Mixed employment compliance is a growing concern for foreign-invested enterprises operating in China. This article explains how to identify mixed employment risks and outlines practical strategies to avoid joint liability under Article 3 of Interpretation II. From contract alignment to dispute preparation, we offer a clear roadmap for HR and legal teams. (Also see our series article: China’s New Judicial Interpretation II on Labor Disputes: Key Themes at a Glance)
On August 1, 2025, China’s Supreme People’s Court (SPC) released the long-awaited Judicial Interpretation II on the Application of Law in Labor Dispute Cases (Fa Shi [2025] No. 12, hereinafter “Judicial Interpretation II” or Interpretation II”), along with a set of illustrative cases. Both will take effect on September 1, 2025. This judicial interpretation marks a watershed moment in China’s labor law landscape, particularly for foreign-invested enterprises operating within group structures or affiliated entities.
Among its many provisions, Article 3 stands out as a groundbreaking development. For the first time, China’s highest court has systematically addressed the “mixed employment” phenomenon—where employees work alternately or simultaneously for multiple affiliated companies. This practice, while common in multinational and domestic corporate groups, has long existed in a legal gray zone, often leading to disputes over labor relationships and employer liabilities.
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Interpretation II introduces the “penetration principle”, empowering courts to look beyond formal corporate boundaries and written contracts. Where a written labor contract exists, courts will uphold the labor relationship as defined. However, in the absence of such contracts, courts are now instructed to evaluate the substance of employment management—including who controls work assignments, working hours, salary payments, and social insurance contributions.
Crucially, if an employee seeks to hold multiple affiliated entities jointly liable for wages and benefits, courts may support such claims—unless there is a clear, lawful agreement among the entities, and the employee has explicitly consented to it. This shift reflects a substance-over-form approach, signaling a departure from rigid formalism toward a more realistic and protective adjudication model.
For foreign-invested enterprises (FIEs), this means that group-wide HR practices, shared service centers, and cross-entity deployments must now be scrutinized for compliance risks. The traditional reliance on corporate separateness may no longer shield affiliated entities from labor liabilities. Instead, actual control and benefit derived from the employee’s work will be key in determining legal responsibility.
In this article, we unpack the concept of mixed employment, compare it with other employment models, analyze the legal criteria for labor relationship recognition, and offer practical compliance strategies for FIEs navigating this new legal terrain.
What is stipulated in Article 3?
Article 3 of Interpretation II introduces a comprehensive framework for handling labor disputes involving multiple affiliated entities that alternately or simultaneously employ the same worker.
Article 3
Where a worker is employed alternately or simultaneously by multiple entities that have an affiliated relationship, and requests confirmation of a labor relationship, the people’s court shall handle the case according to the following circumstances:
If a written labor contract has been signed and the worker requests confirmation of the labor relationship based on the contract, the people’s court shall support the claim in accordance with the law;
If no written labor contract has been signed, the labor relationship shall be confirmed based on the actual employment management behavior, taking into comprehensive consideration factors such as working hours, job responsibilities, payment of labor remuneration, and contributions to social insurance.
Where the worker requests that the affiliated entities involved in the situation described in item (2) above jointly bear responsibilities for the payment of labor remuneration, welfare benefits, and other obligations, the people’s court shall support the claim in accordance with the law, except where the affiliated entities have lawfully agreed upon the allocation of such responsibilities and the worker has given informed consent.
What constitutes “affiliated entities”?
The scope of Article 3 is limited to entities with an “affiliated relationship”. While the Interpretation itself does not define this term, Chinese courts adopt a substance-over-form approach, drawing from multiple legal sources and judicial practices to determine whether such a relationship exists:
Company Law (Article 265): Affiliation is defined based on control relationships, such as those between controlling shareholders, actual controllers, directors, supervisors, senior executives, and the enterprises they directly or indirectly control.
