Cross-Entity Employment in a Chinese Manufacturing Group After SPC Interpretation II

A manufacturing group in Ningbo has three affiliated companies in the same industrial park. Employees sign contracts with Company A, receive payroll from Company B for part of the year, work under supervisors from Company C and move among production lines without formal secondment documents. One employee is terminated after a restructuring and claims salary, severance and social-insurance liability against multiple group companies. The group responds that Company A was always the legal employer because its name appears on the employment contract. Chinese labor disputes are decided from the actual legal and factual relationship, not merely from group branding. The Labor Contract Law governs employment contracts, termination and severance,^[1] while the Supreme People’s Court’s Labor Dispute Interpretation II, effective September 1, 2025, addresses several complex employment arrangements and reinforces the importance of identifying the entity that bears employment-related responsibility in specified situations.^[2] For affiliated companies, the practical issue is evidence. If the group wants one entity to remain the employer, its contract, payroll, management and social-insurance structure should consistently support that position.

The specific problem#

Entity mapping and the written employment relationship#

Start with an entity-by-entity factual map. The legal team can reconstruct the employee relationship across time. For each period, record: signed employer, payroll entity, social-insurance payer, attendance system, direct supervisor, workplace, disciplinary authority, and entity benefiting from the work. Affiliated companies often assume that internal cost allocation is irrelevant to labor law. In litigation, however, payroll and supervision can be important evidence. The map needs to distinguish temporary support from permanent transfer. An employee may spend two weeks helping an affiliate without changing employer, while a two-year relocation with new supervisors and payroll can create a very different evidentiary picture. HR systems need to preserve the reason for cross-entity work. If the arrangement is a secondment, use a written secondment or assignment document. If employment transfers, document termination or transfer of the old relationship and establishment of the new one. Ambiguity benefits no one. The written employment contract remains important but may not answer every question. The Labor Contract Law requires written employment contracts and sets out core contractual obligations.^[1]

A signed contract with Company A is strong evidence that A is the employer. It does not automatically erase later facts showing that another entity may have assumed material employment functions. The group can therefore keep amendments and transfer documents current. If salary begins coming from Company B, the payslip or bank reference should explain whether B pays as agent for A or whether employment has changed. If Company C issues disciplinary notices, the authority for doing so should be documented. Corporate groups need to avoid using whichever affiliate is administratively convenient for each HR task. That flexibility can create inconsistent evidence when a dispute occurs. A centralized HR department can still administer several employers, but it should act clearly on behalf of the correct legal entity. Social-insurance payment needs to match the employment structure. Social insurance is one of the first issues employees raise when group companies share personnel. The employer needs to ensure contribution registration and payment comply with applicable social-insurance law and local implementation.

If one affiliate pays contributions for employees of another, the group needs to understand whether the arrangement is lawful and how it will be explained in a dispute or audit. A mismatch can affect not only contribution liability but also employee perception of who the employer is. During M&A or restructuring, buyers often discover employees whose contract, payroll and social-insurance entities differ. That should be treated as a remediation issue rather than ignored because benefits have been paid in some form. The HR audit needs to identify historic underpayment, location mismatches and employees working for affiliates different from the registered employer. Interpretation II makes responsibility in non-standard work arrangements especially important. The Supreme People’s Court’s Interpretation II addresses several difficult labor-dispute scenarios, including responsibility where contractors subcontract to entities or individuals lacking lawful operating qualifications and other arrangements that can separate formal contracting from the entity bearing employment-related responsibility.^[2] Although affiliated-company employment has its own facts, the broader lesson is clear: courts analyze the substance and statutory allocation of responsibility.

A manufacturing group needs to not create informal labor-supply structures among affiliates that resemble outsourcing without clear legal documentation. If Company A recruits employees solely to supply labor permanently to Company B, group management can assess whether the structure creates labor-dispatch, employment or other regulatory issues. The label “shared employee” has no independent legal magic. Counsel can identify the lawful model—employment, secondment, transfer, dispatch or service arrangement—and make documents and operations match that model.

