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.
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.
The Government of the People’s Republic of China requires all employees to be hired by a legal entity.
Filing staff employment records
These, along with staff dismissal records must be filed with the appropriate government bureaus.
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.
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.
In general, the Chinese government has strict rules when it comes to foreign companies employing workers based in China.
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.
As per Chinese law, only companies based in China may be employers. In the eyes of Chinese law, when a person provides professional services for you or your company and performs employment-like services, that person is your employee. You must comply with everything that is required to fulfill 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 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.
As of today, using PEO / employment solutions represent the best option to hire employees in China without a local company. Whether it be in terms of legality, convenience, or financials, PEO is right for you!
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.
Cons: There are problems in the legality of this method because if the employee isn’t doing any work for the Chinese employer, this can raise legal questions with the Chinese government. Many of those who have used this method have failed in the long run and it is often deemed too risky on the side of the Chinese employer as this can put their own company’s reputation and legal standing at risk. Unless the Chinese employer in question is a certified payroll & employment organization licensed company, this solution is a no-go.
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 tied to a local company in China. However, this practice is becoming less popular these days as it still has its loopholes.
Cons: One problem with this method is when the foreign employer makes its payments to the local Chinese employer the government might question why the Chinese employer is receiving monthly deposits in foreign currency in their bank account and why no taxes are being paid in relation to this.
Employees Forming their Own Domestic Company
The third alternative is also 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.
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 instead of them going through you.
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.
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 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!