As one of the historically fastest-growing economies in the world; China is a huge market for candidates and job opportunities.
Any company looking for expansion needs a local team of qualified candidates to be successful.
Hiring employees require a lot of research and knowledge since each country has its own complex labor laws. Understanding the labor and contract laws in China is of prime importance for all companies looking to hire employees.
China has an unusual labor market where foreign companies without a legal entity cannot hire local labor/citizens directly and should appoint local labor agencies also called ‘HR agencies’ to hire and manage local employees.
Employing foreign candidates requires special permission from the local labor authorities. Moreover, proof of residence in the city in which employment is applied is required by the employees. However, if a foreign company has a legal setup in China, they have the liberty to hire employees directly.
In general, a company in China decides the category of employees that are suitable and the hiring options vary from company to company.
This article describes the hiring options in China for different company types.
- 1) WFOE – Wholly Foreign Owned Enterprises
- 2) Representative Office
- 3) Foreign companies without a legal entity in China or only with a sales office
A WFOE is a fully foreign-owned limited company based in China and is the most popular way of doing business in China.
It acts as a gateway for all foreign investors willing to enter China.
WFOE is one of the means which simplifies the process for foreigners to set up their own company within Chinese borders.
Apart from regular government regulations, such as tax and corporate registration, it involves zero Chinese influence and is fully controlled and invested by foreigners.
Most importantly, WFOE operates like a normal company, involving all the profit-making activities and can hire foreign staff until they fulfill China’s labor laws.
Below you can find some various hiring options in China if you set up a WFOE.
Hiring directly without a legal entity in China is considered illegal for any foreign company.
Establishing a legal entity (WFOE) not only brings the independence of conducting direct business and revenue-generating activities but also provides the freedom to employ both foreigners and local Chinese legally in China.
Hiring through WFOE can happen under three types of employment contracts: full-time, part-time, independent contractor.
1) Full-time employment
In China, a written contract is mandatory for hiring full-time employees by the employer.
Failure of complying to this provision of law corresponds to penalties and fine.
Under full-time employment, employees’ working time is generally limited to 8 hours a day and about 40 hours per week five days per week.
For any work exceeding standard working hours, overtime is required to be paid to employees.
Under such a contract, wages are paid in legal tender to the employees on a monthly basis. On the termination of the contract, employees are entitled to severance pay based at the rate of one month’s salary for each full year employee worked.
2) Part-time employment
Unlike full-time employment, for part-time employment, it is not mandatory for employers to execute a written employment contract with employees.
There is an acceptance of oral agreements between employer and part-time employed candidates.
It is, however, recommended to have a written contract to establish a sound and clear employment relationship.
Under such a contract, employees are allowed to work for not more than 4 hours and not more than 24 hours a week.
On termination, there is no requirement of providing the employees with severance pay by the employers.
Employers should be careful while employing part-time employees, as in the absence of a written agreement it could get difficult to keep up on the task of the staff.
3) Independent contractors
One relationship under which an individual can be engaged in china is as an independent contractor.
Such relationship is project-based and cannot be interpreted as a normal employee/employer relationship.
Under such relationship, the individual works in a way that is similar to a sub-contractor providing a service to the company.
Therefore, to cut down the cost and liability, it is common for companies to engage independent contractors rather than employees.
Despite the advantage to the company wherein, mandatory benefits need not be paid to such individuals and that Chinese Labor Contract Law does not apply to such relationships, this kind of relationship is generally avoided by both companies and individuals.
Although PRC law permits using the independent contractor model, companies should be aware of the risk that an individual may challenge the basis of their relationship with the company.
For most companies, this is not an attractive model mainly due to the legal risks involved that may be presented to the company.
An alternative method used by companies to employ individuals in China is to utilize services from licensed HR agencies.
Partnering with an experienced and reputed recruitment agency is the easiest and the best method of hiring staff in China.
An employer can connect with a ‘labor dispatch’ company in China who will rent its employees’ to the employer.
For such scenario, instead of hiring an independent contractor, the employer is outsourcing the hiring to a licensed company that hires employees legally for them.
Keep reading to know more about the labor dispatch in China.
Labor dispatch solution
The practice of hiring employees through an employment service agency instead of direct employment is referred to as Labor Dispatch.
This type of employment is a common practice in China and is deployed by both foreign and national entities to handle the workforce demands.
An employment contract is signed in between employees and the dispatched HR agency, instead of the actual employer. However, these dispatched employees work for and are managed by the client/user enterprise itself.
As a matter of fact, the client is protected from any legal liabilities involved as there is no direct contract between them and the employees.
Labor dispatch enables firms in acquiring specialists from outside the company and hence saving the time and resources along with minimizing the risks and legal obligations. It is a cheap and flexible alternative for hiring regular employees.
Special license needed for labor dispatch agency in China
Employing staff through a Labor Dispatch Agency is a common practice used by foreign companies in China.
China’s Ministry of Human Resources and Social Security (MHRSS) has released the “Implementing Measures for Labor Dispatch Licensing” for regulating the licensing of labor dispatch service providers.
It is forbidden for entities or individuals to offer labor dispatching services without obtaining the license from local human resources and social security department.
The government has enforced certain standards, which an individual or company must adhere to for establishing a labor dispatching entity.