Social insurance, non-standard work and termination authority#

Termination decisions need to be made by the entity that can legally implement them. A common dispute arises when a group manager tells an employee that “the group no longer needs your position,” but no clear employer termination notice is issued. The termination letter needs to identify the employer, legal basis, effective date, severance calculation and required procedures. If Company C’s manager decides the employee will leave but Company A is the employer, A should take the formal employment action through authorized personnel. The group can also check whether internal restructuring actually provides a lawful termination basis under the Labor Contract Law.^[1] Changing group ownership or moving a function does not itself eliminate statutory employment protections. If the employee is being transferred to an affiliate rather than dismissed, consent and continuity issues should be addressed transparently. The company can not pressure the employee to resign merely to simplify entity records. Severance calculations need a clean employment history. When an employee has worked across affiliates for many years, the parties may disagree over service length. Counsel needs to review: original hire date, transfers, termination and rehiring documents, continuity agreements, salary history, and prior severance payments. The Labor Contract Law provides the statutory framework for economic compensation and calculation.^[1] If the group previously transferred the employee among affiliates without paying severance and expressly preserved service continuity, that history may affect the later calculation. A buyer acquiring one entity needs to also determine whether it is accepting historical service obligations for employees who previously worked elsewhere in the group. Employment diligence needs to therefore include service-credit schedules, not merely current contract copies. Group HR policies need to identify the issuing employer and scope. Many groups use one employee handbook for several subsidiaries. That can work if the policy clearly identifies which entities adopt it and each entity completes the procedures required for its workforce. A handbook issued only by the parent may create questions when a subsidiary later relies on it for discipline. The group should preserve: consultation or adoption records, employee acknowledgment, effective date, entities covered, and later amendments.

Cross-entity management needs to also respect data minimization and access controls. A manager in another affiliate needs to not automatically receive every employee file simply because the companies share ownership. Legal, HR and data-governance functions should agree on who can access employment information and why. Case study: three-company manufacturing group. Assume an engineer signed with Company A in 2018. In 2022, payroll moved to Company B because B handled group finance. Social insurance remained under A. In 2024, the engineer moved permanently to Company C’s plant and reported to C’s factory director. No secondment agreement was signed. In 2026, C’s director announces the position is abolished. A issues a termination notice and calculates severance only from 2024, arguing that the engineer “transferred” then. The records are inconsistent. A better group structure would have documented whether the 2024 move was secondment or employment transfer and whether service years continued. If A remained employer, payroll and management documents should have said so. If C became employer, the transfer should have been formalized.

In the dispute, counsel would reconstruct actual work, payroll, insurance, authority and past communications rather than rely only on the 2018 contract.

Severance, policies and secondment controls#

M&A and restructuring should trigger a cross-entity employment audit. A transaction is an opportunity to clean up group employment structures. The buyer or restructuring team should identify employees with: mismatched contract/payroll entities, intercompany secondments, shared senior management, unresolved service history, and social-insurance anomalies. Each employee can then be placed into a lawful and documented structure before closing or integration. The SPA needs to allocate historic employment liabilities where the target’s records are inconsistent. Post-closing HR integration should not simply move payroll systems on day one. The legal employer, work location and employee consent implications need to be considered. This audit can also protect IP ownership because employee-created inventions and confidentiality obligations depend partly on clear employment relationships. Secondments need to state who manages day-to-day work and who retains employer authority. A written secondment agreement is useful only if it reflects actual operations. The document needs to identify the employing entity, host entity, period, work location, salary arrangement, supervision, discipline, confidentiality, injury reporting and return mechanism.

