Although it is often a challenge to find the right talent, China is a huge market for job opportunities with a colossal local workforce. Hiring employees is certainly an important aspect for foreign companies to learn about when deciding to enter the booming Chinese market.
More and more foreign-invested enterprises are basing their success in China on local employees due to their rich understanding of the regional market and business environment.
Both when hiring local professionals directly or sending their own overseas managers to China, foreign investors should be aware of the right way to hire staff in China, where employment requirements begin with the signing of a labour contract.
The Employment Contract
Under the PRC’s Labour Law, all companies are required to sign a written employment contract with their employees.
An employer gives effect to a labour relationship through the use of its company seal, which must be placed on the contract.
Excluding part-time work, if an activity is practised without a written contract of employment after a period of more than one month but less than one year from the date of employment, the employee has the right to demand double their wage. For the very same reason, all employment relationships should be terminated in a timely manner with written proof in order to avoid any allegations between the parties that it still exists.
It is important to remember that representative offices (ROs), as non-independent legal entities in China, must be engaged with a licensed labour dispatching agency to administrate these contracts with Chinese employees.
Salary Package and Benefits
Wages have dramatically changed in China as its economy has shifted from being ‘the world’s factory’ into a hub for advanced manufacturing, high technology and the service industry.
For foreign investors, taking advantage of the rapidly growing Chinese market with fresh graduates and specialised professionals has become more of an appealing prospect than the cheap labour that previously drove export flows.
As the economy continues to grow and expand in further sectors, so too does the cost of living in China’s major cities, reflecting the increase in wages. The following is a review of the main components of the monetary aspect of employment contracts:
The base salary is the fixed amount to be paid per month that must be indicated in the labour contract.
Although it is very common, a 13th-month salary payment is not required by law and it depends on the commitment between the employer and the employee stipulated in advance. 13th-month salary and bonus payments usually coincide with the Chinese New Year period or the company’s audited results for MNCs.
Usually applied in commercial positions such as salespeople, brokers and dealers, this option has long been used to mitigate the impact of taxation on performances that constantly fluctuate.
Local regulations provide for multiple kinds of commission schemes although the most common ones are a base salary plus commission and a purely commission-based salary, which is used for entirely performance-based positions.
Based on yearly business performance, a one-time annual bonus is expected by employees at around the end of the year. Failure to provide one could be interpreted as a hint that they should find somewhere else to work.
Following the Notice on Convergence Issues Under Preferential Policies, one-off lump-sum year-end bonus and stock options plans for Chinese and foreign personnel do not need to be included in comprehensive income calculations until 31 December 2021, unless taxpayers wish to do so.
Starting from January 2022, the new regime will be applicable to all income and any separation between stock options, bonuses and salaries will be fiscally neutral with no tax-saving effects.
Year-end bonuses will be thus subject to IIT (Individual Income Tax) following the below formula:
Tax payable on year-end bonus = Taxable annual bonus amount * Applicable tax rate – Quick deduction
Allowances can be used to cover the charges for employees’ expenses partially or entirely, such as their transportation, housing, daily meals or phone bills.
Foreign employees used to enjoy tax-exempted allowances on selected categories of expenses, with the only limitation being the actual existence of those costs and the reasonableness of their total amount. These categories included:
- Housing subsidies, food allowances, moving fees and laundry fees of foreign individuals in a non-cash form or in the form of being reimbursed for what they spend.
- Travelling allowances at home and abroad of foreign individuals in accordance with rational standards.
- Visiting relatives' expenses, language training expenses and children education expenses of foreign individuals, subject to being considered reasonable through examination and approval by local tax authorities.
After the reform and until 31 December 2021, foreign employees can still choose between tax-free allowances and new special deductions. However, a forced transition to special deductions shall take place beginning on 1 January 2022.
China’s Social Security System
According to China’s Labour Law, social benefits must be contributed by both employers and employees in China.
The employees’ part of the contribution is deducted from their gross salary directly and added to their personal pension and medical and unemployment insurance accounts, while the contribution by the employer is given to a public social security account.
