The request arrives weekly: a foreign company wants one or two people on the ground in China — a sales manager, a sourcing engineer, a QC inspector — without forming a WFOE. The good news is that lawful structures exist. The bad news is that the shortcut most companies reach for first, paying the person as a "contractor," is the worst of the options.
Why you cannot just employ them directly
A foreign company with no Chinese entity cannot be an employer under Chinese law: it cannot register for, withhold or pay the mandatory social insurance and housing fund contributions, and it cannot sign an employment contract enforceable within the system. An offshore "employment contract" with someone working full-time in China does not opt you out of Chinese labour law — it just means you are non-compliant with it from day one.
The EOR / labor dispatch model
The standard solution is an employer of record (EOR): a licensed Chinese HR company — the FESCO-type agencies and their modern competitors — legally employs your hire and dispatches them to work under your direction. Mechanics:
- The EOR signs the Chinese employment contract, runs payroll, withholds individual income tax, and pays social insurance and housing fund in the employee's work city.
- You sign a service agreement with the EOR and reimburse salary plus employer burdens plus a service fee — typically a few hundred to roughly USD 500 per employee per month, or a percentage of payroll.
- Employer social contributions are substantial: in major cities, all-in employer burdens commonly add 35 to 40 percent on top of gross salary up to contribution caps. Budget this from the start; it shocks newcomers.
Legally, most of these arrangements rest on China's labor dispatch (劳务派遣) rules. Those rules were written to stop abuse by domestic companies and formally restrict dispatch to temporary, auxiliary or substitute positions and to 10 percent of a workforce — restrictions that fit awkwardly when dispatch is your entire China presence. In practice, dispatch to foreign companies without a local entity (and to representative offices, which must hire through agencies) is a long-established, tolerated use of the model, and enforcement focuses on domestic abuse. But understand the structure you are relying on, and use a properly licensed provider — dispatch licences are real and checkable.
What an EOR does not solve
- Permanent establishment risk. An employee habitually concluding contracts or generating revenue in China can create a taxable presence for the foreign company regardless of who formally employs them. Keep roles genuinely preparatory or supporting, or take tax advice.
- Control gaps. The EOR holds the employment relationship. Termination still follows Chinese law — fixed termination grounds, severance of roughly one month per year of service, and a strong position for the employee in disputes. Your service agreement should pass through disciplinary procedures, IP assignment and confidentiality obligations into the employment contract, and an NNN-style undertaking signed directly with you is worth adding.
- Equity and incentives. Granting offshore options to an EOR employee is possible but needs care on tax and foreign-exchange treatment.
The contractor shortcut, and why it backfires
Paying your "China consultant" a monthly invoice to a personal account feels simple until it unwinds. Chinese labour arbitration looks at substance: fixed monthly pay, your management, your tools, full-time exclusivity equals employment. The consequences arrive together — back social insurance with late fees, double-salary penalties for the missing written employment contract (up to eleven extra months), severance, and a person who has every incentive to file precisely when the relationship sours. Meanwhile the individual has likely not been paying tax on your remittances, a problem that splashes back on you commercially if not legally. For an actual independent business serving several clients, a services agreement with a registered Chinese entity that issues fapiao is fine. For your full-time salesperson, it is a deferred liability.
When to switch to your own entity
The EOR model prices linearly; an entity does not. Around three to five employees, or when you need to invoice customers in RMB, hold inventory, or hire credibly for senior roles, a WFOE usually wins on cost and control. Many clients run EOR for the first 12 to 18 months, then transfer the team into a new WFOE — plan that migration in the EOR contract from the beginning, so notice periods and accrued severance do not ambush the transition.