The Chinese market presents ever-increasing opportunities for new and existing businesses, with or without a local presence in China. In recent decades, the markets in China have expanded and diversified, with major progress being made in the energy, agriculture, automotive, insurance, software (AI), and education industries to name but a few. 

For companies looking to capitalize on these emerging markets, a Foreign Enterprise Service Company (FESCO) – also known as a Professional Employment Organization (PEO) – may prove to be the perfect partner. In addition to allowing companies to employ staff in China, FESCOs provide comprehensive HR and administration services, which ultimately furnishes companies wishing to do business in China with everything they need for establishing or enhancing their Chinese workforce.


What is a FESCO China?

In a nutshell, a FESCO is an established and fully licensed legal entity that allows local and foreign companies to employ workers in the Chinese market and outsource their HR and administrative responsibilities. FESCOs are important entities not least because workers in China must be paid locally in accordance with Chinese laws; it is not possible to employ someone in China and pay them from another country, nor to ‘employ’ them as independent contractors or similar. 

It has long been recognized that this situation presents a considerable difficulty for companies looking to hire in China without their own local legal entity. Dan Harris, an international lawyer supporting companies in emerging markets, has vocally lamented the Chinese government’s ostensibly unfriendly laws in this regard. He claims that for years, the government “has sought to force foreign companies seeking to hire in China to form a company in China.” While this may be true in some respects, that does not leave foreign companies without any options. 

In fact, this is precisely the reason that FESCOs are proving so popular with companies looking to dispatch labor in the Chinese markets. FESCOs provide a fast and convenient means to establish or enhance a local workforce in China in a manner wholly compliant with Chinese laws.


Who can use a FESCO? 

FESCOs are available to companies whether or not they have a legal entity registered in China. This means that local Chinese entities are also able to benefit from FESCOs, not just foreign ones.

For local companies, the main attraction of using a FESCO is being able to outsource HR and administrative needs. Local companies may wish to do this for a number of reasons. It may, for example, be more cost effective to hire temporary staff through a FESCO than bring them into the company’s existing systems. It may also prove more cost effective in compliance terms, as using a FESCO could be cheaper than hiring a labor lawyer to review the company’s employment arrangements.

For foreign entities, FESCOs provide a particularly beneficial service because not only provide all of the facilities enjoyed by local entities (outsourced HR and administration) but they also greatly increase the speed of entry into the Chinese market. Establishing a new legal entity in China is complex, expensive, and time-consuming. Often, these costs negate the value of the original opportunity, and accordingly can effectively prohibit companies from expanding into what could be very fruitful markets for their business. Using a FESCO is one way to ensure rapid, compliant, and convenient labor dispatch in China.


What are the main services offered by a FESCO? 

FESCOs serve as excellent partners for the HR and administrative aspects of employing talent in China. The services offered by FESCOs are many and various, but the main ones include:

  • Contract Drafting and Negotiation: Having a local presence to draft and negotiate the contracts of your new hires is imperative, not only for obtaining the best substantive agreement but also for ensuring compliance with Chinese laws and full comprehension in Chinese language. 
  • Tax Arrangements: China’s Individual Income Tax (IIT) laws change often, and a FESCO can safeguard against any legislative or regulatory developments that may impact your business. Since October 2018, tax changes have affected high income and foreign workers in particular, so compliance must remain a priority for local and foreign businesses alike. Deductions are also a complex matter, with the standard deduction increasing to RMB 60,000 per annum for both resident and non-resident tax payers and other deductions, such as childcare (up to RMB 12,000 per child per annum), education (up to RMB 4800 per annum), and care for the elderly (up to RMB 24,000 per annum) also applying in certain circumstances. FESCOs arrange for the requisite deductions to be made from salaries in accordance with Chinese law, relieving their clients of significant legal and administrative responsibilities.
  • Social Security: China’s social security system is complex. Five types of social security are taken (pension, medical, unemployment, work injury, and maternity), along with a contribution to the Housing Fund – which employers and employees must by law contribute to evenly – that ranges from 5-25%. Contribution rates vary by city and by employer, thus it is preferable for businesses to have an expert team – like those offered by FESCOs – available to implement the correct arrangements. 
  • Dispute Resolution: Employer/employee disputes are difficult at the best of times, and they are undoubtedly complicated by the fact that the employer may not even be present in China. FESCOs are highly experienced in managing conflict and ensuring a legally-compliant resolution to any formal disputes. 
  • Visa Arrangements: Where a visa is necessary to work in China, FESCOs are well-positioned to apply for and monitor applications. With local teams that are familiar with the complicated immigration laws in China, outsourcing this especially challenging part of employing talent in China is attractive to businesses of all types. 
  • Contract Drafting and Negotiation: Having a local presence to draft and negotiate the contracts of your new hires is imperative, not only for obtaining the best substantive agreement but also for ensuring compliance with Chinese laws and full comprehension in Chinese language. 
  • Tax Arrangements: China’s Individual Income Tax (IIT) laws change often, and a FESCO can safeguard against any legislative or regulatory developments that may impact your business. Since October 2018, tax changes have affected high income and foreign workers in particular, so compliance must remain a priority for local and foreign businesses alike. Deductions are also a complex matter, with the standard deduction increasing to RMB 60,000 per annum for both resident and non-resident tax payers and other deductions, such as childcare (up to RMB 12,000 per child per annum), education (up to RMB 4800 per annum), and care for the elderly (up to RMB 24,000 per annum) also applying in certain circumstances. FESCOs arrange for the requisite deductions to be made from salaries in accordance with Chinese law, relieving their clients of significant legal and administrative responsibilities.
  • Social Security: China’s social security system is complex. Five types of social security are taken (pension, medical, unemployment, work injury, and maternity), along with a contribution to the Housing Fund – which employers and employees must by law contribute to evenly – that ranges from 5-25%. Contribution rates vary by city and by employer, thus it is preferable for businesses to have an expert team – like those offered by FESCOs – available to implement the correct arrangements. 
  • Dispute Resolution: Employer/employee disputes are difficult at the best of times, and they are undoubtedly complicated by the fact that the employer may not even be present in China. FESCOs are highly experienced in managing conflict and ensuring a legally-compliant resolution to any formal disputes. 
  • Visa Arrangements: Where a visa is necessary to work in China, FESCOs are well-positioned to apply for and monitor applications. With local teams that are familiar with the complicated immigration laws in China, outsourcing this especially challenging part of employing talent in China is attractive to businesses of all types. 

Are there any potential disadvantages of using a FESCO? 

As with any business decision, there are disadvantages as well as advantages in choosing to use a FESCO in China. Accordingly, companies considering a FESCO should be aware of the following concerns:

  • FESCOs may not always be suitable for hiring ‘core’ staff, as the administrative arrangements tends to be better suited to temporary or part-time staff.
  • FESCO labor contracts are limited by law to two years (although, it may be possible legally to terminate the contract within two years and then issue a new contract to the same person, if necessary).
  • FESCOs may indirectly obscure transparency in aspects of employment (for example, payroll) because of the fact that they handle all HR and administrative needs in one comprehensive service.

Thankfully, though, for the vast majority of companies, the advantages of using a FESCO will greatly outweigh the disadvantages.


Summary 

It is clear that FESCOs provide a high level of value to both local and foreign companies wishing to establish or enhance their workforce in China. The Chinese market and legal landscape can be prohibitively complex, but FESCOs can take on many of the burdens and responsibilities, allowing companies to focus on their mission, goals, and expansion into China. To find out more about how Sky Executive could serve as a FESCO for your business, please get in touch.