You want to hire an employee or a whole team in China, but you don’t have a company in China nor are you excited at the prospect of having to set up a subsidiary in China (with all the paperwork, time & liabilities involved). In this article, we provide clear solutions on how to hire employees in China without a legal entity established in the country.
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The Chinese market is a large & booming playground that is attractive to many foreign companies. Whether you’re a company that just wants to get a foot in the door or are quickly moving towards full expansion, having a foothold & hiring in China is a smart choice. Speaking the language, understanding the culture, having local knowledge, these are all good reasons why Chinese employees can be an asset to your company.
With the advancement of communication technologies over the past few years, it has become much easier to find & employ remote employees for your company with a few taps and clicks on your computer. However, despite all these advancements in technology, there are rules and regulations that still apply whenever a company would like to hire employees in China.
Requirements to Hire Employees in China
The Government of the People’s Republic of China requires all employees to be hired by a legal entity.
Filing staff employment records
Filing staff employment records is a crucial aspect of hiring employees in China. The employer is required to keep detailed records of all employees, including their personal information, employment contract, and work permit. These records must be submitted to the local labor bureau within 30 days of hiring the employee.
The employer must also keep track of the employee’s work performance, training, and other relevant details. These records can be used as evidence in case of any disputes or legal issues that may arise between the employer and the employee.
It is important to note that the Chinese government takes labor laws very seriously and failure to comply with the regulations can lead to penalties and legal consequences. Therefore, it is advisable for employers to keep accurate and up-to-date records of their employees to avoid any legal issues.
In conclusion, filing staff employment records is a mandatory requirement for hiring employees in China. Employers should take this requirement seriously and ensure that all relevant information is submitted to the local labor bureau on time.
Maintaining employees’ “personnel files”
These are unique Chinese documents that record the complete academic and employment history of an employee, which transfers from employer to employer when the employee changes jobs.
Maintaining employees’ “personnel files” is a key requirement in China’s employment regulations. These files are unique to Chinese employment law and are different from traditional personnel files in other countries. They contain a comprehensive record of an employee’s academic and employment history, including previous employers, job titles, salaries, and other relevant details.
These personnel files are maintained by the employer and are considered to be the property of the employee. When an employee changes jobs, the personnel file is transferred to the new employer, ensuring continuity of information. This allows employers to make informed decisions about potential employees and also protects the rights of the employee.
It is important for employers to keep these personnel files up-to-date and accurate. Employers must ensure that all information is entered correctly, and any changes in employment status, such as promotions or transfers, are reflected in the file.
In short, maintaining employees’ “personnel files” is a crucial aspect of employment in China. Employers must ensure that these files are accurate and up-to-date, as they are used by both employers and employees to make important decisions. Failure to comply with the regulations can result in penalties and legal consequences, so it is important for employers to take this requirement seriously.
This can be divided into four parts:
- Base Pay – Paid monthly. In China, it is common to have a 13-month scheme, with the additional month being issued during the Spring Festival, also know as Chinese New Year. There is a shortage of managerial ability in China, and so competitive salaries are required to attract and retain good employees
- Incentives – Performance-based payment is widely welcomed across China, especially in cities like Shanghai, Guangzhou, and Beijing. Companies often get creative with how to incentivize employees, and team performance plans, sales bonus plans, and special recognition awards are common
- Allowances – The ways Chinese employees prefer to be compensated often vary from western employees. Many Chinese prefer to receive cash allowances for transportation, meals, clothing, and childcare over a higher salary
- Benefits – Mandatory benefits contribution by both employees and employers are required by Chinese Labor Law and make up a significant portion of an employee’s total compensation. For more information on the mandatory benefits requirements, visit this article
Paying employees’ individual income tax
Local Chinese employees are taxed based on the balance of their monthly income once three items have been subtracted: the employee’s social benefits contribution, a standard RMB 5,000 deduction, and any special additional deductions in income allowed under Chinese law.
Then, a seven-grade progressive rate is applied. Here is a table listing the tax brackets, listed in terms of year-long income.
The employer withholds the full tax amount and submits it to the appropriate Chinese authorities on the employees’ behalf.
