Understanding EOR in China: A Complete Guide for Employers

What is EOR/PEO/Labor Dispatch in China?

EOR, also known as Labor dispatch, is a common practice in China where a third-party staffing company, called a Professional Employer Organization (PEO) or Employer of Record (EOR), hires and manages employees on behalf of a client company.

Under this arrangement, the PEO/EOR is responsible for handling administrative tasks such as payroll, benefits, and taxes, while the client company retains control over the work performed by the employee. The employee is typically assigned to work at the client’s site and is supervised by the client’s managers.

Labor dispatch has become increasingly popular in China, particularly in industries such as manufacturing, where companies often need to hire large numbers of temporary workers to meet fluctuating production demands. However, the practice has been subject to controversy and regulation in recent years, as some companies have been accused of using it to circumvent labor laws and avoid paying benefits to their workers.

In response, the Chinese government has introduced stricter regulations on labor dispatch, including limits on the proportion of temporary workers that can be used by a company and requirements for PEOs/EORs to provide their employees with social insurance and other benefits.

What is the EOR Law in China

The EOR Law in China is a piece of legislation that was introduced in 2014 to regulate the use of EOR in the country. The law aims to protect the rights and interests of dispatched workers, promote employment stability, and regulate the labor dispatch industry.

The key provisions of the EOR Law include:

1. Limits on the proportion of dispatched workers: The law sets limits on the proportion of dispatched workers that can be used by a company, with the maximum proportion set at 10% of the company’s total workforce.
2. Equal pay for equal work: Dispatched workers must receive the same pay as the company’s regular employees who perform the same job.
3. Social insurance and benefits: Dispatched workers are entitled to the same social insurance and benefits as the company’s regular employees.
4. Limits on dispatch duration: The law sets limits on the duration of labor dispatch, with a maximum dispatch period of 6 months for non-core business functions and 12 months for core business functions.
5. Joint liability: The law imposes joint liability on both the company and the staffing agency for labor disputes and other issues related to dispatched workers.

The EOR Law has had a significant impact on the labor market in China, particularly in industries where the use of dispatched workers was widespread. The law has helped to improve working conditions and benefits for dispatched workers, while also providing greater clarity and certainty for companies that use labor dispatch services.

What are the benefits of EOR in China

There are several benefits of EOR in China, both for companies and for workers. Some of the key benefits include:

1. Flexibility: EOR allows companies to quickly and easily adjust their workforce to meet changing business needs. By hiring workers on a temporary basis, companies can avoid the costs and risks associated with permanent hires.
2. Reduced administrative burden: By outsourcing HR and payroll functions to a staffing agency, companies can reduce their administrative burden and focus on core business functions.
3. Cost savings: EOR can be a cost-effective solution for companies that need to hire large numbers of temporary workers, as they do not need to provide benefits such as health insurance, social security contributions, and paid leave to dispatched workers.
4. Access to specialized skills: Staffing agencies often specialize in certain industries or types of work, which can provide companies with access to workers with specialized skills and expertise.
5. Legal compliance: By using a staffing agency that is compliant with labor laws and regulations, companies can reduce their risk of legal disputes and penalties related to labor issues.

It is worth noting, however, that the use of labor dispatch has been subject to controversy and regulation in China in recent years, as some companies have been accused of using it to circumvent labor laws and avoid paying benefits to their workers. As a result, the government has introduced stricter regulations on labor dispatch to protect the rights and interests of dispatched workers.

Limits of EOR in china

The use of EOR in China is subject to several limits and regulations, which are aimed at protecting the rights and interests of dispatched workers and ensuring compliance with labor laws. Some of the key limits of labor dispatch in China include:

1. Limits on the proportion of dispatched workers: Under the EOR Law, companies are limited to using dispatched workers for no more than 10% of their total workforce.
2. Limits on the duration of dispatch: The maximum duration of dispatch is 6 months for non-core business functions and 12 months for core business functions.
3. Equal pay for equal work: Dispatched workers are entitled to the same pay and benefits as regular employees who perform the same job.
4. Joint liability: Companies and staffing agencies share joint liability for labor disputes and other issues related to dispatched workers.
5. Compliance with labor laws: Staffing agencies must be compliant with labor laws and regulations, and must provide their dispatched workers with social insurance and other benefits.
6. Limits on the industries that can use labor dispatch: Certain industries, such as public institutions, schools, hospitals, and government agencies, are not allowed to use labor dispatch services.

