{"id":35376,"date":"2025-09-24T16:00:09","date_gmt":"2025-09-24T16:00:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/il\/35376\/"},"modified":"2025-09-24T16:00:09","modified_gmt":"2025-09-24T16:00:09","slug":"mixed-employment-compliance-in-china-a-guide-for-fies","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/il\/35376\/","title":{"rendered":"Mixed Employment Compliance in China: A Guide for FIEs"},"content":{"rendered":"

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\u2019s New Judicial Interpretation II on Labor Disputes: Key Themes at a Glance<\/a>)<\/p>\n

On August 1, 2025, China\u2019s Supreme People\u2019s Court (SPC) released the long-awaited\u00a0Judicial Interpretation II on the Application of Law in Labor Dispute Cases<\/a> (Fa Shi [2025] No. 12, hereinafter \u201cJudicial Interpretation II\u201d or Interpretation II\u201d), along with a set of illustrative cases<\/a>. Both will take effect on September 1, 2025. This judicial interpretation marks a\u00a0watershed moment\u00a0in China\u2019s labor law landscape, particularly for foreign-invested enterprises operating within\u00a0group structures or affiliated entities.<\/p>\n

Among its many provisions,\u00a0Article 3\u00a0stands out as a\u00a0groundbreaking development. For the first time, China\u2019s highest court has systematically addressed the\u00a0\u201cmixed employment\u201d\u00a0phenomenon\u2014where employees work\u00a0alternately or simultaneously\u00a0for multiple affiliated companies. This practice, while common in multinational and domestic corporate groups, has long existed in a\u00a0legal gray zone, often leading to disputes over labor relationships and employer liabilities.<\/p>\n

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Interpretation II introduces the\u00a0\u201cpenetration principle\u201d, empowering courts to\u00a0look beyond formal corporate boundaries\u00a0and 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\u00a0evaluate the substance of employment management\u2014including who controls work assignments, working hours, salary payments, and social insurance contributions.<\/p>\n

Crucially, if an employee seeks to hold\u00a0multiple affiliated entities jointly liable\u00a0for wages and benefits, courts may support such claims\u2014unless there is a\u00a0clear, lawful agreement among the entities, and the employee has\u00a0explicitly consented\u00a0to it. This shift reflects a\u00a0substance-over-form approach, signaling a\u00a0departure from rigid formalism\u00a0toward a more\u00a0realistic and protective adjudication model.<\/p>\n

For foreign-invested enterprises (FIEs), this means that\u00a0group-wide HR practices,\u00a0shared service centers, and\u00a0cross-entity deployments\u00a0must now be\u00a0scrutinized for compliance risks. The traditional reliance on corporate separateness may no longer shield affiliated entities from labor liabilities. Instead,\u00a0actual control and benefit\u00a0derived from the employee\u2019s work will be key in determining legal responsibility.<\/p>\n

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\u00a0practical compliance strategies\u00a0for FIEs navigating this new legal terrain.<\/p>\n

What is stipulated in Article 3?<\/p>\n

Article 3\u00a0of\u00a0Interpretation II\u00a0introduces a comprehensive framework for handling labor disputes involving\u00a0multiple affiliated entities\u00a0that alternately or simultaneously employ the same worker.<\/p>\n

Article 3<\/p>\n

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\u2019s court shall handle the case according to the following circumstances:<\/p>\n

If a written labor contract has been signed and the worker requests confirmation of the labor relationship based on the contract, the people\u2019s court shall support the claim in accordance with the law;
\nIf 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.<\/p>\n

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\u2019s court shall support the claim in accordance with the law, except\u00a0where the affiliated entities have lawfully agreed upon the allocation of such responsibilities and the worker has given informed consent.<\/p>\n

What constitutes \u201caffiliated entities\u201d?<\/p>\n

The scope of Article 3 is limited to entities with an\u00a0\u201caffiliated relationship\u201d. While the Interpretation itself does not define this term, Chinese courts adopt a\u00a0substance-over-form approach, drawing from multiple legal sources and judicial practices to determine whether such a relationship exists:<\/p>\n

