China Labor Dispatch vs Direct Employment Guide

TL;DR

Direct employment should be the default for ongoing roles in a China entity's normal organization. The China employer signs the contract, manages payroll and carries the ordinary employer obligations.
Labor dispatch is a regulated three-party arrangement, not a general substitute for hiring. It is restricted to temporary, auxiliary or substitute positions, requires a licensed dispatch agency and is subject to a 10% dispatched-worker cap at the user entity.
“EOR” and “outsourcing” are commercial labels, not automatic legal conclusions. Review the actual employer, work control, position, provider license, pay, social insurance and exit process before relying on the label.

The core difference

Under direct employment, the China operating entity and the employee are the two parties to the employment relationship. The entity signs the written employment contract, pays salary, withholds individual income tax, handles statutory contributions and manages performance and workplace rules.

Under labor dispatch, a licensed dispatch agency is the contractual employer and sends the worker to a user entity. The user entity directs the day-to-day work, while duties are divided between the agency and the user under law and their dispatch agreement. This triangular structure creates more interfaces, not fewer responsibilities.

The China hiring guide for foreign companies explains the broader onboarding duties that apply once the employment model is chosen.

When labor dispatch may be used

China's Labor Contract Law describes labor dispatch as a supplementary form of employment and limits it to three categories:

Temporary position: a position lasting no more than six months.
Auxiliary position: a non-main-business position that supports the entity's main-business positions.
Substitute position: a position filled for a period because the regular employee cannot work due to off-job study, leave or another qualifying reason.

An auxiliary position is not created merely by writing “support” in a job description. The Interim Provisions require the user entity to follow an employee-discussion and consultation process and publicize the list of auxiliary positions.

The user entity should also keep dispatched workers within 10% of its total workforce. Under the national Interim Provisions, the denominator includes employees who have employment contracts with the user entity plus workers it uses through dispatch. Confirm how current local practice treats the company's structure and headcount.

These restrictions make dispatch a poor default for permanent core teams. Sales leaders, finance managers, engineers or other roles embedded indefinitely in the main business should not be classified as “temporary” or “auxiliary” only because the group prefers not to hire directly.

Direct employment and dispatch compared

Question	Direct employment	Labor dispatch
Contractual employer	China operating entity	Licensed dispatch agency
Daily work direction	China operating entity	User entity
Appropriate role	Ordinary ongoing roles	Only qualifying temporary, auxiliary or substitute roles
Workforce cap	No dispatch cap	Dispatched workers generally limited to 10% of the user entity's total workforce
Payroll interface	Employer runs or outsources its own payroll	Agency payroll must reconcile with user approvals and the dispatch agreement
Main risk	Employer-process and documentation failures	Misclassification, unlicensed provider, cap breach and split responsibilities
Long-term fit	Usually clearer for a stable China team	Supplementary and limited, not a permanent substitute for direct hiring

Equal pay and divided responsibilities

Dispatched workers have a statutory right to equal pay for equal work. The user entity and dispatch agency should align the role, compensation basis, overtime, performance-related amounts, benefits, social insurance and workplace treatment instead of assuming the provider alone owns every issue.

At minimum, the dispatch agreement should define:

the qualifying position and assignment period;
headcount and work location;
compensation, provider fee and payment flow;
social-insurance and housing-fund handling;
attendance, overtime, leave and performance inputs;
occupational injury and workplace safety responsibilities;
employee complaints, discipline, return and lawful termination procedures;
personal-information and payroll-data controls; and
records and cooperation required if an authority or employee challenges the arrangement.

The employee-facing documents, provider invoice, payroll records and actual management should be consistent. A well-written service agreement cannot cure a model that operates differently in practice.

Dispatch, EOR and genuine outsourcing are not the same

“Employer of record” or EOR is a commercial description. In China, a provider's actual legal structure may be labor dispatch, personnel services or another arrangement. Ask which entity signs the employment contract, whether the provider has the necessary labor-dispatch license, and which legal basis supports the service.

