Despite the various expansion benefits of the Chinese economy, hiring employees in China can still be challenging for many foreign companies. China has a complex system of labour laws, and failure to abide by these laws can result in fines, back pay, or even the revocation of your business license.

This guide provides everything you need to know about hiring employees in compliance with Chinese laws and conducting business in the Chinese market.

Three ways to hire employees in China

There are three options for foreign businesses to hire staff in China:

1. By establishing a legal entity
2. Partnering with an employer of record provider
3. Hiring independent contractors

The latter two options do not require a legal entity set up.

#1 Establishing a legal entity in China

A business may decide to create an entity if it has long-term expansion plans. Selecting a suitable structure for your company is necessary to establish an entity and hire staff in China. Common structures are:

• Joint venture (JV)
• Wholly foreign-owned enterprise (WFOE)

Legal entity establishment gives foreign businesses full autonomy to hire talent directly and handle employee management matters internally. A foreign business could create its local branch, hire employees, and run payroll for its employees by establishing a legal entity.

However, legal entity establishment is a complex and time-consuming process that requires a team with capital investment and in-country knowledge of China’s legal, corporate, and payroll regulations. If a foreign business would like to mitigate the complicated legal entity establishment process, partnering with an EoR will be less time and effort-consuming for you to explore a new market initially.

#2 Partnering with an employer of record in China

A third-party corporation known as an employer of record or EoR recruits compensates and manages your distributed workforce on your behalf. Working with an EoR provider allows you to recruit top talent in China and speed up onboarding without establishing a legal entity. This option allows you to explore the market with less liability before committing to a long-term expansion.

#3 Hiring contractors

Some foreign businesses may choose to use contractors (or freelancers) rather than to hire employees. However, provided the contractor is indeed independent in the nature of his work, the relationship between the foreign business and the contractor will not be employed, and the contractor will not be protected and bound by Chinese labour laws, and the business also generally does not exercise management over the contractor. Furthermore, the restrictions on withdrawing personal foreign currency and the different local tax policies give foreign businesses more uncertainty in hiring contractors in China directly.

Companies that employ contractors, however, run the danger of being misclassified. For instance, Chinese regulators might classify your talent as an employee under Chinese law if you manage your contractors’ working hours or operations, and your company would be subject to legal penalties.

Contractors are far less protected than employees and receive no social insurance benefits, causing many individuals not to accept this structure as a means of engagement by a foreign company. Foreigners in China require a valid work and residence permit to work in China in any form, so contractors’ arrangements are usually not feasible as a result.

What global employers should know about before hiring employees in China

Employment contracts and rules

In China, every employee is required to obtain an employment contract. They may be open-ended or fixed-term, with a possible probationary period.

Fixed-term contracts can normally be renewed only once. Different contract term length determines the specific maximum probationary period for itself (from 1 month to 6 months long probation based on the contract length). When the fixed-term employment contract is renewed for the second time, employees have the right to request an open-ended term employment contract without specific stipulated circumstances.

As well as recognising the rules of the contract, the business must recognise that the People’s Republic of China (PRC) labour laws do not outline specific situations that might be regarded as a breach of company policy.

Therefore, it is advisable for companies to put in place a Staff Handbook (company policies and procedures manual). The handbook should describe policies specific to the company, hours of commitment expected, employee benefits and other such details that should be clarified to the employees but are not stated in the contract.

Employees should sign every page of the handbook to confirm that they have read through it before signing. Abnormal working arrangements should first be agreed upon with the Labour Bureau.

If a company decides to revise certain rules relating to the terms of employment, discussions should be held both with the employee (representatives of an employee may take the place of an employee) and with the labour union if there is one before making the decision to revise.

The Chinese labour laws are strictly enforced, and the local labour bureau occasionally checks foreign-owned businesses to make sure they comply with the rules for recruiting employees in China.

Probation

A probation period can be included in a contract if the employee works full-time and has a contract term lasting over three months. However, this set period can only be included once, and wages during any probation period may not fall below 80% of the agreed wages.

The length of the probation period, which is permitted depends on the length of the contract. If the contract lasts less than a year, then the maximum probation period which is permitted is one month.

If the contract lasts between one to three years, then probation may be set at two months maximum; however, if your contract lasts over three years or over, or is an open-term contract, the probation period will be six months maximum.

Hiring as a foreign company

A representative office in China cannot directly employ a Chinese national; instead, it must recruit through a labour service organisation to hire employees for the representative office on the company’s behalf.

Foreigners are employed as Representatives of a Representative Office and are limited to only four. Foreign Invested Enterprises (FIEs), which are Chinese limited companies, can hire employees directly. Foreigners working in China will require the proper work visas and permits to be obtained.

Potential risks

• Proper employee classification – correctly classifying contractors and employees in China requires a thorough knowledge of local labour legislation. Companies risk being charged with fees and employee back pay if they misclassify their talent in China.
• Permanent establishment status – certain work requirements qualify a foreign company as a permanent establishment in China. If you meet these requirements, you are considered a permanent establishment under local law and susceptible to local taxes.
• Corporate social credit score penalties – businesses operating in China are assigned a social credit score, a qualitative rating based on an ongoing evaluation of their operations and indicates their credibility. Low scores result in limited business options, while high scores qualify for tax breaks and other benefits.

Payroll in China

• Cycle – the pay cycle in China is monthly, the standard practise for salary release is to be paid the last working day of the month.
• Taxes – the calendar year serves as the tax year. Monthly income tax returns for employees must be filed by their employers.
• Hours – a standard workday is eight hours per day, and five days per week results in a 40-hour workweek. Flexibility working hour system is subject to labour authority approval and applies only to specific positions.
• Overtime – for work performed over the regular limits, employees are paid 150% of their standard rate on workdays, 200% on weekends, and 300% on public holidays. For overtime on weekends, the employer may choose to give compensatory time off instead of pay.
• Contributions – provincial regulations and municipal legislation determine the amount of required employer contribution. For instance, the total payroll contributions in Beijing is around 28%.

How Acclime can help with your HR needs

China’s labor laws are highly complex and navigating them can be challenging for international businesses. Failing to comply with these laws can result in significant risks for companies. Therefore, it’s crucial to conduct thorough research on Chinese labor legislation before hiring in China. Alternatively, partnering with an experienced HR expert can also help ensure compliance.

At Acclime, we offer premier professional services in China, including formation, accounting, HR and advisory, and tax services. With our employer of record (EoR) services, you can hire employees in China without setting up a legal entity. This saves you time, reduces costs, and provides you with localised support for payroll, HR administration, and more.