Company Law<\/a> (Article 265): Affiliation is defined based on\u00a0control relationships, such as those between controlling shareholders, actual controllers, directors, supervisors, senior executives, and the enterprises they directly or indirectly control.
\nJudicial practice: Courts typically assess affiliation through a\u00a0comprehensive review\u00a0of evidence such as corporate registration records, equity structures, and employment documentation. The key inquiry is whether the entities exhibit characteristics of\u00a0\u201ccontrol and subordination\u201d\u00a0or form a\u00a0\u201ccommunity of interest.\u201d
\nRegulatory references: Definitions from other domains\u2014such as securities and tax law\u2014may also inform the court\u2019s analysis. For instance, a 25 percent shareholding threshold or shared financial control may be indicative of affiliation, even if not determinative on its own.<\/p>\n

Written labor contracts take precedence<\/p>\n

If a\u00a0written labor contract\u00a0exists and the\u00a0employee requests recognition\u00a0of the labor relationship based on it, courts will support the claim. However:<\/p>\n

This clause empowers\u00a0employees, not employers. The choice to invoke the contract lies with the worker.
\nWorkers may strategically choose which entity to sue\u2014for example, a shell company for social insurance claims or a parent company for compensation\u2014depending on their litigation goals.
\nThe existence of a contract does\u00a0not shield affiliated entities\u00a0from scrutiny if the contract does not reflect actual employment practices.<\/p>\n

Recognition without a written contract<\/p>\n

Where no written contract exists\u2014or the contract is a fa\u00e7ade\u2014courts will examine\u00a0actual employment management behaviors, including:<\/p>\n

Who directs and supervises the work?
\nWho sets working hours and tasks?
\nWho pays wages?
\nWho contributes to social insurance?<\/p>\n

Liability: Joint responsibility among affiliated employers<\/p>\n

If a labor relationship is recognized under the substantive rule, the employee may request\u00a0joint liability\u00a0from all involved affiliated entities. This includes:<\/p>\n

Wages
\nBenefits
\nOther monetary obligations (such as economic compensation for termination, damages for unlawful dismissal, and social insurance-related entitlements)<\/p>\n

Importantly, the Interpretation adopts the term \u201cjoint responsibility\u201d rather than the more commonly used \u201cjoint and several liability.\u201d While both legal constructs allow an employee to claim the full amount of compensation from any one of the responsible entities, \u201cjoint responsibility\u201d emphasizes the notion of a collective employer identity\u2014treating the affiliated entities as a unified whole in their obligations toward the employee.<\/p>\n

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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 \u201csingle employer\u201d under the law, bearing shared obligations as one legal entity.<\/p>\n

A narrow \u201csafe harbor\u201d exception<\/p>\n

Affiliated entities may avoid joint liability\u00a0only if:<\/p>\n

They have a\u00a0lawful internal agreement\u00a0clearly allocating labor obligations,\u00a0and
\nThe\u00a0employee has knowingly and voluntarily agreed\u00a0to this arrangement.<\/p>\n

In practice, this defense is rarely successful. Courts are skeptical of employee \u201cconsent\u201d given during onboarding, especially if it\u2019s buried in standard contracts. Employers bear a\u00a0heavy burden of proof, and employees often argue that any such consent was uninformed or coerced.<\/p>\n

Mixed employment vs. other employment models<\/p>\n

Mixed employment is fundamentally different from labor dispatch, outsourcing, secondment, and shared employment in that it\u00a0lacks legal clarity, formal agreements, and defined responsibilities.<\/p>\n

Mixed employment vs. labor dispatch<\/p>\n

Labor dispatch\u00a0is a\u00a0legally recognized employment model\u00a0under the\u00a0Labor Contract Law\u00a0and the\u00a0Interim Provisions on Labor Dispatch. It involves a\u00a0tripartite relationship:<\/p>\n

The\u00a0dispatching agency\u00a0signs a labor contract with the employee but does not directly use their labor (\u201chires but does not use\u201d).
\nThe\u00a0actual employer\u00a0uses the labor but does not sign the labor contract (\u201cuses but does not hire\u201d).
\nThe two entities sign a\u00a0dispatch agreement\u00a0to allocate rights and obligations.<\/p>\n

Labor dispatch must meet strict legal conditions: it is limited to\u00a0temporary, auxiliary, or substitute roles<\/a>, and dispatched workers must not exceed 10 percent of the workforce.<\/p>\n

In contrast,\u00a0mixed employment\u00a0is\u00a0not a legally defined model. It arises from\u00a0factual employment behaviors\u00a0where multiple affiliated entities\u00a0alternately 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.<\/p>\n

Mixed employment vs. business outsourcing<\/p>\n

In\u00a0business outsourcing, the labor relationship is clearly established between the\u00a0outsourcing service provider\u00a0and the employee. The\u00a0client company\u00a0(the service recipient) has\u00a0no legal relationship\u00a0with the outsourced workers.<\/p>\n

