As global companies continue to expand into dynamic markets, navigating local hiring practices is key to operational success and legal compliance. In this 17-part series, we help foreign businesses explore employment laws and recruitment strategies across major jurisdictions.
Our third stop in these series is China—a powerhouse economy with a complex labor system and a variety of hiring models. From direct employment to alternative options like independent contracting, outsourcing, and labor dispatch, companies entering China must weigh cost, compliance, and long-term goals. Understanding these choices can shape a more flexible and strategic entry into one of the world’s most competitive business landscapes.
Authored by Peter Pang
Aliant+ Law Firm in China (Shanghai)
Are there alternatives to direct employment?
Yes, there are alternatives to direct employment in China. Besides hiring independent contractors, companies can also consider using service outsourcing. For example, they can outsource certain business processes like customer service or data entry to specialized service providers. Another option is to use the dispatch employment model, where a labor dispatch agency sends employees to work for the client company. However, the dispatch model is subject to strict regulations regarding the proportion of dispatched workers in a company’s workforce.
Is it necessary to set up a local entity to hire an employee?
In most cases, yes. To directly hire employees in China, a foreign company usually needs to establish a local legal entity, such as a wholly foreign-owned enterprise (WFOE) or a joint venture. However, for some short-term or project-based work, hiring independent contractors or using service outsourcing can be done without setting up a local entity. But for long-term, full-time employment, a local entity is essential to comply with Chinese labor laws and regulations.
Direct employment vs. independent contractor: what about costs?
For direct employment, costs include not only salaries but also mandatory social insurance contributions (which cover pension, medical, unemployment, work injury, and maternity insurance), housing provident fund contributions, and potentially other benefits like paid leave, bonuses, and employee welfare. These costs are relatively fixed and are based on the employee’s salary and local regulations. In contrast, when hiring independent contractors, the cost is mainly the contracted service fee. There are no legal obligations for social insurance and housing provident fund contributions for the hiring company. However, the contractor may charge a higher service fee to account for their own business costs and risks.
Additional Insights:
- For projects with fluctuating workloads or short-term needs, using independent contractors or service outsourcing can provide more flexibility in terms of cost control and resource allocation. For instance, in the e-commerce industry during peak sales seasons, additional customer service staff can be quickly hired as independent contractors.
- When considering long-term, stable teams, direct employment through setting up a local entity is more conducive to building a corporate culture and ensuring the loyalty and long-term development of employees. This is especially important in industries that require in-depth knowledge transfer and continuous innovation, such as high-tech research and development.
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