In China, a PEO can also be referred to as a Foreign Enterprise Service Company (FESCO), and its services focus on delivering labor dispatch agreements for foreign entities.
In this article, we want to explain in detail what is a PEO and what are the benefits of using one in a country like China.
What is a PEO in China?
PEO stands for Professional Employer Organization. It is also known as talent dispatch, labor dispatch, employee leasing in China.
A Professional Employment Organization (PEO) is a company that provides services under which an employer can delegate employee management tasks such as payroll, employee benefits, and workers’ compensation.
While in the USA and other European countries there is a difference between PEO and EOR, in China this differentiation does not exist.
Simply put a PEO/EOR solution legally employs your staff in China on your behalf while you don’t have a legal entity established in China and seconds them back to you under a service agreement.
With this arrangement, the PEO/EOR service provider becomes the employer of record in China, bypassing the tedious process tied with setting up a legal entity in China and making expansion into the market much simpler.
PEOs assist small and medium-sized enterprises (SMEs), foreign startups, or Representative offices in China with human resource outsourcing, payroll processing solutions, employee benefits services, and employee dispatch services.
Through PEO services a foreigner may launch his business easily and keeps a presence or sales office in China while minimizing their risk-avoiding the long and expensive process of an in-house hire.
Pros and Cons of Using a Professional Employer Organization in China
One of the primary reasons many small businesses choose to use PEOs is to legally hire employees in China before officially setting up the WFOE in China.
The liability of employment is shared between PEO and the company client. Practically, shared responsibility means the elimination of risk someone might face because of the Chinese laws & regulations amendments.
An essential advantage is also that the client company does not have any role in the employment administration. The PEO offers high-quality HR services because of the professional and efficient human resource experts who are familiar with each client’s specific area of interest as well as the foreign SMEs or startups’ concerns when operating in China.
In addition, since the payroll calculation and mandatory benefits policies are different from city to city in China, the PEO service relieves the foreign companies from dealing with the complex processes of the payroll system and mandatory benefits, saving both time and staff.
Some of the disadvantages of using a PEO/EOR are:
- The employee’s sense of belonging will not be the best because the client has no legal entity in China
- It might not be easy to hire employees because some of the employees are not willing to join the company under this employment method
- The employment contract shall follow the HR service provider, so the client cannot tailor-made it
- Based on Chinese law, the employment contract term cannot be lower than 2 years
Talking about the costs of PEO services, in general PEOs charge in two ways:
- A flat fee per-employee, per-year charge (PEPY)
- A percentage of total payroll
A flat fee per employee is the way preferred by many organizations because it does not tie PEO costs to employee compensation, allowing for greater flexibility as you grow. Prices depend on the size of your organization.
With a percentage of total payroll, percentages can vary depending on the size of your organization and the type of workers you employ.
Each of these models has its own advantages:
- A percentage is easy to calculate and grows fluidly with your organization;
- Flat fees do offer the flexibility mentioned above but may not make sense if you expect to add large numbers of lower-earning employees; in that case, a percentage will save you more.
Another cost to mention is the one related to employment. The employment cost includes:
- Employee salary
- Mandatory benefits
- Individual income tax
In the specific, the mandatory benefits include 5 social insurances and 1 housing fund. The 5 social insurances are:
- Pension insurance
- Work injury insurance
- Medical insurance
- Maternity insurance
- Unemployment insurance
How Does a PEO Work?
The specific services that a PEO provides are outlined in the service agreement with the client business, but in general, a PEO offers these kinds of services:
- Human Resource Services – PEOs take charge of all the HR aspects. Because of the expertise in local laws and regulations, a PEO can assure that foreign companies operating in the country are compliant with the law regulating the labor contracts and all the employment aspects.
- Sign Employment Contract– After the client company drafts the employee’s labor conditions (salary, bonus, benefits, leaves, etc.), the HR service provider prepares a bilingual employment contract in compliance with local labor laws. After this, the HR provider signs the labor contract with the staff based in China.
- Benefits Administration – Mandatory benefits are an important factor in employee compensation, but the process of administering them is far from simple. In China, for example, social security is divided into two parts: one is social insurance (composed of 5 types of insurance) and the second is the housing fund. A PEO handles this aspect plus the administration of allowances, vacation pay, sick leave, and other benefits provided by the client company.