Starting from 2020, maternity insurance has been merged with general medical insurance given the complementary nature of the institutions relating to care.
When looking at the impact of contributions versus the total company cost of a salary package, each Chinese province has its own calculation base, while the ratio of the work injury insurance fund depends on the industry each employee belongs to.
The table below is an example of a white-collar worker’s social contributions in Shanghai from 2020 to 30 June 2021:
|Medical and maternity insurance
|Work injury insurance
|0.16% - 1.52%
|5% - 7%
|5% - 7%
|Completed years of service in the PRC
|Statutory annual leave
|Less than 1 year
|1 to 9 years
|10 to 19 years
|More than 20 years
Individual Income Tax (IIT)
Unlike some western economies where workers and taxpayers file their own individual taxes, in China, the employer acts as a withholding agent and pays individual income taxes on behalf of their employees on a monthly basis, as per the rates shown below:
|36,000 - 144,000
|144,001 - 300,000
|300,001 - 420,000
|420,001 - 660,000
|660,001 - 960,000
As of 1 January 2019, Chinese authorities also announced six new additional deductions to ease the burden on local taxpayers and end a situation in which similar benefits were only made available to foreign talents:
- Children’s education
- Adult education
- Medical treatments for chronic illnesses
- Housing loan interest
- Home rental
- Elderly care
With the introduction of a new withholding method in 2019, personal tax is now deducted based on the cumulative annual income of each individual taxpayer.
In this way, the actual net salary that employees receive in the first month of the year will always be higher than the last, in an approach that grants more spending power during Chinese New Year:
Taxable Income = Monthly Gross Income – Statutory Deductions – Additional Deductions – Social Benefits including Housing Fund (Employee’s Part)
IIT = Taxable Income x Tax Rate – Quick Deduction
Net Salary = Monthly Gross Income – Social Benefits Including Housing Fund (Employee’s Part) – IIT
Service Relationships Termination
When a labour relationship comes to an end, under most circumstances either of the proposing parties will need to issue an official statement with one month’s prior notice unless agreed otherwise in the employment contracts. Contract dissolutions are usually classified into two groups:
1. Expiration of the duration of the employment contract
2. Before the termination date stated in the employment contract:
- Mutual: when both the employer and the employee reach an amicable termination decision by committing to a closing agreement via a negotiation.
- Unilateral: when either of the two decide to break the terms (fixed or open) of the contract notwithstanding a negotiated approach.
An employer is always entitled to add a probation period in the employment contract to examine whether the worker is qualified for the job. The duration of the contract is the element that dictates how long the probation can last:
|3 months to a day before 1 year
|1 year to a day before 3 years
|3 years or more
In the event an employee wishes to unilaterally terminate the contract during their probation period, three days of written notice is sufficient. During probation, and notwithstanding the contract’s formulation, it is still an employer’s legal obligation to properly declare and contribute to an employee’s social insurance and housing fund.
In all circumstances, with the only exception of an employee’s voluntary resignation, when the employment contract is terminated, the employer has to liquidate a severance compensation proportional to the years of service in the company.
Although aiming for simplification, China’s labour framework and the underlying complications definitely impact foreign investments in the Chinese economy. Hiring employees in China is a delicate and complex process, especially for foreign SMEs that rarely consider providing a legal or HR in-house team of consultants, particularly in the start-up phase.
China's laws place a significant burden on employers with regard to calculating and deducting social housing fund contributions, together with individual income tax payables on behalf of their employee(s).
Not only from a cost perspective but also from a human resources perspective, management of personnel can be one of the most difficult challenges, especially for foreign enterprises that have to dig deep into the technicalities of the strict Labour Law regulations while dealing with major cultural differences.
It’s always recommended to review these issues of compliance with the help of qualified and expert consultants who can take care of the most difficult aspects and merge them with the company’s general terms applied worldwide, ensuring compliance with local regulations and minimising labour risks.
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