If the host directs daily tasks, that should be acknowledged while reserving formal employment actions to the employer where that is the intended model. The employee needs to understand the arrangement. Secret intercompany documents that contradict the employee’s experience are less persuasive than a transparent assignment. Secondments need to also have an end date or review mechanism. Indefinite “temporary” placement for several years can undermine the intended characterization. When the secondment ends, HR needs to document return or formal transfer rather than leave the employee in the host entity’s systems. Cross-entity bonus and commission plans need ownership and payment clarity. Manufacturing groups often pay sales or project bonuses from a different affiliate from the employment entity. That can create disputes over which company owes variable compensation. The plan needs to identify the obligor, calculation, approval process, payment date and effect of transfer among affiliates. If a regional group entity funds the bonus but the legal employer owes it, payroll records should show the payment relationship clearly.

Commission disputes can become especially complex where sales teams support several affiliated companies and revenue is booked by different entities. Group management can decide whether compensation follows the employee, the product line or the contracting entity and document the rule. A consistent plan reduces both labor disputes and intercompany accounting confusion. Work injury and occupational-safety incidents expose weak entity structures quickly. An employee may be injured while working at an affiliate’s plant. The incident immediately raises questions about employer responsibility, work-injury insurance, host-site safety and possible third-party liability. The group can have an incident protocol that identifies the registered employer and coordinates reporting with the host entity. A lack of secondment documentation can make factual reconstruction difficult when authorities and insurers ask why the employee was working at another company. Safety training and site rules should also cover seconded personnel. The group needs to not assume that insurance payment by one entity resolves all liability questions. High-risk manufacturing operations should therefore treat employee placement as part of safety governance, not only HR administration.

Compensation, injury, data and workforce transfers#

Data and investigation rights need limits when HR is centralized. A shared HR team may investigate misconduct across several affiliates. The team should know which entity is the employer, which entity controls relevant systems and what employee data may be accessed for the investigation. A manager from another affiliate should not be given unrestricted access simply because the group owns both companies. The Personal Information Protection Law and internal data policies should be considered when collecting attendance, communications, device logs or health information. Investigation notices should identify the employing entity and purpose. If disciplinary action follows, the evidence chain should show how the employer lawfully obtained and relied on the information. Centralization can improve compliance, but only if authority and data access remain defined. Business transfers should distinguish employee continuity from entity convenience. A group may move a production line from Company A to Company C and want the workforce to follow. HR needs to identify whether employees consent to a new employer, whether service years continue, whether contracts need amendment and how accrued benefits are treated.

The corporate project timetable needs to allow enough time for employee communication. Forcing employees to resign from A and “reapply” to C can create disputes if the move is effectively employer-driven. A written transfer agreement among employee and relevant entities can clarify service continuity and benefit treatment. The buyer in an M&A transaction should also check whether historic transfers were documented properly, because inherited service obligations can affect severance calculations. A group employment matrix should become a standing compliance tool. After cleanup, the group should maintain a live matrix showing each employee’s contract entity, payroll entity, social-insurance entity, worksite and host assignment. Exceptions should be reviewed periodically. The purpose is not to prevent all cross-entity work. It is to ensure that every exception has a recognized legal structure. HR, finance and legal teams should reconcile the matrix because changes often begin in payroll or operations before legal is informed. When an employee moves permanently, the matrix should trigger formal transfer documentation. For large groups, automated HR systems can flag mismatches.

A simple entity map can prevent years of inconsistent records from accumulating. Salary arrears and intercompany payment arrangements should be documented transparently. Financial stress can cause one affiliate to pay another affiliate’s employees because the legal employer lacks cash. That emergency measure may be commercially sensible but should be documented as an intercompany payment on behalf of the employer. The employee needs to receive a payslip identifying the employing entity and the period paid. If the arrangement becomes permanent, the group needs to reconsider whether the legal employment structure still reflects reality. During restructuring, counsel needs to also track which entity bears unpaid salary and severance so that creditor and employee claims are filed correctly. A group cannot solve liquidity problems by moving payroll among affiliates without considering the legal evidence created.

