Most employment risk in an AI company lies not in the contract template but in who actually manages the people. Under an identical outsourcing contract, a court may still find a de facto employment relationship where the company schedules on-site personnel, records their attendance, appraises them and issues them staff badges; and where a non-compete restriction for an algorithmic role has been signed but no compensation is paid, the clause is equally unenforceable. Employment compliance is not a matter of writing longer contracts but of ensuring that three relationships are each properly constituted: employment, dispatch and outsourcing.
Contract design for algorithmic roles
The distinctive feature of an algorithmic role is the ownership of outputs and the mobility of the individual. Four matters must be addressed in the contract.
First, ownership of work-made-for-hire. Model architecture, training code, tuning records and data recipes should be specified as work made in the course of employment and owned by the company; code repositories, commit records and project documentation should be retained as evidence for any future claim. A single line in the employment contract stating that “work product belongs to the company” will often prove insufficient once a core employee has left.
Second, the relationship between confidentiality and non-compete. A confidentiality obligation may be imposed generally, whereas a non-compete restriction may be imposed only on senior management, senior technical personnel and other personnel under a confidentiality obligation, for a period not exceeding two years, with monthly compensation. Where every employee is brought within the scope of the restriction, the clause is readily held invalid.
Third, service period and training. Where an employee is sent on external training at the company’s expense, a service period and liquidated damages may be agreed, but the damages may not exceed the cost of training and must be apportioned to the unperformed portion.
Fourth, working time. Sustained overtime is normal in R&D roles; where the standard working-time system applies, overtime pay is due. An application for the non-fixed working-time system or the comprehensive working-time system requires approval by the human resources and social security authority; a statement in the company handbook that working hours are “flexible” does not discharge the obligation to pay.
The dividing line between outsourcing and labour dispatch
Labour dispatch is governed by the Interim Provisions on Labour Dispatch. The proportion of dispatched workers may not exceed 10% of the total workforce, and dispatch may be used only in temporary, auxiliary or substitute positions. Where the proportion is exceeded or dispatch is used for core positions, there is a risk of a finding of unlawfulness.
Outsourcing is different: what the client purchases is a result, not labour. Whether an arrangement is genuine outsourcing or a disguise is usually tested against four points: who issues work instructions; who is responsible for attendance and performance; who supplies tools and premises; and whether fees are settled per head or per result. Where most of these point to direct management by the client, a de facto employment relationship or unlawful dispatch may be found.
The common scenario for an AI company is the outsourcing of data annotation and model evaluation. Such roles readily produce on-site presence, shift scheduling and per-head settlement, which fall precisely within the risk zone. A workable approach is to settle by batch against acceptance criteria, to leave site management to the outsourcer, and for the client to deal only with the project manager; access by outsourced personnel to data should at the same time be segregated by permission and logged.
Flexible work and interns
Flexible work is not a single legal relationship but an umbrella term for several. Consultancy settled per engagement is a service relationship, requiring attention to withholding of individual income tax and invoicing; under a platform crowd-sourcing model, the allocation of responsibility among platform, client and individual must be set out in the agreement.
An intern should sign an internship agreement rather than an employment contract, specifying the term, remuneration, accident insurance and confidentiality. Where the individual continues to be engaged after graduation, the relationship should promptly be converted to employment; otherwise double wages for the period of engagement without a written contract become payable.
Handover at departure
Departure is the point at which risk concentrates. What must be completed is the recovery of accounts and devices, a logged handover of code and data, written notice of the non-compete obligation with confirmation of when compensation begins, and a record of the exit interview. Non-compete compensation should be paid monthly after departure; where payment ceases for more than three months, the worker may apply to have the restriction released.
Common disputes and their handling
Four categories account for most disputes: double wages for the absence of a written contract; compensation for unlawful termination; proof of overtime; and non-compete compensation and liquidated damages. Procedurally, most claims must first go to labour arbitration. Where the burden of proof rests on the employer, attendance records, payroll records and evidence of publication of the internal rules are all indispensable.
Q: May a non-compete restriction be imposed on all algorithmic roles?
A: No. It may be imposed only on senior management, senior technical personnel and others under a confidentiality obligation, and monthly compensation must be paid. A scope that is too broad will be held invalid.
Q: If outsourced personnel work on site for a long period, might they be treated as our employees?
A: There is a risk. Where the company directly schedules, records attendance and appraises them, and settles per head, a de facto employment relationship may be found. Settlement should be by result, with site management left to the outsourcer.
Q: May non-compete compensation be withheld?
A: No. Where compensation is not paid monthly, the worker may apply to have the restriction released, and any partial payment may also affect enforcement of the liquidated damages.
This article is prepared on the basis of the Labour Contract Law, the Interim Provisions on Labour Dispatch, the Work Injury Insurance Regulations and the relevant provisions of Judicial Interpretation (II) on Labour Disputes, in force since September 2025. For assistance with a review of an employment contract system or with the conduct of a labour dispute, please contact Geason Law Offices.