The IP Risks of Chinese Third Party Hiring Agencies

Rethinking China Operations: Third-Party Hiring Agencies

As foreign companies reduce their China operations to minimize risk, they often turn to third-party hiring agencies to staff projects without a local entity. But relying on these dispatch firms creates a major vulnerability: loss of valuable IP if specific protections aren’t in place. This post delves into how these dispatch systems operate and the critical importance of safeguarding your company’s IP in this unique hiring context.

Understanding the Mechanism of Employee Dispatch Companies in China

China places many restrictions on hiring employees using employee dispatch companies (a/k/a third-party hiring agencies) and there are a number of legal issues foreign companies that go this route should consider, and IP is one of them.

Typically, the foreign company and dispatch agency sign a contract. The agency then hires staff as its own employees. These staff carry out work for the foreign firm.

The contract between the foreign company and the dispatch agency is pivotal. It sets the terms for the company’s relationship with the dispatch agency and details the employees’ roles with both entities.

The Role of Dispatch Companies and Intellectual Property

As the employer of record, the dispatch company will need to sign an employment contract with “your” employee. The dispatch company’s employment contract should and probably will accord with the relevant national and local employment laws and practices, and it will almost certainly protect the dispatch company as well. However, it will not do anything to protect your interests as the foreign company for which the employees will be working.

Though the interests of foreign companies often align with the interests of their dispatch companies, this isn’t the case when it comes to protecting trade secrets and IP. In other words, you cannot rely on the dispatch company’s contracts to protect your own IP. You must actively protect your IP by entering into a trade secrecy and IP protection agreement with each of “your” employees that (among other things) clearly mandates the employee’s confidentiality obligations. In addition, you need to make sure this agreement not only fits your overall situation but also complies with China’s applicable laws so you can actually enforce it.

Protecting Your Assets: A Vital Consideration

Don’t make the mistake of leaving your IP protection to your third-party hiring agency. That part of the employment arrangement is on you and if you want to prevent your workers from running off with your trade secrets and other IP, you need your own contract or contractual provisions to prevent this.

We regularly get calls from foreign companies who have “lost” their IP to the people they used from these third party hiring agencies. In virtually all of these instances, the foreign company’s contract with their third party hiring agency did not protect them and their personnel had never signed anything that would protect them either.

Dispatch firms in China will simplify your China HR, but the risk these firms pose to your IP is real. Act now by securing your IP with robust agreements that will safeguard your company’s future.