Due diligence, restructuring and remediation#

Foreign managers should receive entity-specific authority training. Multinational manufacturing groups often appoint regional managers who supervise employees across several subsidiaries. Those managers may believe they can hire, discipline or terminate anyone in the regional organization. The group can explain which decisions they can make commercially and which require action by the legal employer. For example, a regional director may recommend termination, but the formal notice should come from the employer through authorized HR. This distinction can be built into delegation matrices and manager training. It reduces the risk that an employee receives conflicting instructions from people who appear to represent different group entities. Employment due diligence should test a sample of real employees, not only templates. A buyer may receive standard employment-contract and handbook templates that look compliant while actual practice differs. Diligence needs to sample employees from different factories, seniority levels and functions. For each sample, compare contract, payroll, insurance, attendance and worksite. This can reveal systemic cross-entity arrangements quickly.

The buyer can also review terminated employees and pending disputes because those files show how the group actually implements its policies under pressure. Findings should be quantified where possible, especially social-insurance and severance exposure. A practical sample-based review is often more informative than reading hundreds of identical contract forms. Board-level restructuring plans should identify the workforce entity map. When a group consolidates plants or legal entities, the board paper should state which employees move, which entity remains employer, what consent or consultation is needed and how service years are treated. That information should sit beside the corporate merger or asset-transfer plan. Otherwise the transaction can be approved without a realistic labor implementation route. Finance needs to also budget severance, benefit transfers and HR system changes. A corporate restructuring is not complete when the equity or assets move; the people who operate the business need a lawful transition.

Case analysis and standing group controls#

Remediation should prioritize consistency over formal complexity. A group does not need an elaborate agreement for every short visit to an affiliate. The priority is consistency between the intended relationship and the evidence. Short temporary support can be documented through a simple assignment. Long-term placement deserves a formal secondment or transfer. Payroll and social insurance should follow a clear rule. Managers should know which entity acts as employer. A simple structure that everyone follows is more defensible than sophisticated paperwork contradicted by daily practice. Audit findings should be converted into a remediation timetable. After identifying cross-entity inconsistencies, the group needs to rank them by legal and operational impact. High-priority items include employees whose contract, payroll and worksite point to different entities for long periods, social-insurance mismatches, and planned terminations where employer identity is unclear. Lower-priority documentation gaps can be corrected through regular HR updates. Each remediation item should have an owner, employee communication plan and completion date. Group management can also avoid retroactive documents that misstate past facts. Historical inconsistencies should be recorded honestly while future arrangements are cleaned up.

That approach improves both compliance and credibility in any later dispute. The same discipline should be built into future onboarding so that every new employee has one clearly identified employer from the first day and any later cross-entity move triggers documented review. That clarity also helps finance, payroll and line managers apply the same entity structure consistently instead of creating new contradictions through routine administration. Exit documentation should close the entity question cleanly. When an employee leaves, the termination or separation file should identify the legal employer, final salary payer, social-insurance handling, severance and return of company property. If the employee worked across affiliates, a closing confirmation can state whether any other group entity owes outstanding compensation. This reduces the risk that an ambiguous operating arrangement survives into a multi-entity claim.

Conclusion#

Affiliated companies can share management and resources, but employment responsibility still attaches to legal relationships and statutory duties. The Labor Contract Law governs contracts, termination and compensation,^[1] while SPC Interpretation II provides current judicial guidance on several non-standard employment arrangements and responsibility questions.^[2] The decisive point is that a group cannot rely on the corporate chart alone. If one entity is intended to be the employer, contracts, payroll, social insurance, supervision and termination authority should tell the same story.

Legal and regulatory sources#

^[1] Labor Contract Law of the People’s Republic of China, official NPC legal database: [official source](https://flk.npc.gov.cn/) ^[2] Supreme People’s Court, Interpretation on Several Issues Concerning the Application of Law in Labor Dispute Cases (II), effective September 1, 2025: [official source](https://gongbao.court.gov.cn/Details/bb72019c45453f84d920bd6375573e.html)

General legal information only; not legal advice for a specific employment arrangement.