Representative Offices, also known Permanent Representative Offices or Resident Representative Offices, cannot employ Chinese staff directly. Chinese staff can only be employed through local foreign service companies or other entities designated by the local government. These foreign service companies enter into employment contracts with Chinese individuals and should be responsible for managing the personal files of the Chinese employees. These foreign service companies are also responsible for paying salaries to the Chinese employees and providing social benefits such as retirement packages and medical insurance.
A foreign service company usually enters into a service contract with a Permanent Representative Office, whereby the foreign service company seconds these Chinese employees to Permanent Representative Offices of foreign enterprises. Therefore, from the legal perspective, Rep Offices and their Chinese staff do not have a direct employment relationship. The Chinese staff members are only service providers. The relationship between the Chinese staff and the foreign service companies is an employment relationship.
Because Permanent Representative Offices are not employers of the Chinese staff members, Permanent Representative Offices are therefore not obligated to abide by the Chinese labor law. In practice, Permanent Representative Offices usually deem themselves to be employers of the Chinese staff and hence abide by the PRC labor law in dealing with the Chinese staff. However, due to the special status of the Permanent Representative Offices, they do not have the ability or capacity to provide some compulsory obligations of employers. For example, Permanent Representative Offices cannot purchase pension insurance for their Chinese employees. On the other hand, foreign service companies are able to provide all such benefits.
Foreign service companies usually charge a monthly fee to the Permanent Representative Offices. Part of the fee would be used for payment of salaries of the Chinese staff of the Permanent Representative Offices. Another part of the service fee would be used in provision of social benefits to the Chinese staff of the Permanent Representative Offices. The remaining part of the fee then is the service charge of the foreign service companies. In practice, the salaries paid by foreign service companies to Chinese employees are relatively low. Permanent Representative Offices always directly pay allowances to the Chinese staff in order to reach the salary rate agreed upon between the Permanent Representative Office and the Chinese staff.
This system has changed a lot. Many foreign service companies have already begun to adopt a more flexible attitude. For example, they are now willing to collect basic fees from the ROs. Such basic fees only cover the profit of the foreign service companies and do not cover the Chinese staff’s salaries and social benefits.
The current employment system was formed in the early 1980s. Pursuant to Article 11 of the Tentative Provisions of the State Council Concerning the Administration of ROs of Foreign Enterprises issued by the State Council in 1980, ROs should entrust a local entity designated by the Chinese Government to lease offices and employ Chinese staff members. It should be noted that the above requirement regarding lease of offices is no longer implemented in China. ROs may lease offices in their own name or the name of their parent companies. On the contrary, employment of Chinese staff members must be handled through local foreign service companies as required under Article 11 above.
The most significant problem arising from the above system is that Rep Offices are actual employers. Chinese staff members work for the ROs every day. However, there is no labor relationship between Permanent Representative Offices and Chinese staff members. Theoretically, disputes between Rep Offices and Chinese staff members are not labor disputes. Such disputes do not need to be submitted to the local labor arbitration commission before a labor action is filed before a people’s court. However, in practice, in order to protect the interests of the employees the labor contracts between Permanent Representative Offices and Chinese staff members are generally deemed to be valid by labor arbitration commissions. The disputes between Permanent Representative Offices and Chinese staff members should first be submitted to the labor arbitration commission before any labor action is filed before the people’s court. This is a major distinction between PRC law and practices.