A firm understanding of China’s laws and regulations related to human resources and payroll management is essential for foreign investors who want to establish or are already running foreign-invested entities.
In principle, companies located anywhere in the world may hire a Chinese person to physically work in China. However, the labor contract will not be regulated by relevant Chinese legislation unless it is entered into via an invested entity on the Chinese mainland.
Hiring staff is one of the first key decisions a company will come across. Before employing significant numbers of employees, a company should first consider the challenges and employer obligations that may arise when opening or expanding a business.
An enterprise can hire staff through three basic options –
- Direct hiring;
- Labor dispatch; and
Representative offices (RO) in China cannot hire staff directly. Instead, Chinese staff must be seconded from an agency that will take the title of oﬃcial employer. This is because an RO is not a capitalized legal entity in China. An employee must have the right to claim against their employer, and an RO is not a suitable entity to file claims against. By forcing ROs to employ staff through an agency (which itself is a capitalized legal entity in China), the interests of the employee are thereby protected.
Other things to pay attention to include:
- Probation period: The range of legitimate grounds for dismissing an employee is considerably wider during their probation period. The employer may also pay only 80 percent of the employee’s contractual salary during this time.
- Working hour system: There are three main work hour systems-the standard work hour system, the comprehensive work hour system, and the non-fixed (flexible) work hour system. The latter two systems are considered ‘special work hour systems’, which require special approval and compliance requirements.
- Payment and tax: An employee’s salary package should include base salary, allowances, bonuses, non-monetary pension plans, and employer’s portion of social security contribution. The base salary should be stipulated in the labor contract. Employers are required to file individual income tax (IIT) for their employees on a monthly basis.
- Mandatory social security: China’s social security system is made up of five different kinds of insurance-pension, medical, maternity, work-related injury, and unemployment, plus one housing fund. Although both employer and employee are obligated to make contributions, it is the employer’s responsibility to correctly calculate and withhold the payments for both parties. Employer’s obligation to make adequate and timely contributions cannot be alleviated or exempted by reaching mutual agreement with employees. Foreign employees working in China have been required to participate in China’s social insurance scheme, but this obligation can be exempted if they come from countries that have social insurance exemption agreements with China.
- Leave during the first year of employment: Employees are not entitled to any mandatory minimum number of leave days during their first year of employment (ever), except those public holidays such as Chinese New Year around February, and the National Day celebrations in early October.
- Regional variation: National laws are often intentionally broad and vague, leaving a lot of room for local interpretation or additional legislation. Regulations and practices differ per city on issues such as minimum wage, work visa policy, social security contributions, and maternity leave.
- No at-will termination: Terminating employees in China is both diﬃcult and expensive. Employees may resign with 30 days’ notice after their probation period, but for employers, there are limited grounds for terminating an employee before their contract has come to an end.
- Non-fixed term contract after two fixed term contracts: After an employee finishes their second contract with your company, he or she generally shall be offered a lifetime contract as the third unless he or she wants another fixed term contract instead. Such non-fixed term contract can only be terminated if there are grounds for dismissal. Notably, some regions, such as Shanghai, offer more flexibility on this rule.
- Severance payments mandated by law: In practice, severance payments are even higher than the law prescribes, and can comprise a significant part of overall HR costs.
Labor dispatch is an important form of supplementary employment. Unlike direct hiring, labor dispatch has a triangular form of employment relations, in which a host company hires dispatch workers from a dispatch agency. While dispatched workers work for and are supervised by the host company, the dispatch agency, which usually have considerable experience and knowledge of hiring local workers, is the de facto legal entity that is responsible for the administrative management of the employees.
Thus, labor dispatch is regarded as an effective method to help businesses save hiring costs, avoid tedious administrative processes, and minimize risks and legal responsibilities for potential labor disputes.
Compared to direct hiring, labor dispatch is particularly preferred where:
- Business is not allowed to hire employee directly, either because the business is in the process of setup and hasn’t got its business license, or because the business is structured as a RO, which is legally required to recruit through dispatch agencies;
- Business priority is given to revenue-generating activities over any other concerns, especially when the business is small-size and at its very early stage; or
- There is an inconsistent workflow for businesses in seasonal and project-based industries.
Labor dispatch is only applicable for the following three types of positions:
- Temporary position: A position with a duration of no more than six months;
- Auxiliary position: A position that provides auxiliary services to the main or core business of the employer; and
- Replaceable position: A position that can be performed by a dispatched employee in place of a permanent employee during the period when such an employee is away from work for study, vacation or other reasons.
The applicable position type must be specified within the dispatch contract.
The Interim Regulations stipulate that the number of total dispatched employees used by an employer should not exceed 10 percent of its total number of employees, including regular employees and dispatched employees.
ROs of foreign enterprise are not subject to this restriction.