The outsourcing company provides services in its own name.
\nWorkers are stationed at the client site solely to fulfill the service contract.
\nThere is no overlap in management or employment responsibilities.<\/p>\n

When properly managed,\u00a0outsourcing<\/a> does not involve dual employment\u00a0or mixed responsibilities. In contrast,\u00a0mixed employment often involves overlapping control, shared management, or unclear payment responsibilities, which can trigger joint liability under Article 3.<\/p>\n

Mixed employment vs. secondment\/assignment<\/p>\n

Secondment or assignment\u00a0typically occurs within\u00a0corporate groups\u2014for example, between a parent company and its subsidiaries, or between strategic partners.<\/p>\n

The labor relationship remains with the\u00a0original employer.
\nThe employee is temporarily assigned to another entity but continues to be managed and paid by the original employer.
\nThe receiving entity has\u00a0no direct legal relationship\u00a0with the employee.<\/p>\n

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.<\/p>\n

Mixed employment vs. shared employment<\/p>\n

Shared employment\u00a0emerged during the COVID-19 pandemic as a\u00a0temporary, cooperative solution\u00a0to labor imbalances between enterprises.<\/p>\n

The employee\u2019s labor relationship and social insurance remain with the\u00a0original employer.
\nA\u00a0cooperation agreement\u00a0is signed between the two companies to define rights, obligations, and risk-sharing.
\nThe employee is temporarily used by another company but returns to the original employer after the arrangement ends.<\/p>\n

Unlike mixed employment,\u00a0shared employment is transparent, documented, and time-bound, with no ambiguity about labor relationship ownership. It is also\u00a0endorsed by the Ministry of Human Resources and Social Security\u00a0as a flexible employment model under special circumstances.<\/p>\n

Legal consequences of mixed employment<\/p>\n

Mixed employment, while often arising from practical staffing arrangements within corporate groups, carries significant legal risks under Chinese labor law.<\/p>\n

Misalignment and ambiguity in labor relationship recognition<\/p>\n

From the employee\u2019s perspective, mixed employment can make it difficult to identify the correct employer responsible for fulfilling labor obligations. This often leads to\u00a0prolonged litigation, increased legal costs, and delays in rights protection.<\/p>\n

From the employer\u2019s side, the lack of clarity in employment boundaries\u00a0undermines compliance and HR management, making it difficult to implement consistent policies, performance evaluations, or disciplinary actions.<\/p>\n

Joint responsibility among affiliated entities<\/p>\n

Under Article 3, if mixed employment is established,\u00a0affiliated entities may be held jointly responsible\u00a0for labor remuneration, benefits, and other obligations. Notably:<\/p>\n

As introduced above, the Interpretation uses \u201cjoint responsibility\u201d rather than \u201cjoint and several liability,\u201d emphasizing a shared employer identity rather than a creditor-debtor relationship.
\nThe scope of \u201cresponsibility\u201d includes, but is not limited to,\u00a0wages and benefits. Courts may interpret this broadly to include:<\/p>\n

Paid leave entitlements,
\nSocial insurance benefits,
\nEconomic compensation for termination,
\nDamages for unlawful dismissal.<\/p>\n

This significantly expands the\u00a0risk exposure\u00a0of each affiliated entity involved in the employment arrangement.<\/p>\n

Barriers to work-related injury recognition and compensation<\/p>\n

In a mixed employment scenario, the employee typically participates in social insurance under\u00a0only one entity\u2019s name. However, if the actual work performed is not clearly attributable to that entity,\u00a0work-related injury claims may be denied.<\/p>\n

The\u00a0injury recognition authority\u00a0may reject the claim on the grounds that the insured entity was not the actual employer.
\nAs a result, the employee may be unable to access compensation from the work injury insurance fund and may instead seek\u00a0direct compensation from all affiliated entities, increasing the legal and financial burden on the group.<\/p>\n

Complications in termination or contract dissolution<\/p>\n

Mixed employment also creates\u00a0legal uncertainty in terminating or ending labor relationships:<\/p>\n

It may be unclear\u00a0which entity has the authority\u00a0to terminate the contract.
\nThe\u00a0grounds for termination\u00a0may exist only within one entity, while others remain unaffected.
\nThis can lead to\u00a0unlawful termination findings.<\/p>\n

Why does it matter to FIEs in China?<\/p>\n

FIEs in China may get involved in mixed employment in the following scenarios:<\/p>\n