The above requirements for legal entities in China are further complicated because the company must work with several different government bureaus and deal with difficult paperwork. Instead of going through this tedious process, foreign companies often choose to use local HR providers such as HROne to outsource all HR and administrative requirements.
Best Way to Hire Employees in China Without a Company
Typically, the Chinese government imposes stringent regulations on foreign companies that intend to hire workers in China. As a foreign firm seeking to engage people in China for specific undertakings or even regular employment, it is unlawful to directly recruit employees.
If you are a foreign company wishing to hire people in China for certain projects or even as a regular employee for your company, it is illegal to directly hire the employee yourself.
According to Chinese legislation, only companies established in China are eligible to hire employees. Consequently, when an individual offers professional services to your firm and performs duties akin to those of an employee, they are considered your employee under Chinese law. As such, you are required to adhere to all the necessary provisions that govern the employment relationship.
The best option is to hire Chinese employees from a China-based staffing agency.
There are companies based in China that can provide Employment Solutions / PEO (Professional Employment Organization) to foreign companies in need of hiring for specific types of short and long-term projects, tasks, and jobs.
Employment solutions enable foreign employers to hire Chinese employees in China without a company established; and, therefore, outsourcing all employer liabilities; from the signature of a local compliant employment contract to monthly payroll, income taxation, mandatory benefits (social security), and visa procedures (applicable to foreign employees).
HROne is a Chinese PEO and Employer of Record that provides employee leasing services such as HR and payroll related services to clients without a legal entity established in China. HROne is a fully licensed employment services or employee leasing provider in China.
Presently, the most favorable approach for foreign companies to hire employees in China without having a local company is through the use of PEO/employment solutions. This option allows a third-party company, which has a registered entity in China, to hire employees on behalf of the foreign firm.
The use of PEOs provides various benefits, including compliance with Chinese laws, regulations, and policies concerning employment contracts, payroll, and taxes. It also offers convenience as it takes care of various aspects of employment, including onboarding, payroll, benefits, and compliance, thus saving time and resources. Moreover, financially, using a PEO is often more cost-effective than setting up a local entity in China, making it an ideal choice for foreign firms seeking to hire employees in China.
There are a few other options available to work around the legalities, but they all come with their pros and cons. Here are some of them:
Hiring Through a Chinese Partner Company
If you already have an employee in China but your employment relationship is not legally recognized by the government one option is to have the employee hired by a Chinese company. Your company can pay the Chinese company the equivalent of the Chinese employee’s wages, taxes, and administrative fees.
By having the employee hired by a Chinese company, the employment relationship can be legally recognized by the Chinese government, ensuring compliance with local labor laws.
In this arrangement, the foreign company pays the Chinese company the equivalent of the Chinese employee’s wages, taxes, and administrative fees. The Chinese company then hires the employee and handles all the legal and administrative requirements, including payroll, social security contributions, and filing of employment records.
While this approach can be more expensive for the foreign company, it provides a legal and compliant way to employ staff in China. It also offers the benefit of having a local partner who can provide guidance on local business practices and regulations.
However, it is important to ensure that the Chinese partner company is reputable and trustworthy, as the foreign company is entrusting them with sensitive employment and financial information.
In conclusion, hiring through a Chinese partner company is a viable option for foreign companies looking to employ staff in China. It is important to ensure that the partner company is trustworthy and compliant with local laws and regulations.
Cons: The legality of this approach raises concerns as it may pose questions with the Chinese government if the employee is not performing any work for the Chinese employer. Moreover, many who have attempted this method have faced failures in the long run, and it is often viewed as too risky for the Chinese employer as it could potentially jeopardize their company’s reputation and legal status. Unless the Chinese employer is a certified payroll and employment organization with a proper license, this solution should be avoided.
Hiring Someone Tied to a Local Company
Another common practice that many do from a few years ago is to hire someone who is already hired by a local company in China. However, this practice has multiple negative loopholes.
