Understanding China's laws and regulations regarding human resources and payroll management is crucial for foreign investors establishing or operating foreign-invested entities in the country.
In general, companies from anywhere in the world can employ a Chinese national to work physically within China. However, the employment contract will only be governed by Chinese legislation if it is established through an invested entity on the Chinese mainland.
Hiring Options
One of the first significant decisions a company must make is how to hire staff. Before bringing on a large number of employees, it's important to consider the challenges and obligations of being an employer in China.
There are three primary methods for hiring staff:
Direct hiring
Labour dispatch
Outsourcing
Direct Hiring
Representative offices (ROs) in China cannot directly hire staff. Instead, they must use an agency to second Chinese employees, as ROs are not capitalised legal entities. This ensures that employees can make claims against a suitable legal entity, protecting their rights.
Important aspects of direct hiring include:
Probation period:Â Employers have broader grounds for dismissing employees during probation and may pay only 80% of the contractual salary.
Working hour systems:Â There are three main types: standard, comprehensive, and non-fixed (flexible) work hour systems. The latter two require special approval.
Payment and tax:Â The salary package must include base salary, allowances, bonuses, non-monetary pension plans, and social security contributions. Employers must file individual income tax (IIT) for their employees monthly.
Mandatory social security: Both employers and employees must contribute to China’s social security system, covering pension, medical, maternity, work-related injury, unemployment insurance, and a housing fund. Foreign employees must participate unless exempted by an international agreement.
Leave during the first year of employment:Â Employees are not entitled to mandatory leave in their first year, apart from public holidays like Chinese New Year and National Day.
Regional variation:Â Local interpretation of national laws can result in differences across cities in areas like minimum wage, work visa policies, social security contributions, and maternity leave.
No at-will termination:Â Terminating employees is challenging and costly for employers. Employees can resign with 30 days' notice after their probation period, but employers have limited grounds to end a contract early.
Non-fixed term contract after two fixed-term contracts:Â After two fixed-term contracts, employees are generally offered a lifetime contract unless they prefer another fixed term. Some regions, like Shanghai, may offer more flexibility.
Severance payments:Â Severance payments can be substantial, often exceeding legal requirements.
Labour Dispatch
Labour dispatch is a form of employment where a host company hires workers through a dispatch agency. The agency manages the administrative aspects and acts as the legal employer. This approach can reduce hiring costs, streamline administrative processes, and minimise legal risks.
Labour dispatch is ideal when:
The business cannot directly hire employees, such as during setup or when structured as an RO.
The focus is on revenue-generating activities over administrative concerns.
The business operates in industries with seasonal or project-based workflows.
There are restrictions on the use of dispatched employees, limited to temporary, auxiliary, or replaceable positions. Dispatched employees should not exceed 10% of the total workforce, although ROs of foreign enterprises are exempt from this rule.
Outsourcing
Outsourcing involves contracting out specific tasks, usually those requiring specialised skills or confidentiality, such as IT development, accounting, tax filing, HR administration, and payroll processing. This method is increasingly used as an alternative to labour dispatch due to regulatory scrutiny.
Key characteristics of outsourcing include:
The task requires specialisation, confidentiality, or a clearly defined scope.
The agreement focuses on the work to be done rather than specific employees.
The outsourcing company often uses specialised software for the task.
The outsourcing company retains control over the resources used for each project.
Hiring Foreign Employees
Hiring foreign employees means employing non-Chinese nationals who do not have permanent residency in China. Citizens of Hong Kong, Macao, and Taiwan are treated the same as mainland Chinese workers and do not need to follow the procedures for hiring foreign employees.
Foreigners must meet several criteria to work in China, including being at least 18 years old, possessing the necessary skills and experience, having no criminal record, and securing a valid work permit and visa. The main administrative steps involve obtaining a ‘Notification Letter of Foreigner’s Work Permit’, applying for a visa, securing the work permit, and obtaining a residence permit.
Types of Labour Contracts
Labour contracts in China fall into three categories:
Fixed-term contract:Â The most common type, used for a set period.
Non-fixed term contract:Â Offers job security until retirement.
Job contract:Â Tied to a specific project, ending when the project is completed.
Mandatory clauses in these contracts include company and employee details, contract terms, job description and location, working hours, salary, social insurance contributions, and conditions of employment.
Employer Obligations
Employers in China must withhold and pay individual income tax (IIT) for their employees, with rates ranging from 3% to 45% based on income. IIT must be filed monthly, and employers are responsible for calculating and withholding the tax.
China’s social security system comprises six types of insurance: pension, unemployment, medical, work-related injury, maternity, and housing fund. Employers must ensure correct and timely contributions for both themselves and their employees.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
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