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In many companies, labour costs (including employee wages, benefits, payroll and other related taxes) account for the largest part of businesses’ expenditures. This article will delve into all the costs associated with employing talent in your business in China.
The cost of hiring, employing & terminating staff in China comprises several components, such as salary, social security contributions and other payments employers are obliged to cover under Chinese Labour Law.
- There are five insurances and one fund covered by China’s social security system: pension, medical, unemployment, maternity, work injury and housing funds.
- Employees are entitled to paid sick and annual leave depending on the employee’s work period.
- Employers must pay severance to terminate employees due to changes in business circumstances (i.e., mass layoff, health issues and company dissolution).
Hiring costs in China
Once a company has made the strategic decision to expand its business and start hiring within the Chinese market, it will have to carefully consider the various costs associated with hiring talent in this market, which we have outlined below.
Social security contribution
Both employers and employees (local or expats) are required by law to contribute to China’s social security system. According to the Chinese labour law and labour contract law, there are five insurance schemes available and one fund under the Chinese social security system: pension; medical; unemployment; maternity; occupational accident; and the housing provident fund.
The contribution rate for each scheme and fund is based on the location (city) of the employment. The table below provides detailed information regarding the contribution rate for three cities in China: Beijing, Shanghai and Guangzhou.
|Insurance schemes||Employer contribution rate||Employee contribution rate||Employer contribution rate||Employee contribution rate||Employer contribution rate||Employee contribution rate|
|Work-related injury||0.16% – 1.52%||0%||0.16||0%||0.2%||0%|
|Housing funds (residents only)||12%||12%||7%||7%||5-12%||5-12%|
Social security bilateral agreement
To avoid double payment of social security for foreign employees, China has signed bilateral social security agreements with 11 countries which include Canada; Germany; Finland; Denmark; Japan; Luxembourg; South Korea; Netherlands; Switzerland; Spain and Serbia).
In China, the provincial government determines the minimum wage considering factors such as minimum living costs of employees, social insurance premiums, housing funds, the employee’s average salary, level of local economic development and the employment status.
The minimum wage comes in two forms:
- Monthly minimum wage – full-time employees
- Hourly minimum wage – part-time and temporary workers
Examples of minimum wages in Chinese cities include the following:
|City||Monthly minimum wage (RMB)||Hourly minimum wage (RMB)|
Wages for probation period
According to section 20 of the Chinese Labour Contract Law, the wage of a worker on probation shall not be lower than the lowest wage level for the same job of the employing unit or be less than 80% of the wage agreed upon in the labour contract, and shall not be lower than the minimum wage rate in the place where the employing unit is located.
Employees who work more than eight hours a day should be paid a minimum of 150% of the employee’s basic salary. Companies can, however, set up overtime in two different methods, which are:
- Comprehensive working hour system – the number of work hours must be agreed upon by the employee and employer in the employment contract, and overtime pay is required if the agreed-upon number of work hours is exceeded.
- Flexible work hour system – certain employees, such as senior managerial staff and sales staff, may be required to work more than 40 hours a week by their employers without receiving overtime pay. Local regulations, however, may include provisions concerning allowable overtime.
If employees are required to work on a weekend, they must be paid two times their basic salary or get an additional day off work during the week. Employees must be paid three times their regular wage if they are required to work on a statutory holiday.
Overtime pay is summarised as follows:
|More than eight hours a day||1.5 times of the regular wage|
|Work on a weekend||2 times of the regular wage|
|Work on a statutory holiday||3 times of the regular wage|
Employees in China who are sick or injured are entitled to paid sick leave, and employers are not allowed to terminate employment contracts. Sick leave is paid to both local and foreign employees.
|Sick leave is less than six months|
|Working period||Percentage of salary|
|Less than two years||60%|
|Between two and four years||70%|
|Between four and six years||80%|
|Between six and eight years||90%|
|More than eight years||100%|
|Sick leave is more than six months|
|Working period||Percentage of salary|
|Less than one year||40%|
|Between two and three years||50%|
|Between three and six years||60%|
The minimum sick leave allowed for employees with less than 10 years of employment is three months, while the maximum sick leave for employees with 20 years of seniority is unlimited.
Statutory annual leave
Employees who have worked for more than 12 months are entitled to statutory paid annual leave from five to 15 working days, depending on the employee’s working period with the company.
The number of paid leaves for employees are:
- Employees working for one to 10 years will receive five paid leave days per year
- Employees working 11 to 20 years will receive 10 paid leave days per year
- Employees working over 20 years will receive 15 paid leave days per year
Maternity leave payment
Female employees will receive maternity pay in place of their salary if she has participated in maternity insurance required by the local maternity insurance scheme. The local social security office will cover this payment and any medical expenses for delivery. Employers are responsible for the costs if maternity insurance does not cover female employees.
The general rule for calculating maternity pay is provided in the Special Provisions on Labour Protection for Female Employees (State Council Decree No.619):
- Employers must pay for the maternity leave based on the female employee’s wage for employees who are not covered by the maternity insurance.
- Female employees covered by maternity insurance will be paid from the maternity insurance fund based on the employee’s monthly wage. The formula to calculate the maternity pay covered by maternity insurance is as follows:
- Maternity pay = company average salary for the preceding year / 30 x maternity leave days
The maternity leave pay for Beijing, Shanghai and Guangzhou are as follows:
|City||Maternity leave payment|
|Beijing||First 128 days:|
Remaining 30 days:
|Shanghai||The employee’s wage or maternity pay covered by maternity insurance, whichever is higher|
|Guangzhou||First 98 days:|
Remaining 80 days:
Terminating an employee: Severance payment
Severance pay is paid to employees when the employer terminates the employee’s contract because of the following:
- Change in business circumstances
- Company dissolution
- Health issues or injuries
- Mass layoff
- Not renewing fixed-term employment contracts
Severance pay is typically calculated based on the employee’s salary or hourly wage and how long the employee has worked for the company.
The rate of severance pay are as follows:
|Employment period||Rate of severance pay|
|Less than 6 months||½ month|
|1 year||1 month|
|2 years||2 months|
|3 years||3 months|
|4 years||4 months|
|5 years||5 months|
How Acclime can help
China is renowned for its high productivity level, which can offer numerous growth opportunities for companies looking to enter the Chinese market. However, China’s regulation is often unfamiliar to foreign businesses which becomes very time consuming for companies looking to do business compliantly.
If you’re looking for a compliant employment solution without the need to set up a legal entity to enter the Chinese market, feel free to contact Acclime to discuss our Employer of Record (EOR) solution.
Acclime is a premier provider of professional formation, accounting, tax, HR & advisory services in China. We focus on providing high-quality outsourcing and consulting services to our international clients in China and throughout the region.