There is a fixed registered capital that is required along with permanent business premises for conducting the business.
Therefore, a labor dispatching management system should adhere to the relevant laws and administrative regulations for companies to obtain a labor dispatching license.
Limitation for labor dispatch in China
The Chinese government imposes some limitations on the use of dispatched employees.
Emphasis is laid on direct hiring of employees as per the amended labor contract law and this should serve as the primary means of employment in China.
The method of labor dispatch should be considered as supplementary.
It is required by the regulations that the number of dispatched employees used by a company should be less than 10 percent of the total number of employees.
According to the amended labor contract law, the limitation is not restricted to numbers, but to positions as well.
An employer can make use of dispatched employees only for three types of positions, which are:
‘Temporary’ refers to positions no longer than six months, ‘auxiliary’ refers to positions providing supporting services to the core business positions of an enterprise, and a ‘substitute’ refers to a temporarily vacant position which could be for various reason like an employee on leave.
As difficult as it is to form a WFOE, closing down the WFOE is also time-consuming and involves a lot of formal procedures and regulations.
Investors in China may face the decision to cease the company operation for various reasons.
Although in such situation, walking away from the entity in China would seem an easy way out, this is not advisable at all.
This may lead to barring companies for doing business in the future in China as PRC law requires any corporation to follow a formal deregistration process.
Other than deregistration or simply walking away by abandoning the company, investors can choose to sell the company or should consider reducing the operations while still meeting the statutory requirements such as tax filings, corporate bank account, etc.
For whatever reason the company chooses to shut down its business, it still has the option of employing staff and completing the pending work done.
One option is involving a third-party Staffing Agency that will directly hire the employee on behalf of the company.
The employee will be officially the agency’s employee, so the host company is free from the stress about complying with Chinese labor laws.
These agencies, however, might not be ready to work with foreign companies and might charge a significant amount of fee for providing the services.
The viable option to consider is using a Professional Employer Organisation (PEO) which acts as an employer of record taking on all the compliance matters and employment liabilities.
It stands responsible for signing employment contracts with employees, paying wages, withholding taxes and third party payments, and other administrative and human resources responsibility.
The management and control of daily activities still remain with the host company while delegating the legal burden to a trusted partner like HROne.
A Representative Office (often called Rep Office or RO) is an attractive and common means of establishing a long term presence for foreign companies in China as it involves no initial capital requirement.
A RO is an extension of an existing overseas business which does not form its separate legal entity in China.
It allows foreign companies to have a physical presence anywhere in mainland China with a limited scope.
In the simplest form, it allows a foreign company to engage in market research or testing activities but is not allowed to perform any profit-making activity.
A Representative Office is not allowed to perform any kind of hiring of local Chinese employees directly.
Instead, Chinese staff working for a RO must be employed via an Employment solution called talent dispatching service in China.
Such HR agency signs a contract with both RO and Chinese staff, ensuring employment compliance, timely payments of social security, and housing funds.
There is no limitation to the number of Chinese staff an RO can employ, however, it is restricted to no more than four foreign employees.
Below you can read some clarifications about the hiring options for Chinese and foreign employees.
Hiring Chinese employees
The option for Representative Offices for foreign-invested enterprises looking to hire Chinese staff is Labor/Talent Dispatch also known as PEO or EOR solution.
It is through labor dispatching contracts that ROs in China can recruit Chinese Staff, make payments for salaries and benefits to them.
Under such contract an agency dispatches an employee to work at an organization.
The flexibility and lower cost make the labor dispatching service as one of the most popular ways to hire employees in China.
Hiring foreign employees
A Rep Office is not allowed to hire more than 4 foreign employees and they are not allowed to work directly for their overseas office.
Another important point to consider is that there should be a Chief Representative (CR) associated with a Rep office, who is not required to be a Chinese national, and rather than directly employed by the Rep Office should be an employee of the parent/overseas company.
While in opening the RO, the person’s name and details are required.
In simpler terms, it implies that there can be four foreign representatives operating from China and the Chief Representative (CR) could be the fifth foreign employee considering that he is not residing in China.
For companies without any legal entity, the hiring options in China are limited and it gets difficult to hire staff legally.
While setting up legal entities in China may require a great deal to time and investment, labor dispatch and PEO solutions are the alternatives and the most popular options for hiring local employees in China as it requires minimal cost and flexible hiring process.
Foreign companies get to make use of this solution to test the China market by hiring marketing, sales, or BD employees.
After a couple of months of operating in China, foreign companies can choose:
- To set up a WFOE in China if they think the China market is worth to invest;
- To leave the China market by terminating these employees through the HR agency if they think China market has no potential to them. This kind of terminating is all done by HR agency, which is very flexible for foreign companies both to enter into China market but also to leave China market;
- To continue hiring employees through the HR Agency is a feasible option if foreign companies would not like to set up a legal entity in China but would need to continue hiring the Chinese employees.
These agencies play an important role in assisting foreign companies to hire the local workforce as they are fully aware of the labor rules and regulations.
This employment service in China allows HR agencies to hire and manage employees on behalf of the company and everything from payroll setup, drafting contracts, and legal matters are handled by these agencies so that foreign companies can access and test the market in a flexible and fully compliant manner.
This service is also quite beneficial for industries or projects where the labor requirement is not considered.