Hiring an Employee Without a Company in China
In this article, we provide clear insight on how to hire a Chinese employee without a legal entity established in China:
- Requirements to hire employees in China
- Best way to hire employees in China without a company
- Other alternatives
The Chinese market is booming, and many foreign companies are interested in this exciting market. Whether you’re a company who just wants to get a foot in the door or are quickly moving towards full expansion, hiring local Chinese employees is a smart choice. Speaking the language, knowing the culture, having local knowledge, all are reasons why Chinese employees can be an asset to your company.
With the advancement of technology and the internet over the past few years, it has become much easier to find the kinds of employees you need 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.
Legal Entity Requirement
The People’s Republic of China Government requires all employees to be hired by a legal entity within
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 which 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. 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 incentive employees, and team performance plans, sales bonus plans, and special recognition awards are common.
Allowances – The ways Chinese employees prefer to be compensated often varies from western employees. Many Chinese prefer to receive cash allowances for transportation, meals, clothing, and child care 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 two items have been deducted: the employee’s social benefits contribution, and a standard deduction of RMB 3,500.
Then, a seven-grade progressive rate is applied. The employer withholds the full tax amount and submits it to the appropriate Chinese authorities on the employees’ behalf.
Here are some useful formulas surrounding income taxation:
Taxable Income = Gross Salary – Social Benefits – 3,500
IIT = Taxable Income x Tax Rate – Quick Deduction
Net Salary = Gross Salary – Social Benefits – IIT
These above requirements for a legal entity in China are complicated further because the company must work with various government bureaus and deal with difficult paperwork. Instead of going through this tedious process, foreign companies often chose to use local HR providers such as HROne to outsource all HR and administrative requirements.
Best Solutions to Hire Employees in China
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 your 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 their 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).
One example of this type of company is HROne. We are a Chinese PEO that provides employee leasing services such as HR and accounting related services to clients without a legal entity established in China. HROne is a fully licensed employment services or employee leasing provider in China, Hong Kong and Taiwan.
As of today, using PEO / employment solutions represent the best option for hiring a Chinese employee in China without a company, whether it be in terms of legality, convenience or financial wise.
What are the other alternatives?
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 employee 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 can still be a problem 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.
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 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.
What is HROne?
HROne is a non-state-owned foreign enterprises 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.
Throughout the years, we have not limited our services to mainland China alone but have expanded our reach and services with branches in Hong Kong, Taiwan and Macao. Why wait? Reach out to us today to begin your entry to the booming Chinese market!