative aspects of the employment relationship. Under Chinese labor law, a labor dispatch agency takes on the role of the employer while the worker is sent to perform duties at another company. The arrangement is restricted to positions that are temporary, auxiliary or substitutable in nature.
Employment Structure
The relationship involves three parties where the labor dispatch agency signs the contract with the worker and the host company pays a service fee. The agency is responsible for the payment of wages and the social security contributions required by the local government. This structure allows the host company to adjust its headcount more flexibly than through direct employment.
Regulatory Limit
Statutory caps prevent companies from using dispatched workers for more than ten percent of their total workforce. This restriction was introduced to ensure that the labor dispatch agency model is not used to bypass the protections offered by direct long-term contracts. Authorities monitor these ratios through periodic inspections and may fine companies that exceed the limit.
The agency itself must hold a specific labor dispatch license, which is renewed every three years based on the company’s capital and compliance record. Failure to maintain this license renders all existing dispatch contracts invalid and may lead to the host company being declared the direct employer by default.
Operational Responsibility
The host company still bears the duty of ensuring a safe working environment and providing the necessary tools for the job. While the labor dispatch agency handles the paperwork, the host company is liable for any workplace injuries that occur during the assignment. Clear communication between the two entities is required to manage performance and handle any disciplinary actions.