China Employees and Independent Contractors: The O2O Business Carve-Out

Despite the many risks, our China lawyers still see far too many foreign companies engage in pointless gyrations to convince themselves that their relationship with their China “agent” or “independent contractor” or “partner” is anything other than an employer-employee relationship. We know that the costs of hiring an employee in China is high, but you have to trust us when we say that the costs of improperly trying to get around this in China will almost certainly eventually be considerably higher. For just how bad this can get, I urge you to check out this Forbes Magazine article, China’s Tax Authorities Want You.

But now that I have scared you, I should note that China recently opened the door a crack to allow independent contractor like relationships “online to offline” (O2O) world.

In a series of cases concerning ride-hailing service drivers (think Uber or Lyft or Didi), China’s courts have  held that the drivers were not employees. In each case, the driver and the company entered into an e-ride-hailing driver cooperation agreement.

Let’s look at one recent case (decided in 2015). The plaintiff, a ride-hailing driver for Beijing Yi Xin Yi Xing Auto Technology Development Service Co., Ltd. claimed he was an employee of the Yi Xin and was paid RMB 4000 (about USD 600) per month during the term of his employment, but Yi Xin failed to make social insurance payments and withheld his wages for no good reason and terminated his employment without cause. The former driver initiated a labor arbitration claim against Yi Xin, demanding (among other things) double statutory severance pay for illegal termination of an employee relationship. The former driver lost at arbitration and then took his case to court, where he lost again. The former driver then appealed to the intermediate court and lost yet again.

The intermediate court held that the former driver bore the burden to prove he had been in an employment relationship with Yi Xin and he had failed to meet that legal burden. The court’s analysis is unsatisfactorily brief: it says that in seeking to determine whether an employment relationship existed between the parties, it will consider the following: (1) whether the employer and the employee qualified as employer and employee for purposes of the Chinese labor and employment laws; (2) whether the employee was subject to the employer’s rules and regulations and the labor management of the employer and undertook work arrangements from the employer for remuneration; and (3) the employee’s services constituted a part of employer’s business. The court’s ruling did not discuss (1), but I note it generally means the employer must be a China entity with a business license and the employee must be at least 18 years old. The court went on to say that the parties signed a cooperation agreement, pursuant to which the former driver provided ride-hailing services to clients and charged fees accordingly. Yi Xin then deducted information service fees from the service fees held by the former driver. The former driver worked flexible hours based on his own desires  and Yi Xin did not pay him a fixed monthly wage. Therefore, the characteristics of an employment relationship were lacking and no employment relationship existed between the parties. In reaching its conclusion, the court focused on the former driver’s flexible schedule and how he did not take orders from Yi Xin.

In a case currently pending in Chaoyang District People’s Court in Beijing, seven chefs brought a legal action against Lekuai Information Technology Co., LTD for unlawful termination. The main issue is their case is the same as that in the Yi Xin former driver case: did an employment relationship exist between the parties? Much like the arguments made by Yi Xin, the defendant in this case, Lekuai, has claimed that it was in “a cooperation relationship” with these chefs, and not an employment relationship. Lekuai further asserts that the parties had agreed in their written “cooperation agreement” that “there was a business cooperation relationship between the parties” and the chefs would not be subject to Lekuai labor management and the chefs themselves would be solely responsible for its work product.

In July of this year, China published a set of interim provisions on the administration of ride-hailing services, which will take effect on November 1, 2016. The interim rules require ride-hailing companies enter into various “kinds” (whatever that means) of labor contracts or cooperation agreements with their drivers and provide all sorts of training to the drivers. The initial draft of these rules explicitly required the companies sign full-time employment contracts with their drivers, but this requirement has been removed from the official rules set to go into effect in about a month.

We do not see this cases as abrogating the need for foreign companies doing business in China to treat pretty much every individual that performs services for them as an employee, and to pay all of the taxes and benefits that go with that. In any employee-like dispute, China will no doubt continue to favor the individual against the company, and this holds double for foreign companies. But in an O2O context, it certainly appears that China is loosening the employer-employee strings and its courts are no longer treating all situations where employee-like individuals had independence and flexibility as traditional employees. Do note that the courts did not use the concept “independent contractor” as we commonly see in the U.S.

This could be huge. No employment relationship means the company is not obligated to treat the cooperating party as an employee, thereby saving large amounts on labor costs, such as employer taxes, social insurance, and housing fund payments. Termination will also be considerably easier. But what all of this means (if anything at all) for China employers outside of the O2O context remains to be seen.

Bottom Line: If you regulate someone pursuant to your company’s rules and regulations, the chances are an employment relationship exists between you and such employee. But if you are an O20 company and if you have a written contract (in Chinese) that clearly delineates in multiple ways that the role of your cooperating individual is not that of employee, you will have a good basis for claiming that person is not an employee. If you want to be really safe though, you should consider requiring that your cooperating individual form his or her own Chinese domestic company and then have your company contract with that company. As this recent article notes, the number of Chinese domestic companies being formed is rising rapidly as those formations become considerably easier and cheaper.

But whatever you do, do not confuse the above cases with China’s flexible working hours system nor forget that foreigners still need a proper work visas to stay and work in China. Most importantly, if you are going to  try to set up a cooperation relationship to avoid an employer-employee relationship, just be sure you are documenting it correctly and in Chinese.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.