Cons: The use of the approach where a foreign employer transfers funds to their Chinese counterpart in foreign currency can result in a complicated situation for both parties. The regular foreign currency deposits made to the Chinese party’s bank account can attract government scrutiny as it may raise questions about the absence of tax payments. Thus, this method is not an easy solution for foreign companies seeking to enter the Chinese market.
Moreover, there are several other challenges to consider with this approach. One of the main issues is the potential conflict of interest that arises when an employee is working for two companies simultaneously. The local company may not approve of their employee working for a foreign company and could create issues for the employee and the foreign company. The employee’s legal status may also not be clear, and there may be issues with obtaining the necessary work permits and visas, leading to potential legal and regulatory issues for both parties.
Furthermore, this approach’s use may be limited by the Chinese government’s increasing scrutiny of foreign companies operating within its borders. As the government tightens its regulations and enforcement, foreign companies must be cautious about their activities in China. The lack of legal clarity in this approach further complicates the situation for foreign companies seeking to enter the Chinese market.
Considering these challenges, foreign companies are turning to other options to enter the Chinese market. They are increasingly partnering with Chinese companies or establishing a legal presence in China to operate within the legal framework and ensure compliance with regulations. While this approach may have been popular in the past, it is becoming less common due to the potential risks and lack of legal clarity.
Employees Forming their Own Domestic Company
The third alternative is recommended from a legal standpoint. You can request your potential employee or employees to form their own domestic Chinese company. Once created, you can simply contract out to the company they created for the services that you need.
Once the domestic Chinese company is established, the foreign company can contract out to the company for the services they require, such as consulting or project management. This approach provides a clear legal structure for the employment relationship and ensures compliance with local labor laws and regulations.
However, it is important to ensure that the domestic Chinese company is established correctly and complies with all relevant regulations, such as business registration and taxation requirements.
Cons: This option requires a lot of work on the employee’s side. Because of this, despite it being a great option in terms of legality, it is not a very popular method with most companies. Also, another downside is that there is now an independent Chinese company out there that can directly offer business to your company’s clients (or competitors) instead of them going through you.
Things You Need to Know Before Hiring Employees in China
Understand employment and hiring costs in China
In China, different cities, and provinces have different policies income tax & mandatory benefits contribution. These kind of policies are continuously changing, making it difficult for foreign investors to ensure legal compliance of their employee’s payroll calculation, mandatory benefits and tax contributions. Check out this article to know more about how an employees’ salary is calculated in China.
Holidays and annual leaves in China
Understanding the holidays and leaves your employee/s are entitled to in China is a must for employers. If you would like to arrange for employees to work during the national holidays, you might need to pay extra to compensate the employees. In this article about annual leaves in China, you can find a more detailed explanation.
Choose a licensed HR service provider in China
In China, only licensed service providers can provide PEO service/employment service/talent dispatch, and payroll service in China. When looking for service providers in China, it is extremely important (a must) to check if the vendor holds two special licenses to legally provide this service in China. Link to licenses here.
The first license is called the Talent Dispatch License, which allows the agency to legally provide PEO service/employment service/talent dispatch in China.
The second license is called HR Agency Service Provider License, which allows the agency to legally provide recruitment, payroll, benefits administration service in China.
Understanding termination practices in China
Before hiring employees, it is also essential to understand the termination practices in China. Foreign investors hiring in China should all be aware of the notice periods they need to issue when they want to terminate the employment relationship. Check out this article about employment termination in China for details regarding notice periods and severance payment, situations the employer is able to terminate employees, etc.
Cities Where You Can Hire Employees in China
In China, there are many cities where you can hire employees for your company. Listed below are the most popular cities where we can hire employees on your behalf (please keep in mind that these are some of the cities, contact us for more information about cities not listed here):
- Tier 1 Cities
- Tier 2 Cities
- Tier 3 Cities
What is HROne?
HROne is a non-state-owned foreign enterprise service firm located in Shanghai, China. HROne enables foreign companies to take their business to further heights in China through employment solutions. We are the top-choice & one-stop shop for Human Resources for foreign companies and businesses looking to establish and operate business activities in China.
Why wait? Reach out to us today to begin your entry into the booming Chinese market and start to hire employees in China!