China Employment Through FESCO (Third-Party Labor Services)

OK…Let’s talk a minute about FESCO. Back in the day, meaning 30 years ago, they were one government company that could lease employees to foreign businesses. They privatized, and broke up into hundreds of small companies. And then thousands of other companies joined into the labor services market. Many of them use the “FESCO” label as shorthand to show that there are third party labor service company. But they’re not connected, are all part of the same business. It’s kind of like how Americans used to call making copies of a document Xeroxing. The original company in that space becomes the shorthand name for any company in that space.

Whether your company is obligated to or chooses to hire employees in China through third party service agency such as FESCO – there are some things you should consider.

Often times clients come to me because they want to transition away from one labor service provider to another, or they need to terminate key personnel that they’ve hired through the labor company, or maybe they just found out that there’s a major problem with the way their management in China has gone about hiring. Chinese labor law is extremely robust, and every employee must be on a written signed contract. So how you hire is important both legally and financially.

First let’s be clear on what a labor service company such as FESCO provides. This third party company becomes the employer of record for the employees in your office or factory. They then provide their services to you on contract. But when it comes to hiring, paying, and terminating the employees all of that is done by the 3rd party labor service. You should have collaboration with them over those decisions. But fundamentally they are the official employer not you.

Next, why would you? In some situations such as a foreign owned representative office you’re not allowed to employ workers directly. In other situations a company may choose to hire their workers through a third party labor service company to simplify their own administrative procedures and potentially reduce liability.

To understand why I’m advocating you take the precautions I’m going to list at the bottom, let’s look at what can go wrong.

Example 1 – The labor service company needs to maintain ongoing contracts with the employees as each employment contract expires they should sign a new one. I’ve had clients where the labor service company doesn’t sign contracts with the employees because their own contract with you is only for 12 months, and the employees are hired and the last few months of that contract. And they don’t want to have an employee contract that extends beyond their contract with you. The problem was that my client didn’t know they weren’t signing contracts with the employee’s. And in the twisted assignment of blame in these circumstances even though the 3rd party labor company was the employer, my client as a foreign company could have had some co liability. Also depending on how the agreement with the labor company was written.

Example 2 – When it comes time to terminate an employee you have to do it in conjunction with the labor service company. I had a clients who explained in excruciating detail how they wanted termination to occur, because it was a key employee and we did not want them to know of the termination in advance. After weeks of laying out the plan and finalizing the documents together with the labor service company, we get to the final hour and the labor service company Rep sends an email to the terminating employees warning them a meeting is coming. The meeting is with her boss and the labor company. She’s immediately suspicious and we have to do damage control.

Example 3 – The labor service company may also insist on a particular calculation for severance and the termination (the government calculated minimum). I argued that that’s not what’s expected by employees, even though that’s the law, we spend days back and forth. But it’s legally their employee, and they’re going to proceed with their plan. Which means when the termination occurs the employee is insulted by the low offer and pushes back. We end up with a higher agreed upon severance plan, even more than the one I had suggested based on their real wage (not the govt calculated minimum). Your the one paying the severance (you reimburse them), it should be your decision. But in the rush of a termination if you don’t have a relationship with the FESCO team – than its even more difficult to communicate with their staff.

So what should you do to reduce the risk of having problems when you are using a third party labor service company?

1 – For starters make sure that you have direct contact with the Labor Service Provider and it’s not only your management team in China who’s working with them. Many companies start out by having direct contact, but years down the road they’ve forgotten about it and only the Chinese management team is working with the labor service company. If you need to terminate one of those management staff it’s going to be much more difficult. You will need to reestablish contact, understand the capabilities of the Rep, build trust and communication, etc.

2 – You need to have a policy in place that the labor service company sends headquarters every employment contract as it’s executed. That way if you want to review what employees could be laid off at the end of their contract, which employees you may want to terminate and calculate the severance, you won’t have to ask for the contracts. If you ask for one contract, they will guess what’s up. And if their staff are close to your staff – the secret may get out.

3 – Make sure you’re really dealing with an official licensed third party labor service company. Their fees tend to be fairly high, so many times Chinese management finds a work around. They have the workers hired by a different category of company. There are alternatives in the market that lease certain “services” to you (not employees) as if they’re a consulting or service company. This is not the same thing as being an officially designated third party labor service business.

How do you know? The contract language will not specify that they’re your employees, only that you paying for services. The fees will be much lower.

If your management uses this system, it puts you at risk of hiring workers through a company who’s not legally authorized to provide third party labor services. So you and the organization would have to be very careful that you’re not managing or hiring these employees, they’re just showing up every day and providing services.

4 – It should be part of your annual review of the subsidiary in China you should be looking at all of these factors.

*You should confirm that you have the employee contracts that are in force at that time. 

*You should make contact directly with the third party labor company.

*You should have a spreadsheet that’s updated to management with employee start dates and contract terms.

* You should always review any of the agreements with outside service providers before they’re signed by the management team.

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