Outsourcing is another form of supplementary employment. It’s traditionally applied to tasks that require specialist skills, a high degree of confidentiality, or those that have a clear scope but incur major consequences if incorrectly implemented, such as IT development, accounting, tax filing, HR administration, and payroll processing.
With labor dispatch facing increasing scrutiny, many companies tend to use outsourcing as a substitute to dispatching, as another alternative to avoid directly hiring employees.
Outsourcing, like labor dispatch, can help businesses avoid tedious administrative processes and still match workforce needs. Under this model, the client enterprise has no direct employment relationship with the outsourcing employees.
However, outsourcing has its special characteristics:
- The outsourcing task usually require a high level of specialization, confidentiality, or defined scope;
- The outsourcing agreement usually does not refer to specific employees or performance criteria, but rather defines the work that needs be done;
- The outsourcing tasks usually need to be processed with special software licensed by the outsourcing company, but the client enterprise usually does not need to pay for the software license or the development work; and
- The outsourcing company usually retains a high-level of autonomy to direct whichever resources it feels are best for each project.
Hiring foreign employees
Hiring foreign employees implies hiring non-Chinese nationals who do not have permanent residency in China to engage in social labor work in exchange for labor remuneration. Citizens of Hong Kong, Macao, and Taiwan do not need to go through the administrative procedures for hiring foreign employees. They are under the same treatment as mainland Chinese in employment management.
To be eligible for working in China, foreigners should meet the following criteria:
- Attained 18 years of age, and are healthy;
- Possess the requisite professional skill and the corresponding work experience for the work;
- Have no criminal record;
- Has a confirmed employer in China; and
- Hold a valid passport or any other international travel document.
According to the Administrative Regulations on the Employment of Foreigners in China and the Guideline for Applying Foreigner’s Work Permit in China (Trial Implementation), the major administrative procedures for hiring foreign employees include:
- Applying for ‘Notification Letter of Foreigner’s Work Permit in China’;
- Applying for Z-visa or R-visa;
- Applying for ‘Foreigner’s Work Permit’; and
- Applying for ‘Residence Permit’.
Types of labor contracts
Labor contract in China is divided into three categories:
- Fixed-term Labor Contract;
- Non-fixed Term Contract; and
- Job Contract.
1) Fixed-term labor contract
The fixed-term contract creates an employer-employee relationship for a fixed length of time. It can be used for part-time or full-time work. Fixed-term contract is the most used norm of labor contract in employment relationship.
2) Non-fixed term contract
Non-fixed term contract refers to a norm of labor contract between employer and employee that has no fixed term. The non-fixed term contract effectively guarantees the employee job security until retirement age.
3) Job contract
A job contract is defined by the task or project the employee is to work on, not the length of time. This type of contract allows a company to hire a person to implement a specific project. Once the project is completed, the employment relationship comes to an end.
Mandatory clauses in labor contracts
According to relevant laws, the following clauses are mandatory to be included in the labor contracts:
- Name of the company, address, name of the legal representative or a key person-in-charge of the employer;
- Name of the employee together with a valid address and identification number;
- The term of the labor contract;
- Description of the job and the location where it is to be implemented;
- Working hours, rest periods, and off days;
- Salary details;
- Statement that the employer will contribute social insurance for the employee; and
- Labor protection, labor conditions and protection from occupational hazards.
Obligations for companies when hiring in China
Withholding and paying individual income tax
IIT in China is levied at a progressive rate, ranging from three percent for taxable incomes of RMB 36000 (approx. US$5200) or less, to 45 percent for taxable incomes greater than RMB 960,000 (approx.US$138,500) for resident taxpayers.
Employers are required to file individual income tax (IIT) for their employees on a monthly basis. An employee’s salary package includes base salary, allowances, bonuses, non-monetary pension plans, and employer’s part of social security contribution. It’s the employer’s responsibility to accurately calculate and withhold individual income tax (IIT) on employment income, including but not limited to wages and salaries, bonuses, stock options, and allowances, before paying a net amount to its employee.
Tax payment & deadline
The employer is required to make IIT filing within the first 15 days of the month following the tax withholding either through IIT system online or submit a Filing Form for Individual Income Tax Withholding to the Tax Bureau in charge.
When the employer pays a taxpayer for the first time, the employer must complete an Individual Income Tax Basic Information Sheet (Form A) based on basic information such as tax ID provided by the taxpayer and submit it to the tax authorities at the time of tax filing in the following month.
China’s social security system is comprised of six different kinds of insurance–
- Pension insurance;
- Unemployment insurance;
- Medical insurance;
- Work-related injury insurance;
- Maternity insurance; and
- Housing fund.
Although both employer and employee are obligated to make contributions, it is generally the employer’s responsibility to correctly calculate and withhold the payments for both parties.