By HROne, Payroll & Employment Solutions in Greater China
The employment of staff offers fundamental challenges that all foreign companies or Representative Offices entering China need to master. What rules and regulations apply in creating labor contracts? How do employees and employers pay social benefits and taxes? What differences exist between employing locals and foreigners? Since Representative Offices or foreign companies that have no legal entity in China aren’t allowed to hire local staff directly, how can they employ staff? Can HR outsourcing help solve these issues? These questions, and more, tax companies as they begin the hiring process.
Apart from the usual employment requirements, such as signing contracts with employees, meeting salary standards, and paying salaries on schedule, employers in China must also:
- File their staff employment and dismissal records with relevant government bureaus
- Maintain an employee’s “personnel file” – a unique Chinese document that records all of the employee’s academic and employment history – which transfers from one employer to the next when the employee changes jobs
- Withhold and pay individual income tax on behalf of their employees
- Make monthly contributions to their employees’ social benefits and housing funds
Most of the above processes are complicated by the involvement of several government bureaus, which require tedious paperwork. Foreign companies starting operations in China, and unfamiliar with the system, may choose to rely on HR service providers or HR specialists to give them guidance.
The Employment Contract
Under the People’s Republic of China’s (PRC) Labor Law, all companies are required to sign employment contracts with their employees. While limited liability companies are allowed to sign employment contracts directly with local PRC staff, Representative Offices or foreign companies with no legal entity in China must engage licensed HR service providers in the administration of these contacts. While there is no standard contract form, the agreement should include:
- Term of contract & probation period
- Job title and description
- Labor protection and working conditions
- Compensation
- Termination conditions
- Breach of contract provisions & disciplinary rules
- Other provisions such as Training Bond, Non-disclosure agreement, and Non-compete agreement
Note that employers can choose to structure employment as “international secondment.” In the case of international secondment arrangements, employees can have their employment structured in a home country. A Chinese employment contact is not necessary in this case, although local HRs often practically do sign them.
The Employee Personnel File & Employment Booklet
Every employee in China has a personnel file, as discussed above, as well as a proof of employment history. Unlike the personnel file, regulations on the proof of employment history vary across regions. In Shanghai, employers must maintain the employees’ employment booklet during the employment period. Foreign companies must engage a local labor agency to maintain these files.
Basics of Compensation
Compensation is typically divided into four elements: base pay, incentives/bonuses, allowances and benefits.
- Base Salary is paid monthly and varies from 12-14 months. A 13-months pay scheme is common in China, with the additional month’s pay issued during the Spring Festival month. Due to the shortage of managerial talent, competitive salaries are required to attract and retain good employees.
- Incentive Pay, tied to individual performance, can be paid monthly, quarterly, or annually. The concept of performance-based variable pay is now welcomed by many companies and Chinese employees, especially within China’s first tier cities – Shanghai, Beijing, and Guangzhou. Current incentives include: individual performance plans, team performance plans, cash profit sharing plans (payouts based on organizational profitability), comprehensive performance plans (awards based on the performance of the company, team and individuals), sales bonus plans, sales commissions, and special recognition awards.
- Employee Allowances are a somewhat unique and very important form of compensation in China. Although foreign invested companies are not obliged to provide them, cash allowances are often valued higher than salaries by employees, and include transportation, meals, clothing, and child care allowances.
- Benefits fall into two categories: mandatory and supplemental. Mandatory benefits contributions by both employers and employees are stipulated by the China Labor Law and comprise a significant portion of the total compensation. The chart below details the mandatory benefits plan designed for Shanghai residents in 2018, using a gross salary minimum base of RMB 4279 and maximum cap of RMB 21396. Note that each city has its own contribution base and percentage, updated annually.
| Mandatory Social Benefits | By Employer | By Employee |
| Pension Insurance | 20% | 8% |
| Unemployment Insurance | .5% | .5% |
| Medical Insurance | 9.5% | 2% |
| Workplace Insurance | .2-1.9% | – |
| Maternity Insurance | 1% | – |
| Public Housing Fund | 7% | 7% |
| Total | 38.2%-39.9% | 17.5% |
Individual Income Tax
Local Chinese employees are taxed on the basis of the balance of their monthly income after deducting their social benefits contribution, a standard deduction of RMB 3,500, and then applying the seven-grade progressive rate as shown in the table below. The employer withholds the full tax amount and submits it to the appropriate Chinese authorities on behalf of its employees.
Taxable Income = Gross Salary – Social Benefits – 3,500
IIT = Taxable Income x Tax Rate – Quick Deduction
Net Salary = Gross Salary – Social Benefits – IIT
| Taxable Income | Tax Rate (%) | Quick Deduction |
| <1,500 | 3 | 0 |
| 1,500<S<4,500 | 10 | 105 |
| 4,500<S<9,000 | 20 | 555 |
| 9,000<S<35,000 | 25 | 1,005 |
| 35,000<S<55,000 | 30 | 2,755 |
| 55,000<S<80,000 | 35 | 5,505 |
| >80,000 | 45 | 13,505 |
Employment Relationship Termination
China’s Labor Law requires companies to pay severance unless the employer dismisses a staff member with a specifically defined cause, such as the employee failing to satisfy the conditions of the new position under the probationary period, seriously violating company regulations, or committing a civil crime. In other situations, the employer must give 30 days’ notice to the employee and/or pay compensations stipulated by the provincial governments. Severance pay is generally equivalent to one month’s salary per year of service. The labor law also requires companies to consult with the appropriate labor union if they wish to reduce their workforce.
Turning to HR Outsourcing services
Because HR business processes are often resource-intensive and time-consuming, many companies are now choosing HR outsourcing as a cost-effective solution. Generally, HR outsourcing services in China occupy one of two categories: HR Agency Services and Talent Dispatch Services.
- HR Agency Services encompass basic HR administration, including employment and dismissal, payroll and individual income tax administration, social insurance. housing fund administration, and personnel file management.
- Talent Dispatching Services assist Representative Offices or foreign companies with no legal entity in China to locate licensed HR service providers that can hire employees and sign labor contracts. HR service providers can also provide all HR Agency Services mentioned above. For Representative Offices or foreign companies with no legal entity in China, talent dispatching is the only avenue to legally recruit local employees.
Established in 2005, HROne is one of the few non-state-owned foreign enterprises service companies in China. Through their headquarters in Shanghai, China and branches in Hong Kong, Jiangsu, Beijing and the USA they are able to provide clients with professional and efficient service both at an international and local level.