Personnel management<\/p>\n

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.
\nDual 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.
\nCentralized 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.<\/p>\n

Operational integration <\/p>\n

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\u2019 projects simultaneously, making it difficult to determine which entity is the true employer.
\nInterchangeable 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.<\/p>\n

Financial and payroll risks<\/p>\n

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.
\nAmbiguous 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.<\/p>\n

Unified HR and compliance<\/p>\n

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.
\nJoint 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.<\/p>\n

How to ensure compliance?<\/p>\n

To avoid the legal risks of mixed employment, FIEs in China should focus on three core principles:\u00a0clarity of employment relationships,\u00a0corporate independence, and\u00a0evidence-based risk control.<\/p>\n

Maintain clear corporate boundaries<\/p>\n

Ensure each affiliated company operates independently in HR, finance, and business management.<\/p>\n

Separate bank accounts and avoid informal fund transfers.
\nManagers should only supervise employees of their own legal entity.
\nIntercompany transactions must follow fair market principles.
\nConduct internal audits to identify and correct blurred responsibilities.<\/p>\n

Align employment elements under one entity<\/p>\n

Follow the \u201cFour-in-One\u201d rule: the same entity should be responsible for:<\/p>\n

Signing the labor contract;
\nPaying wages;
\nContributing to social insurance; and
\nManaging the employee\u2019s daily work.<\/p>\n

This alignment helps avoid joint liability and ensures the labor relationship is clearly attributable to a single employer.<\/p>\n

Handle cross-entity work with proper agreements<\/p>\n

If employees must work across entities (for example, project-based work or secondments), take these steps:<\/p>\n

Sign internal agreements between companies defining responsibilities.
\nProvide employees with a clear, standalone consent form explaining the arrangement and legal implications.
\nKeep signed documents as evidence of informed consent.<\/p>\n

Standardize employment practices across the lifecycle<\/p>\n

At hiring:<\/p>\n

Clearly state the legal employer in the labor contract.
\nIf cross-entity work is expected, disclose it and define responsibilities.<\/p>\n

During employment:<\/p>\n

Track work assignments and attendance by legal entity.
\nPay wages through the contracting entity\u2019s account. If another entity pays, sign a formal agreement and inform the employee.
\nEnsure social insurance is paid by the actual employer.<\/p>\n

At termination:<\/p>\n

Review the employee\u2019s work history across affiliates.
\nClearly document service periods in the termination certificate to avoid disputes over seniority or compensation.<\/p>\n

Prepare for disputes with strong documentation<\/p>\n

To effectively prepare for potential labor disputes, foreign-invested enterprises should focus on building a strong documentation system. This includes:<\/p>\n

Keep records of work assignments, evaluations, and intercompany agreements.
\nRespond to employee inquiries in writing, explaining the employment structure.
\nIf a dispute arises, review the facts and, if needed, sign a supplemental agreement to clarify responsibilities.<\/p>\n

Key takeaway<\/p>\n

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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.<\/p>\n

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\u2014such provisions are likely to be ruled invalid and may expose the company to joint liability.<\/p>\n

A proactive, transparent, and legally sound approach to workforce management is essential for compliance and long-term risk control.<\/p>\n

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<\/a>.<\/p>\n

About Us<\/p>\n

China Briefing is one of five regional Asia Briefing<\/a> publications, supported by Dezan Shira & Associates<\/a>. For a complimentary subscription to China Briefing\u2019s content products, please click here<\/a>.<\/p>\n

Dezan Shira & Associates assists foreign investors into China<\/a> and has done so since 1992 through offices in Beijing<\/a>, Tianjin<\/a>, Dalian<\/a>, Qingdao<\/a>, Shanghai<\/a>, Hangzhou<\/a>, Ningbo<\/a>, Suzhou<\/a>, Guangzhou<\/a>, Haikou<\/a>, Zhongshan<\/a>, Shenzhen<\/a>, and Hong Kong<\/a>. We also have offices in Vietnam<\/a>, Indonesia<\/a>, Singapore<\/a>, United States<\/a>, Germany<\/a>, Italy<\/a>, India<\/a>, and Dubai (UAE)<\/a> and partner firms assisting foreign investors in The Philippines<\/a>, Malaysia<\/a>, Thailand<\/a>, Bangladesh<\/a>, and Australia<\/a>. For assistance in China, please contact the firm at china@dezshira.com<\/a> or visit our website at www.dezshira.com<\/a>.<\/p>\n

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