Judicial practice: Courts typically assess affiliation through a comprehensive review of evidence such as corporate registration records, equity structures, and employment documentation. The key inquiry is whether the entities exhibit characteristics of “control and subordination” or form a “community of interest.”
Regulatory references: Definitions from other domains—such as securities and tax law—may also inform the court’s analysis. For instance, a 25 percent shareholding threshold or shared financial control may be indicative of affiliation, even if not determinative on its own.
Written labor contracts take precedence
If a written labor contract exists and the employee requests recognition of the labor relationship based on it, courts will support the claim. However:
This clause empowers employees, not employers. The choice to invoke the contract lies with the worker.
Workers may strategically choose which entity to sue—for example, a shell company for social insurance claims or a parent company for compensation—depending on their litigation goals.
The existence of a contract does not shield affiliated entities from scrutiny if the contract does not reflect actual employment practices.
Recognition without a written contract
Where no written contract exists—or the contract is a façade—courts will examine actual employment management behaviors, including:
Who directs and supervises the work?
Who sets working hours and tasks?
Who pays wages?
Who contributes to social insurance?
Liability: Joint responsibility among affiliated employers
If a labor relationship is recognized under the substantive rule, the employee may request joint liability from all involved affiliated entities. This includes:
Wages
Benefits
Other monetary obligations (such as economic compensation for termination, damages for unlawful dismissal, and social insurance-related entitlements)
Importantly, the Interpretation adopts the term “joint responsibility” rather than the more commonly used “joint and several liability.” While both legal constructs allow an employee to claim the full amount of compensation from any one of the responsible entities, “joint responsibility” emphasizes the notion of a collective employer identity—treating the affiliated entities as a unified whole in their obligations toward the employee.
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This choice of language is not merely semantic. It reflects a clear legislative intent to deny the legitimacy of such employment arrangements when they obscure the true nature of labor management. In essence, the Interpretation declares that, in the face of factual mixed employment, affiliated enterprises will be regarded as a “single employer” under the law, bearing shared obligations as one legal entity.
A narrow “safe harbor” exception
Affiliated entities may avoid joint liability only if:
They have a lawful internal agreement clearly allocating labor obligations, and
The employee has knowingly and voluntarily agreed to this arrangement.
In practice, this defense is rarely successful. Courts are skeptical of employee “consent” given during onboarding, especially if it’s buried in standard contracts. Employers bear a heavy burden of proof, and employees often argue that any such consent was uninformed or coerced.
Mixed employment vs. other employment models
Mixed employment is fundamentally different from labor dispatch, outsourcing, secondment, and shared employment in that it lacks legal clarity, formal agreements, and defined responsibilities.
Mixed employment vs. labor dispatch
Labor dispatch is a legally recognized employment model under the Labor Contract Law and the Interim Provisions on Labor Dispatch. It involves a tripartite relationship:
The dispatching agency signs a labor contract with the employee but does not directly use their labor (“hires but does not use”).
The actual employer uses the labor but does not sign the labor contract (“uses but does not hire”).
The two entities sign a dispatch agreement to allocate rights and obligations.
Labor dispatch must meet strict legal conditions: it is limited to temporary, auxiliary, or substitute roles, and dispatched workers must not exceed 10 percent of the workforce.
In contrast, mixed employment is not a legally defined model. It arises from factual employment behaviors where multiple affiliated entities alternately or simultaneously manage and benefit from the same employee, without clear boundaries of responsibility. Each entity may appear to have a complete labor relationship on paper, but in practice, the employment is fragmented and ambiguous.
Mixed employment vs. business outsourcing
In business outsourcing, the labor relationship is clearly established between the outsourcing service provider and the employee. The client company (the service recipient) has no legal relationship with the outsourced workers.
The outsourcing company provides services in its own name.
Workers are stationed at the client site solely to fulfill the service contract.
There is no overlap in management or employment responsibilities.
