Evaluating Economic Employer Doctrine Principles under Chinese Secondment Rules
China reclassifies foreign secondment wage recharges as taxable service fees whenever the local entity operates as the true economic employer under Bulletin 19.
Labor Dispatch License
Meaning
Administrative permits issued to employment agencies authorize the practice of hiring workers and sending them to work at another company under a service agreement. A labor dispatch license is a mandatory requirement for any firm that intends to operate as a labor intermediary within the domestic market. The Ministry of Human Resources and Social Security regulates this sector to protect the rights of workers and to prevent the abuse of temporary labor contracts.
The boundary of the license is defined by the specific types of roles that can be filled through dispatch, which are limited to temporary, auxiliary, or substitutable positions. Under the Labor Contract Law, no more than ten percent of a company’s total workforce can consist of dispatched workers. This restriction ensures that the majority of employees have a direct and stable relationship with their actual employer.
The license is valid for a fixed period and must be renewed regularly to ensure the agency remains in compliance with capital and operational standards.
Capital Requirement
Maintaining a significant amount of registered capital is a prerequisite for obtaining and holding a permit for labor mediation. The labor dispatch license requires that an agency has a minimum paid in capital of two million yuan to ensure it can meet its financial obligations to its workers. This capital acts as a buffer against the risk of the agency failing to pay wages or social insurance contributions if a client company defaults on its payments.
The authorities verify the existence of this capital through an audit of the company’s financial statements during the application process. If the capital falls below the threshold, the license can be suspended or revoked. This financial requirement prevents the entry of small, unstable firms that might exploit workers.
Operational Limit
Restrictions on the use of dispatched labor are designed to ensure that this form of employment does not replace permanent staff. The labor dispatch license is granted on the condition that the agency only provides workers for specific categories of work. Temporary roles are those that last for less than six months, while auxiliary roles are those that provide support to the core business of the company.
Substitutable roles are used to cover the absence of a permanent employee due to leave or study. The tax and social insurance bureaus monitor the headcount of dispatched workers to ensure the ten percent cap is not exceeded. If a company is found to be over the limit, it can be fined, and the dispatched workers may be deemed to be direct employees.
Compliance Risk
Entities that engage labor agencies must verify the validity of the service provider’s credentials to avoid legal and financial liabilities. Using an agency that does not hold a valid labor dispatch license can result in the entire arrangement being declared void. In such cases, the client company becomes the de facto employer and is responsible for all back wages, social insurance, and severance pay.
The client company is also jointly and severally liable with the agency for any violations of labor rights. This includes workplace injuries or the failure to pay overtime. Regular audits of the agency’s license status and its social insurance payment records are a standard part of corporate governance for large employers.
The final responsibility for a safe and legal workplace rests with the entity where the work is performed.