Genuine business outsourcing is different. The supplier undertakes a defined business function or deliverable, uses its own organization and management, and bears delivery responsibility. If the customer selects individuals, controls their daily attendance and work, evaluates them like employees and pays by headcount, calling the contract “outsourcing” may not change the underlying facts.

Before the China entity exists, direct hiring by that future entity is generally not available. The pre-registration hiring guide outlines bridge options and the need for a documented conversion plan.

Six-step decision process

1. Confirm the business stage

Determine whether the China entity already exists, has payroll and employer registrations, and is ready to employ. Separate a short incorporation gap from a permanent workforce design.

2. Classify the position

Document whether the role is part of the main business and whether it genuinely meets the temporary, auxiliary or substitute definition. Record the facts, not only the desired contract label.

3. Test the 10% cap

Calculate the current and projected dispatched headcount using the applicable denominator. Include planned hires and assignment renewals so the company does not cross the cap after onboarding.

4. Verify the provider

Review the provider's legal entity, labor-dispatch license, service location, payroll and contribution capability, data controls, insurance and dispute history. Confirm that the contracting entity is the licensed entity, not just an affiliated sales company.

5. Map responsibilities

Create a responsibility matrix for contracts, payroll inputs, salary funding, IIT, contributions, overtime, leave, injury, discipline, employee queries and offboarding. Name owners at both organizations.

6. Set the exit or conversion plan

State what happens when the assignment ends, the China entity becomes ready, the role ceases to qualify, or the provider relationship terminates. Review employee consent, continuity, service history and cost before promising a direct transfer.

Copy-pastable review checklist

[ ] China entity readiness and intended end state confirmed
[ ] Position meets temporary, auxiliary or substitute criteria
[ ] Auxiliary-position consultation and publication completed where applicable
[ ] Current and projected dispatch ratio remains within the applicable cap
[ ] Contracting provider and labor-dispatch license verified
[ ] Equal-pay comparison and compensation logic documented
[ ] Payroll, IIT and contribution responsibilities reconciled
[ ] Work injury, overtime, leave and discipline procedures assigned
[ ] Employee and payroll data access restricted
[ ] Assignment end, return and direct-hire conversion plan documented

Common mistakes

Treating labor dispatch as a general way to avoid building an HR function.
Putting permanent core positions under dispatch without testing the statutory categories.
Using an “EOR” brand name without verifying the legal entity and license.
Ignoring the 10% cap or using an unsupported headcount denominator.
Calling a position auxiliary without the required internal process.
Assuming the provider alone is responsible for equal pay, overtime or workplace safety.
Funding one amount while the provider's payroll, tax and contribution records show another.
Using an outsourcing contract while managing named individuals as the customer's own staff.
Promising seamless transfer to direct employment without reviewing employee documents and service history.
Keeping no copies of employee-facing records or contribution evidence.

Frequently asked questions

Is labor dispatch illegal in China?

No. It is a lawful but regulated supplementary model when the agency is licensed, the position qualifies and the user entity follows the applicable cap and responsibilities.

Can a foreign company use dispatch for every employee before forming a WFOE?

That is not a safe general assumption. Each role and provider structure must be reviewed, and the arrangement should not be used to bypass dispatch restrictions, immigration, tax or permanent-establishment concerns.

Does the 10% cap apply to the dispatch agency or the user entity?

The national Interim Provisions frame the cap at the user entity. The exact workforce calculation and any restructuring or transition question should be checked against current local practice.

Is outsourcing outside labor-dispatch rules?

Genuine business outsourcing is a different model, but the written label is not decisive. If the customer directly manages individual workers and the supplier only processes payroll or invoices headcount, the arrangement may be challenged based on its actual operation.

If you are comparing direct hiring, dispatch or a temporary provider arrangement for a China team, talk to ChinaBizPro about a documented model, provider review and payroll handoff.

Labor Dispatch vs Direct Employment in China