When properly managed, outsourcing does not involve dual employment or mixed responsibilities. In contrast, mixed employment often involves overlapping control, shared management, or unclear payment responsibilities, which can trigger joint liability under Article 3.
Mixed employment vs. secondment/assignment
Secondment or assignment typically occurs within corporate groups—for example, between a parent company and its subsidiaries, or between strategic partners.
The labor relationship remains with the original employer.
The employee is temporarily assigned to another entity but continues to be managed and paid by the original employer.
The receiving entity has no direct legal relationship with the employee.
However, if the receiving entity begins to manage, evaluate, or pay the employee directly, the arrangement may evolve into mixed employment, especially if the original employer relinquishes control.
Mixed employment vs. shared employment
Shared employment emerged during the COVID-19 pandemic as a temporary, cooperative solution to labor imbalances between enterprises.
The employee’s labor relationship and social insurance remain with the original employer.
A cooperation agreement is signed between the two companies to define rights, obligations, and risk-sharing.
The employee is temporarily used by another company but returns to the original employer after the arrangement ends.
Unlike mixed employment, shared employment is transparent, documented, and time-bound, with no ambiguity about labor relationship ownership. It is also endorsed by the Ministry of Human Resources and Social Security as a flexible employment model under special circumstances.
Legal consequences of mixed employment
Mixed employment, while often arising from practical staffing arrangements within corporate groups, carries significant legal risks under Chinese labor law.
Misalignment and ambiguity in labor relationship recognition
From the employee’s perspective, mixed employment can make it difficult to identify the correct employer responsible for fulfilling labor obligations. This often leads to prolonged litigation, increased legal costs, and delays in rights protection.
From the employer’s side, the lack of clarity in employment boundaries undermines compliance and HR management, making it difficult to implement consistent policies, performance evaluations, or disciplinary actions.
Joint responsibility among affiliated entities
Under Article 3, if mixed employment is established, affiliated entities may be held jointly responsible for labor remuneration, benefits, and other obligations. Notably:
As introduced above, the Interpretation uses “joint responsibility” rather than “joint and several liability,” emphasizing a shared employer identity rather than a creditor-debtor relationship.
The scope of “responsibility” includes, but is not limited to, wages and benefits. Courts may interpret this broadly to include:
Paid leave entitlements,
Social insurance benefits,
Economic compensation for termination,
Damages for unlawful dismissal.
This significantly expands the risk exposure of each affiliated entity involved in the employment arrangement.
Barriers to work-related injury recognition and compensation
In a mixed employment scenario, the employee typically participates in social insurance under only one entity’s name. However, if the actual work performed is not clearly attributable to that entity, work-related injury claims may be denied.
The injury recognition authority may reject the claim on the grounds that the insured entity was not the actual employer.
As a result, the employee may be unable to access compensation from the work injury insurance fund and may instead seek direct compensation from all affiliated entities, increasing the legal and financial burden on the group.
Complications in termination or contract dissolution
Mixed employment also creates legal uncertainty in terminating or ending labor relationships:
It may be unclear which entity has the authority to terminate the contract.
The grounds for termination may exist only within one entity, while others remain unaffected.
This can lead to unlawful termination findings.
Why does it matter to FIEs in China?
FIEs in China may get involved in mixed employment in the following scenarios:
Personnel management
Cross-appointments: Senior executives or technical staff may hold concurrent positions across the FIE and its affiliates. For example, a general manager may simultaneously serve as the legal representative or director of multiple group entities.
Dual employment and dispatch: Employees may sign a contract with one entity but be assigned to work under the direction and supervision of another, blurring the lines of actual employment.
Centralized recruitment and deployment: Group companies may recruit through a unified channel without clearly identifying the hiring entity. Employees are then allocated across affiliates based on operational needs, often without clarity on who their actual employer is.
Operational integration
Overlapping business functions: The FIE and its affiliates may engage in similar or identical business activities, often under a unified brand or market presence. Employees may serve multiple entities’ projects simultaneously, making it difficult to determine which entity is the true employer.
