Restrictions on Foreign Law Firms in China
At present, foreign law firms and foreign lawyers are not allowed to provide legal services in the names of consulting companies or other organizations in China.
The legal industry in China is considered a restricted market meaning wholly foreign-owned enterprises (WFOEs), standard representative offices (ROs), and even Sino-foreign joint ventures (JVs) are prohibited from entering the legal market in China.
The only way a foreign law firm can enter the Chinese legal market is by registering a legal representative office (LRO). These representative offices cannot hire Chinese legal practitioners to provide PRC law services and must rely on 3rd party HR providers. In addition, foreign lawyers are not entitled to appear in court as lawyers in the PRC or to practice Chinese law in the PRC. Furthermore, there is no legal education, workplace training, or qualifying tests for foreign lawyers in the PRC.
LROs are complicated and time-intensive to register and very limited in the types of services they can offer. Instead, a new overseas expansion model for law firms called Employer of Record (EOR) promises to be an easier, faster, and more empowering option for law firms who want to expand their operations to China.
Legal Representative Offices
The establishment of LRO demands permission from the Administrative Department of Justice of the State Council. To acquire such permission, the foreign law firm must be a law firm legally embarking on law affairs in its country of origin and must not have been imposed sanctions before. The parent law firm must also prove they have an active need to enter the Chinese market. The registration procedure and approvals for an LRO can take between 6 and 9 months.
Whereas ROs are restricted to conducting marketing, R&D, and quality control activities in China. LROs are permitted to organize and bill for the following legal services.
- Providing legal advice (for China & internationally)
- Commissioning lawyers/law firms in countries where the parent law firm has obtained permission to provide legal services.
- Commissioning Chinese law firms on behalf of foreign clients in China.
Drawbacks of Legal Representative Offices
The LRO’s business scope is limited as its main activities are to provide legal advice or legal information concerning China’s legal environment, and commission Chinese law firms on behalf of its clients.
Other activities explicitly banned for an LRO encompass investment in a Chinese law firm, management or control of a Chinese law firm, the establishment of a JV or a joint office with Chinese legal practitioners or a Chinese law firm, and sending staff to a Chinese law firm to occupy in the provision of legal services.
Requirements of the LRO’s legal representative
Every company in China is required to have a legal representative. The legal representative of the LRO must be a practicing lawyer and member of the lawyer association of their home country, possess at least two years of experience practicing law outside of China and have a clean criminal record.
The legal representative must have at least three years of experience and must have the title of “Partner” at the parent law firm. Additionally, the legal representative of the LRO cannot be the legal representative of another RO in China.
Legal representatives of an LRO are expected to work full-time, which means they should stay in China for at least six months per year. The annual inspection will ask for proof of this.
EOR: An Easier & Better Solution
What is an Employer of Record (EOR)?
An Employer of Record is a type of service that enables you to outsource your overseas HR, payroll, and employment liabilities to an entity seated in your targeted market.
To put it simply, through the cross-border EOR model, your overseas employees are hired by a local company that handles all the requirements of labor legislation, including social security, pensions, labor contracts, tax returns, housing fund, etc.
For your overseas employees, this is also a benefit as they have access to their payroll and employment records from the local company, making it easier to deal with banks. This also means that any employer-employee dispute is to be resolved locally, assuring the employees of local legal relief and transferring the liability to the local employer.
Advantage #1: Easier and faster than setting up an entity
To register a Legal Representative Office it takes 6 to 9 months to gather documents and get them notarized and translated for registration and licensing. The whole process of entity establishment is costly and time-consuming.
Nevertheless, using an employer of record service to legally employ workers and conduct business is often regarded as a new and revolutionary model for expanding abroad. Now you can simply sign a company-to-company contract and voila. Your team can be hired and ready to work in about a week.
Advantage #2: Safe for your company and your overseas employees
Utilizing an employer of record to expand your legal business in China means outsourcing your employment liabilities in China to a local entity.
Because HROne is an HR firm with an emphasis on legal matters, your Chinese lawyer employees hired through EOR can participate in a court of law and enable your company to do business indirectly in China.
The frequent changes to market regulations in China are also avoided in this way. As for your employees, they benefit from the security and flexibility of being paid and hired in accordance with Chinese tax and labor law.
Advantage #3: Hiring employees in China becomes easier
As mentioned previously, foreign law firms utilizing a legal representative office in China are restricted when hiring employees in China. However, the employer of record (EOR) model can help them to overcome this problem, so that foreign law firms can hire staff in China without setting up the legal representative office. In this way, they can reduce costs, and compliance with local laws is guaranteed.
Future of the Legal Industry in China
As China becomes more important on the world stage so will the need for legal representation in the expanding Chinese legal system. At the same time, as the world becomes more and more connected and digitalized, we expect Employer of Record as a service to become the norm by which companies (and law firms) expand overseas.
