FESCO in China: Guide for Foreign Companies

In China, a foreign company must have a registered legal entity in the country before it can hire either local or foreign employees. By establishing a Wholly Foreign-Owned Enterprise (WFOE) or a Joint Venture (JV), foreign companies can legally hire individuals in China.

However, registering either of these options can often be complex, resource-intensive, and time-consuming for many. This is why many investors interested in expanding into the Chinese market use the services of a Foreign Enterprise Service Company (FESCO). Here are a number of key insights into what you need to know about FESCO in China including what FESCO services entail, the advantages and disadvantages of using FESCO and alternatives of using FESCO.

What is a FESCO?

A FESCO is an umbrella term for Human Resources (HR) companies in China whose job is to dispatch employees to clients. They are fully established and registered as a legal corporate entity in China. As such, they have the right to legally hire local and foreign employees.

A FESCO is recognized as the employee of record (EOR) for your business in China as well as the official administrative employer.

The main services that FESCO offers are as follows:

• Contract drafting and negotiation
• Social security management
• Payroll and tax arrangement
• Labor dispute resolution
• Visa arrangement

Previously, companies used FESCOs for the large-scale hiring of Chinese workers. However, the Labor Contract Law has since been updated, limiting hiring through FESCO which previously allowed for temporary or auxiliary employment as opposed to permanent, full-time employees.

How Does a FESCO Work?

A representative office (RO) will first sign a contract with the chosen FESCO. Thereafter, the FESCO will proceed to hire staff under their company and assign them to work for the RO through a dispatching contract.

The FESCO will handle salary payments, social security contributions, rules of employment, holidays, confidentiality agreements, and other related regulations to ensure complete compliance with local labor laws in China.

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Who Can Use a FESCO?

Both foreign and local companies can benefit from the services of a FESCO. As Representative offices cannot directly hire employees, they rely on a FESCO to carry out recruitment and other administrative tasks. In some cases, even an established entity like a WFOE will make use of the services of a FESCO for handling recruitment, payroll, and labor disputes.

For local businesses, a FESCO is a compliant way for employers to outsource their HR and administrative tasks. Furthermore, outsourcing tasks through a FESCO is more cost-effective in terms of hiring temporary staff as opposed to directly employing auxiliary employees.

Additionally, a convenient component of FESCO services is that it reduces the need to hire a lawyer for general labor disputes that arise. Generally, the FESCO company has their own legal representatives specialized in labor matters as well as a comprehensive understanding of labor regulations, ensuring complete compliance for your business when outsourcing their services.

For foreign entities, the primary reason for using a FESCO is how it can dramatically increase the speed of entry into the Chinese market. The way in which a FESCO can rapidly and conveniently dispatch employees to companies while ensuring compliance makes them very effective for capturing the business opportunities that foreign investors seek when expanding operations in China.

Advantages and Disadvantages of Using a FESCO

Advantages

• Get your operations started faster

One of the most valuable benefits derived from using the services of a FESCO is during the pre-incorporation period.

This is due to the fact that foreign entities require the assistance of Chinese employees to process their registration papers given the understanding locals have with the regulations and processes. However, contracting workers is illegal in China unless the company already has its license to operate.

A FESCO can dispatch temporary employees to a foreign entity to expedite the registration process. Some companies even guarantee deployment as fast as 48 hours after the enlistment of their services. However, in the case of foreign employees, it may take more time for them to be operational and available to be dispatched due to the requirement of undergoing a medical and ensuring social security contributions can be properly made.

• Easier resolution of disputes

Chinese labor laws greatly favor employees over employers. As such, for foreign companies that are unfamiliar with the environment, resolving labor disputes can be very challenging. However, by utilizing the knowledge and experience of FESCO regarding Chinese labor laws, dispute resolution can be more organized and result in greater outcomes for both parties.

• Better understanding of local labor laws

Some FESCOs in China are state-owned, while others are private. Regardless of the company that is chosen, generally both state-owned and private companies have a reliable legal team that have a comprehensive understanding of Chinese labor laws.

• Flexible hiring option

Many foreign companies often need Chinese employees, especially during the initial stages of incorporation. A FESCO provides a complete employment package with legally compliant contracts that make it easier for foreign entities to increase or decrease their headcount, in accordance with their hiring needs.

• Outsource legal and payroll obligations

In China, labor laws and regulations may vary in each jurisdiction. Moreover, the country’s payroll and mandatory welfare systems are also highly complex.

For a foreign company, this can be confusing and challenging to navigate, and the unfamiliarity increases the risk of getting penalized. By utilizing the expertise of a FESCO, compliance with legal and payroll regulations is assured.

• Visa processing

A FESCO can help in processing the work visa application of foreign workers. Visa processing is a lengthy and complex process that can be challenging to navigate for foreign investors.

The expertise, familiarity, and connections of a FESCO reduce the burden and make it easier to acquire valid work permits.

• Focus on company growth

By outsourcing everything to a FESCO, from recruitment to payroll management, businesses can focus on their growth strategies. This allows foreign investors to have more time to think about how to tackle the local market successfully, especially now that the Chinese market is more competitive than ever.

Disadvantages

• Limited hiring capabilities

A FESCO is generally allowed to hire on behalf of companies with or without existing branch offices or WFOE subsidiaries in the country. However, such companies are only used for small scall hires in the case of a company without a legal entity in China.

• Fixed-term labor contracts

FESCO employment contracts are fixed and can last up to a maximum of two years. It means that businesses are required to stick with the employment contract unless they have a legal and compliant way of terminating the employee earlier than agreed.

• Lack of transparency

While FESCOs are generally trustworthy, they also have a reputation for not providing enough transparency on the payroll process. This is more often observed when FESCOs handle both the recruitment and payroll of employees. Reports typically issued are lacking sufficient detail and may in some cases may not be a complete representation of employment matters.

Alternatives to Using a FESCO

If a company does not want to use the services of a FESCO, there are alternative methods it can use to hire employees.

Incorporate your own entity

The first method is to incorporate a wholly foreign owned entity or joint venture and hire staff once the company is fully registered. While this is the most optimal option, the process is often longer than the use of a FESCO, but it is a better solution for the long term.

A global employment agency

An alternative method is to use a Global Employment Organization (GEO). A GEO will recruit the employees needed and handle the payroll tax and labor law compliance, while providing the client with full responsibility in directing and assigning tasks to employees.

With a GEO, companies gain access to both foreign and local employees because they have a legally registered entity in China. The catch with GEOs is that they might be less familiar with the cultural practices in China and in some cases may be using a local partner.

Independent contractors

An alternative option, that should generally be avoided, is to hire independent contractors in China, as this is illegal (to understand how independent contractors in China can be employed, check out our article on all you need to know about independent contractors in China). The same goes for having the payroll handled by an agency abroad that does not have a registered legal entity in China. There are legal risks and penalties that may be involved for companies the business is found to be using these options.

It is essential for foreign companies operating in China to be knowledgeable of the regulations with regards to hiring employees, as well as resources and methods in which to optimally source talent. It is important for foreign entities to weigh the advantages and disadvantages, relative costs and benefits for available services such as FESCOs, to allow for swift market entry while ensuring compliance throughout the process. Contact our professionals at Moore MS Advisory so that we are able to assist you in all your accounting, financial advisory or corporate set-up needs.

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