Contrary to the popular conception, a FESCO (Foreign Enterprise Service Corporation) is not a single, monolithic entity. Rather, it is a catch-all term for many different Chinese companies that provide similar services. The main reason for the popularity of FESCOs is that to hire any employee (whether foreign or local), Chinese law requires the employer to be a legal entity already registered in Mainland China (not including Hong Kong, Macau, and Taiwan).
The Foreign Investor’s Catch-22
Naturally, the registration requirement poses something of a Catch-22 for foreign investors seeking to establish legal entities in China. How do you recruit workers to perform the activities necessary to register a company in China if you can’t hire employees to do so until after the company has already been registered? Even the independent contractor relationship is illegal in Mainland China. There is a way out of this seemingly contradictory situation, however.
The solution for many foreign investors is to engage a FESCO whose job is to dispatch its own employees to its clients. Pre-registration tasks are not the only functions performed by FESCOs. Representative offices, for example, are required to rely on FESCOs for their staffing needs, and already established WFOEs (Wholly Foreign-Owned Enterprises) find FESCOs useful for a variety of different purposes such as precruitment, payroll management, and labor disputes.
Advantages of Using a FESCO
There are many advantages of using a carefully chosen FESCO to assist in both pre- and post-registration activities in Mainland China, including:
- By hiring and dispatching employees prior to formal company registration, companies that utilize a FESCO can begin their China operations much sooner than they would otherwise be able to.
- Resolution of labor disputes. Employees in China enjoy greater rights than similarly situated employees in many foreign countries, especially the United States. Furthermore, Chinese labor authorities are widely perceived to be labor-friendly. The right FESCO knows Chinese labor law inside and out, and it enjoys extensive experience in resolving labor disputes in a manner that is acceptable to foreign-owned employers.
- Many FESCOs are state-owned, meaning that they probably employ a strong and effective legal team that can play the roles of advisor and advocate to prevent and resolve disputes. This is especially useful for foreign investors with limited understanding of the nuances of Chinese law. A FESCO legal team can also help prevent foreign-invested enterprises avoid inadvertent legal errors that could result in serious penalties.
- A FESCO can handle payroll and other legal obligations in different cities and provinces, a service that is particularly useful in light of the fact that the laws and regulations of different local jurisdictions vary significantly.
- China imposes a mandatory welfare system for employees. The system is complex, and contributions can amount to nearly 40 percent of the employee’s salary. A reputable FESCO can handle these complexities for you.
Disadvantages of Using a FESCO
Using a FESCO is not without its disadvantages:
- FESCO is only permitted to perform services for companies with existing branch offices or WFOE subsidiaries in China. A FESCO cannot hire or even recruit employees for clients without a company registered in China – employees can only be dispatched.
- When a FESCO is performing the dual functions of recruiting employees and managing payroll obligations at the same time, a potential conflict of interest arises, since confidential data relevant for one purpose can easily be misused for another purpose by an unscrupulous FESCO.
- A FESCO cannot legally be used to hire “core staff,” it can only provide temporary and auxiliary employees. Of course, this is unlikely to be a problem when a FESCO is used solely for the purpose of registering a new company.
- FESCO labor contracts must be fixed-term, and the maximum duration is two years (although early termination is allowed as long as it complies with Chinese labor laws).
- FESCOs have a reputation for lack of transparency in the payroll process, and reports issued by FESCOs are often written in basic English with very few details.
Alternatives to Using a FESCO
Engaging a FESCO is not the only way to resolve your labor problems in China. There are at least two other commonly-used alternatives:
- Wait until your company is registered before you hire any employees, whether Chinese or foreign. Think twice before undertaking this option, however – setting up a WFOE or branch in China can take up to a year and will cost at least $50,000, not including the minimum capital investment required by Chinese law for your particular industry. That’s a lot of time and money to expend before you even begin operations.
- Use a GEO (Global Employment Organization): A GEO could roughly be described as an international version of a FESCO. Technically the employees sent to you by a GEO are employees of the GEO, not your company. GEO handles payroll, tax, and labor law compliance while you are free to direct the day-to-day activities of the employees. Some GEOs claim to be able to dispatch employees in as little as 48 hours.
You can use a GEO to gain access to both Chinese and foreign laborers. It accomplishes this by establishing its own legally registered subsidiary in China. Transparency is generally better than with FESCOs, and the language barriers are less serious. On the negative side, some GEOs are less familiar with Chinese cultural and business practices than FESCOs are, and they are often less well-connected.
Above all, resist the temptation to use de facto independent contractors or attempt to handle payroll from abroad without a formally registered Chinese company in place (such as a foreign-owned WFOE). You might get away with that approach for a while, but the legal risks are simply too great to make it worth even considering.
IPO PANG XINGPU, with headquarters in Shanghai China, we have been helping clients from all over the world with their legal matters since 1992. We are a group of dedicated attorneys and professionals with expertise and experience in a variety of legal disciplines. Clients come to us “When Being Right Matters ®”.