- Payroll Services – The payroll process is the procedure that organizations or companies do to pay their employees. Payroll in China, for example, involves the payment of an employee’s salary, handling the mandatory benefits (social security), Individual Income Tax deduction, payment of annual bonus, Overtime Payment (if applicable), etc. A PEO can handle the payroll process in a manner that complies with the local jurisdiction and make payments to employees.
- Visa Processing – A PEO can help with the immigration process required by Chinese authorities. In addition to obtaining a residence permit, all foreign employees must also have valid work permits. The work permit process is complex, with three and corresponding requirements. A PEO can make sure employees’ applications are correct and submitted smoothly.
Benefits of Using a PEO in China
PEOs are often staffed with experts in human resources, tax, legal, and payroll functions. Having a business arrangement with a PEO can often allow a company to expand faster, more affordably, and with less risk than other alternatives.
Below we list some of the benefits for companies using a PEO:
- Companies using a PEO grow faster – Growing the business is the main concern of every owner and it is also the biggest challenge most companies face. A PEO can help companies handle human resources needs allowing the staff to focus more on high-value activities that help grow the business. As uncovered in the NAPEO report, PEO clients grow 7 to 9 percent faster.
- Reduced costs – Using a PEO allows the company to skip expensive and time-consuming processes. The biggest cost saver is in not having to establish a separate legal entity. PEOs lower the costs of administering benefits and the company can also reduce the costs for the employee’s turnover. In fact, PEOs can lower employee turnover by 10% to 14%.
- Compliant with local laws – One of the most significant benefits of using a PEO is being able to outsource the complex task of regulatory compliance to a local expert. HR and payroll are complicated aspects for companies entering a new market and they can distract business owners from their goal of expanding the business. A PEO handles HR and payroll processes and can guarantee full compliance with the law.
- Business survival – Companies that use PEOs for at least four quarters are 50% less likely to permanently go out of business from one year to the next.
- Test a market with fewer risks – Entering a new market, especially a complex market like China, can be very risky. Navigating among local laws, language barriers, regulations, are costly and time-consuming tasks. One of the main benefits of using a PEO is the possibility to test the market with fewer costs and risks because you can enter the country without a legal entity. Together with the PEO, the company can hire staff and start operating in the country in one month.
Who Should Use a PEO?
Companies that want to expand abroad should consider using a PEO.
PEOs are often used by small and medium-sized enterprises that do not have an internal dedicated human resource team. These kinds of companies can save time and costs using a PEO to handle all HR and payroll aspects, focusing on growing the business in the country.
But PEOs can also be used by large enterprises that are setting up multiple offices or branches in varying jurisdictions.
Wholly foreign-owned enterprises (WFOE’s) who have no legal entity in China can similarly benefit from employee leasing as the process allows the company to avoid an establishment process that is complex and time- consuming, with many approvals required by multiple government authorities in China.
In general, a PEO/EOR in China is the best solution for:
- Companies requiring to on-board local staff to handle ground operations (client meetings, sales support, supply management, etc) but the company strategy does not require the setup of a Representative Office or a Wholly Foreign-Owned Enterprise (WFOE);
- Foreign SME testing the Chinese market requiring hiring local staff for early market research, marketing activities, and exploration;
- Companies with an overseas-based contractor they wish to base in China;
- Companies that intend to register an entity in China but want to hire staff in the interim period before formal establishment.
How Can We Help Your Business to Expand in China?
Our PEO/EOR services are built for foreign companies whose business operations require them to hire local or foreign employees in China.
While all employment, HR, administrative and legal matters are outsourced to HROne, the end-client can have a physical presence in China without the need to set-up a legal entity.
Our PEO/EOR services include:
- Candidate search (optional)
- Labor contract signature
- Monthly payroll
- Work visa processing
- Income tax compliance
- Employee social benefits
- Bonus & commissions
- Medical insurance
- Expense claim
Compliance, transparency, and data security are our values and we are one of the very few companies in China that obtained the ISO/IEC 27001:2013 certification for Information Security Management and the ISO 9001:2015 certification for Quality Management.
These certifications represent a certainty that the employees, processes, and the IT systems that we utilize here at HROne conform worth the standard risk management processes set forth by the International Standardization Organization (ISO) while also following the systematic approach of managing our client’s sensitive information.