Interchangeable work instructions: Employees may receive tasks from managers across different entities, with no clear distinction between the sources of authority. This creates a factual basis for courts to find shared employment control.
Financial and payroll risks
Unsegregated financial accounting: Payroll, bonuses, and reimbursements may be processed across entities without clear allocation. One entity may pay employees who are functionally working for another.
Ambiguous compensation structures: Affiliates may adopt similar or identical compensation systems, and the actual wage-paying entity may vary over time, leading to confusion over labor relationship attribution.
Unified HR and compliance
Shared policies and procedures: The FIE and its affiliates may apply the same employee handbook, disciplinary rules, and performance systems across all staff, regardless of the legal employer.
Joint management practices: Training, performance evaluations, and disciplinary actions may be conducted jointly by managers from different entities, making it difficult for employees to identify their direct employer.
How to ensure compliance?
To avoid the legal risks of mixed employment, FIEs in China should focus on three core principles: clarity of employment relationships, corporate independence, and evidence-based risk control.
Maintain clear corporate boundaries
Ensure each affiliated company operates independently in HR, finance, and business management.
Separate bank accounts and avoid informal fund transfers.
Managers should only supervise employees of their own legal entity.
Intercompany transactions must follow fair market principles.
Conduct internal audits to identify and correct blurred responsibilities.
Align employment elements under one entity
Follow the “Four-in-One” rule: the same entity should be responsible for:
Signing the labor contract;
Paying wages;
Contributing to social insurance; and
Managing the employee’s daily work.
This alignment helps avoid joint liability and ensures the labor relationship is clearly attributable to a single employer.
Handle cross-entity work with proper agreements
If employees must work across entities (for example, project-based work or secondments), take these steps:
Sign internal agreements between companies defining responsibilities.
Provide employees with a clear, standalone consent form explaining the arrangement and legal implications.
Keep signed documents as evidence of informed consent.
Standardize employment practices across the lifecycle
At hiring:
Clearly state the legal employer in the labor contract.
If cross-entity work is expected, disclose it and define responsibilities.
During employment:
Track work assignments and attendance by legal entity.
Pay wages through the contracting entity’s account. If another entity pays, sign a formal agreement and inform the employee.
Ensure social insurance is paid by the actual employer.
At termination:
Review the employee’s work history across affiliates.
Clearly document service periods in the termination certificate to avoid disputes over seniority or compensation.
Prepare for disputes with strong documentation
To effectively prepare for potential labor disputes, foreign-invested enterprises should focus on building a strong documentation system. This includes:
Keep records of work assignments, evaluations, and intercompany agreements.
Respond to employee inquiries in writing, explaining the employment structure.
If a dispute arises, review the facts and, if needed, sign a supplemental agreement to clarify responsibilities.
Key takeaway
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To minimize the legal risks associated with mixed employment, FIEs must prioritize clarity in employment relationships, maintain strong documentation, and respect the legal boundaries between affiliated entities. Informal or undocumented cross-entity staffing should be strictly avoided.
When temporary work across entities is necessary, companies should use formal secondment or part-time agreements to define roles and responsibilities. If mixed employment is truly unavoidable, responsibilities must be clearly allocated in writing, and employees must provide informed, written consent. Under no circumstances should employment documents include clauses that waive employee rights or shift statutory obligations—such provisions are likely to be ruled invalid and may expose the company to joint liability.
A proactive, transparent, and legally sound approach to workforce management is essential for compliance and long-term risk control.
In light of heightened enforcement of labor regulations and the evolving compliance landscape in China, Dezan Shira & Associates supports foreign-invested enterprises in identifying and mitigating employment risks. Our services include reviewing employment structures, aligning HR and payroll practices, and advising on intercompany staffing arrangements to ensure compliance with the latest labor laws and regulations. Connect with our China HR and legal advisory team to schedule a consultation: China@dezshira.com.
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