These limits and regulations are designed to protect the rights and interests of dispatched workers, and to prevent companies from using labor dispatch as a way to circumvent labor laws and avoid paying benefits to their workers.

Types of company using EOR

In the late 1970s, the triangular employment relationship known as labor dispatch was first utilized in representative offices of foreign companies. Due to the limited business scope and lack of legal entity status in China, these offices were only able to hire local Chinese staff through licensed employment agencies. By doing so, the dispatching agency would assume all legal responsibilities associated with employment, holding labor contracts and managing payroll and benefits for the client’s employees.

1. Representative offices of foreign companies – As mentioned earlier, representative offices in China often use labor dispatch as they are not legal entities and have limited business scope.
2. Foreign companies without a registered entity in China – Companies that do not have a registered entity in China can use labor dispatch to legally hire employees.
3. Startups – New companies that are still in the process of setting up a legal entity in China can use labor dispatch to hire employees until their entity is established.
4. Companies with short-term projects – Companies that have short-term projects that require additional workers can use labor dispatch to hire temporary workers without the need to hire permanent staff.
5. Companies with limited headcount – Companies with a limited number of employees can use labor dispatch to temporarily fill vacant positions caused by unforeseen circumstances, such as employee absences.

The role of employment agencies in EOR

Employment agencies play a crucial role in labor dispatch as they act as intermediaries between the employer and the employee. In the case of EOR, the employment agency hires the employee and then dispatches them to work for a third-party company under a service agreement.

The employment agency is responsible for handling all legal and administrative matters related to the employment of the dispatched worker, including:

1. Recruitment and hiring – The agency is responsible for finding and screening suitable candidates for the client company’s job positions.
2. Contract management – The agency manages the labor contracts of the dispatched workers and handles any amendments or terminations of these contracts.
3. Payroll and benefits – The agency is responsible for managing the payroll and benefits of the dispatched workers, including social insurance, housing fund, and any other legally required benefits.
4. HR management – The agency manages the HR aspects of the dispatched workers, such as attendance, performance, and disciplinary issues.
5. Compliance – The agency ensures that the employment of the dispatched workers complies with all relevant Chinese labor laws and regulations.

Employment agencies provide a valuable service to both the client company and the dispatched worker by handling all administrative and legal matters related to employment. This allows the client company to focus on its core business activities, while the employment agency ensures that the dispatched workers are employed in compliance with Chinese labor laws and regulations.

How to engage in EOR in China

1. Identify a licensed employment agency – To engage in labor dispatch, the first step is to identify a licensed employment agency in China. The agency must have a valid license for employee leasing issued by the local labor authority.
2. Sign a service agreement – Once an employment agency is identified, the client company must sign a service agreement with the agency. The agreement should include the terms and conditions of the employment, such as the duration of the employment, the job position, the compensation, and the benefits.
3. Provide necessary documents – The client company must provide the necessary documents to the employment agency, such as the business license, the tax registration certificate, and the organization code certificate.
4. Identify suitable candidates – The employment agency will screen and identify suitable candidates for the job position. The client company can also participate in the recruitment process and provide input on the candidates.
5. Sign labor contracts – Once suitable candidates are identified, the employment agency will sign labor contracts with the candidates on behalf of the client company. The labor contract will specify the terms and conditions of the employment, such as the job position, the compensation, the benefits, and the duration of the employment.
6. Payroll and benefits management – The employment agency will manage the payroll and benefits of the dispatched workers, including social insurance, housing fund, and any other legally required benefits.
7. Compliance – The employment agency will ensure that the employment of the dispatched workers complies with all relevant Chinese labor laws and regulations.

Engaging in EOR in China can be a complex process, and it is important to work with a licensed employment agency to ensure compliance with all applicable laws and regulations.

In conclusion, the ideal alternative for the majority of enterprises or businesses wishing to extend their presence in China is to use an employment agency to lessen the administrative load.

In addition to relieving them of their legal obligations as employees, this will provide them the time and resources they need to concentrate on their primary business operations. Talk to us now to get your plan on EOR in China.