Some importers take a shortcut as they set up their supply chain, and pay for it many times over a few years later. I want to cover one of these shortcuts today.
We have had a few clients come to us after being let down by an Upwork freelancer who was sooo great at the start… before things went downhill.
(I get it — it seems convenient, fast, and cheap to go to Upwork and get a freelance sourcing agent. After all, you may be selling goods online through the “Fulfilment By Amazon” model, and managing your employees through online transactions seems like the most efficient approach. And yes, of course, many Upworkers are great — we seldom hear about those ones.)
Some of these offers seem too good to be true!
Did you know that your hiring an Upwork freelance worker is illegal in China? We wrote about it before, based on an article from the China Law Blog:
Any person (as opposed to a registered China business entity) performing employment-like services for you in China is your employee because China does not recognize independent contractors in anything other than extremely limited circumstances (and your circumstances do not qualify!). And Chinese law requires you pay both employer taxes and benefits on that employee. These employer taxes and benefits vary from city to city, but they usually total around 40 percent of an employee’s salary. China also mandates employers withhold around 15 percent of their China-based employees’ wages for individual income taxes. […]
So when all is said and done, the foreign company owes a heck of a lot of taxes to the Chinese government, plus steep penalties, plus interest.
Now, what are your risks? If you are a non-Chinese company, you are not going to get in trouble in your home country. However, let’s look at the risks you are taking.
Risk 1: under-the-table commissions that inflate your costs
If you let an ‘agent’ search and introduce a potential supplier, a commission for the agent is generally built into the supplier’s price. And yes, on top of that you are paying for the work to get done…
How much is that commission? From what I have seen, anywhere between 3% and 15% if you buy finished products (and sometimes much more on some components). It ends up being very expensive!
This is extremely common (over 90% of the time) when a Chinese individual puts a local manufacturer in contact with a foreign buyer. It is less common when the “agent” is an established sourcing agency.
Risk 2: your representative actually watches out for your supplier’s interests over yours
This is a corollary of what I described in the above section. Since they get paid by the supplier side (probably more than the amount they get from you), they are not watching out for your interests…
One thing you can’t trust is their quality control reports, for example – if the agent and the factory made a deal before, why wouldn’t they make a deal again?
Risk 3: they can disappear anytime
Let’s say you start to pay the freelance ‘agent’ 15 USD an hour.
When the contract employee has time, he/she does some extra work for 20 USD, and then 25 USD, an hour – after all, your paying them so much money over time makes their profile appear safer and more attractive to other companies.
What will they showcase in their portfolio? Your products. Which means they are more likely to work for companies that might be your competitors.
After they have enough business at 25 USD an hour and you only raise them to 18 USD an hour, you might read the dreaded “my grandmother is sick, I need to go back to hometown”. End of the line.
What might also happen is, they find a full-time job. Or their spouse’s Taobao’s business is flourishing and they need to help. We have heard so many such stories over the years…
Risk 4: they are incompetent at some of their jobs
I read some of the sourcing agents’ profiles on Upwork. They can do everything! Sourcing, procurement, project management, QC inspections, logistics management, negotiations with tough factory bosses, and so on and so forth.
And that makes sense. The more hours they work for you, the more money they earn.
I wrote before how different jobs should be handled by people with different profiles and talents.
Risk 5: they circumvent you and steal your business
Your contract employee knows pretty much everything about your business after a while: your sources and the prices you pay, your main customers, etc.
They might see a golden opportunity and circumvent you – buying from your suppliers, selling to your customers or to your competitors, and acting as the trading company. I have seen this situation so many times, I stopped counting!
One nasty story we heard of recently involved a contract employee who took rejected parts (purchased for a very low price from the manufacturer) and sold them on Aliexpress. This behavior damaged the brand reputation and infuriated the brand owner.
In some other cases, the buyer only realizes what happened after years have passed…
It is particularly likely with Upwork because, as I mentioned, their profiles will tend to attract your competitors too.
Remember, what you have been doing is illegal in China (as I wrote above), and you can’t sue your illegally-employed contractors…
Risk 6: when you set up your own operations, your ex-contract employees turn you to the authorities
If you have been paying them through Upwork for years, they can very easily track all the payments back to you. And the Chinese authorities will be happy to come and collect all the taxes you haven’t paid over the years.
In some extreme cases, it might become impossible (no visa), or very risky, for you to come to China.
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I can be even blunter because I have no dog in this fight because my law firm does not do any sourcing work.
Anyone who hires a sourcing agent in this way is taking MASSIVE risks. You cannot believe how often the China lawyers at my firm get phone calls or emails from people who have hired a bad sourcing agent and lost their product or their money or their ability to ever go to China. In some cases these people have essentially lost everything they worked so hard to create and in most cases there is nothing we can do to help them beyond suggesting how they do things differently the next time around.
Thanks Dan. Yes, this is also what we have seen. We tell buyers and they simply don’t believe us…
Interesting. We have almost the same topic scheduled for Friday this week.
Got to mention though that the Chinese government have not blocked Upwork.com. I bet they have “wait and see” approach to freelancer websites, as they may become a pretty big “employer” in China in the future.
Further, I wonder how many people, living in the US EU or even HK, got visas denied because they hired Chinese staff on Upwork – compared to the number of people got visas rejected (or worse) because their Chinese employees did something.
(Being based in China and using Upwork staff is another thing though, but that’s not what I am referring to here)
That’s a good point. It brings money in, you are right. And most upworkers are getting relatively small amounts of money (not representing a lot of individual income tax), I guess. Maybe that’s why Upwork hasn’t been blocked.
Yes, small amounts per freelancer perhaps, but I think the Chinese government is aware of how the future of work is changing. In 10 years, Upwork.com and domestic Chinese freelancing platforms will become crucial “employers”. The last thing they want is increased unemployment.