Are you seeking to expand your operations into China? Having local employees on board is often seen as being integral to business success in this vibrant market. Their comprehensive understanding of local habits and customs can help you traverse an unfamiliar market. While the large pool of local talent offers immense potential, the vastness of the local labour market can pose certain challenges to foreign companies.
China’s labour market is evolving rapidly. Understanding its dynamics is crucial to ensuring success in recruiting and retaining the right talent. Against the backdrop of an ageing population, a declining working-age population, and the emergence of new employment trends, the world’s second-largest economy is bolstering efforts to upskill its workforce.
In addition, it is essential to keep abreast of the latest employment regulations as well as to consider the various cultural nuances. China has a complex framework of labour laws to which employers must adhere. Non-compliance can have serious consequences, ranging from hefty fines, the revocation of business licences, to being blacklisted.
This article will walk you through the important aspects of the hiring process in China. Topics covered include methods to hire local employees, employment contracts, and other compliance considerations.
Table of Contents
Overview: China’s labour market
China has consistently emphasised the importance of shoring up the job market, recognising that robust employment levels are essential for maintaining social stability. Moreover, the active participation of the country’s vast population of 1.4 billion in the workforce plays a vital role in propelling economic expansion. According to China’s population census conducted once every ten years, the 15-59 age group comprised 894.38 million people in 2020. This accounted for 63.35 per cent of the total population, indicating a decline of 6.79 per cent compared to the previous census conducted in 2010.
China is expected to face a labour shortage to the tune of approximately 11.8 million in the coming decade and beyond. The shortage is attributed to both a “demographic gap” and an “educational gap”. The “demographic gap” refers to the labour shortage caused by demographic shifts, such as an ageing population, low birth rate, and limited immigration. On the other hand, the “educational gap” denotes the labour shortage resulting from a discordance between workers’ actual skillsets and the skills required by available jobs. This is commonly referred to as structural unemployment.
To address this misalignment and meet the future needs of the labour market, the Chinese government has taken a host of proactive measures. It has introduced different policies focused on promoting vocational training, including the 14th Five-Year Plan Vocational Skills Training Plan and Opinions on Strengthening the Construction of High-Skilled Talent Teams in The New Era. These initiatives are aimed at upskilling the workforce, ensuring that they keep pace with the evolving demands of the economy.
How to hire local employees in China
Setting up a legal entity
In order to hire staff directly in China, you must set up a foreign-invested enterprise, which is a limited company. Limitations are imposed on representative offices (“ROs”) when it comes to employing staff. Direct hiring by ROs is not permitted. Instead, local staff are despatched from an agency that effectively assumes the role of the employer. The reason behind this is that an RO is not deemed a separate legal entity in China.
Operating as an extension of the foreign parent company, an RO lacks a distinct legal personality. As such, it lacks the necessary legal structure for employees to make claims against their employer should disputes arise. The rights and interests of employees can be safeguarded by mandating the hiring of staff via a specialist employment agency.
The foreign parent company is, however, free to directly appoint staff from its home country and second them to China to act as Representatives of the RO. The number of Representatives is limited to four, which includes three Representatives and one Chief Representative.
Using labour despatch services
Labour despatch refers to the employment practice where staff are hired through specialist agencies. Such agencies are solely engaged in the labour despatch business. Under this arrangement, the business does not establish a direct employment relationship with the despatched employees. Instead, it signs a contract with the specialist employment agency to enlist the services of the worker.
Prior to 2008, labour despatch was not a prevalent practice. It was primarily adopted by representative offices that are prohibited from hiring local employees directly. After the Labour Contract Law came into force in 2008, however, many began hiring despatched workers. The primary reason is that many employers prefer having greater flexibility in managing their workforce. Using despatched workers can allow for improved budget control and headcount management. This is particularly applicable to companies operating in seasonal industries or on a project basis. In addition, since the employment agency is the official employer, the company can be better shielded from liabilities should legal disputes arise.
To prevent abuse of the system, restrictions are imposed on the use of despatched workers. These include the following:
- The number of despatched workers cannot exceed ten per cent of the total workforce at any given time.
- Despatched workers can only fill “temporary” positions (those lasting no more than six months), “auxiliary” positions (those that perform a supporting function for the employer’s core business operations), and “substitute” positions (vacancies that have arisen due to employees taking leave, for example).
Hiring independent contractors
An independent contractor is defined as an individual or entity that provides services on a temporary basis to another entity. Unlike an employee, an independent contractor operates as a self-employed individual or entity, providing services to another without establishing an employer–employee relationship. An independent contractor, therefore, does not qualify for the benefits typically associated with a conventional employer–employee relationship, such as healthcare insurance, social security, and other perks enjoyed by employees.
A well-formulated independent contractor agreement should be drawn up to clearly set out the respective rights and obligations. The agreement should precisely define the nature of the relationship, establish payment terms, and address the protection of intellectual property rights, for instance.
A note of caution should be sounded, however. Employers should not hire independent contractors for the purpose of evading their legal obligations under China’s labour laws. This could lead to the working relationship being deemed of an employment nature. Consequently, the company will be required to fulfil its duties as an employer as set out under China’s labour regulations. To avoid a misclassification of the relationship, you are well advised to conduct a careful assessment, taking into various factors, such as the extent and nature of control exercised.
According to China’s Labour Law and Employment Contract Law, it is mandatory for employers to draw up a written contract with every full-time employee within one month from the employee’s first working day. Failure to comply with this requirement entitles the employee to receive double renumeration for every month without a written contract. After one year of employment without a written contract, an open-term contract will be automatically established.
The duration of the employment term is determined by the employer and employee reaching a mutual agreement. This may take the form of a fixed-term contract, an open-term contract, and a contract that expires upon the fulfilment of specific job responsibilities, i.e., a project-based contract.
In the case of a fixed-term contract, where an employer decides to extend an employee’s contract beyond the initial term, it usually indicates a firm commitment to retain the employee for the long term. Hence, renewal upon the expiry of the first fixed-term contract should be approached with careful deliberation.
Under the Employment Contract Law, probationary periods are only permitted in the initial employment contract. The duration of the probationary period varies depending on the contract length, up to a maximum of six months, as stated below:
- If the contract length is between three months to one year, the maximum probationary period is one month.
- If the contract length is between one to three years, the maximum probationary period is two months.
- If the contract length is more than three years, the maximum probationary period is up to six months.
In China, there are three different types of work-hour systems: the standard work-hour system, the comprehensive work-hour system, and the flexible work-hour system. Prior approval must be sought before the latter two systems can be implemented.
- Standard work-hour system: The maximum working hours allowed are eight hours daily and 40 hours weekly, with at least one rest day weekly. Overtime is defined as any hours worked beyond the regular working hours. According to the law, the maximum number of overtime hours allowed is three hours daily and 36 hours monthly.
- Comprehensive work-hour system: This scheme usually applies to seasonal or shift workers that are required to work over a continuous period due to the nature of their jobs. Under this system, the cumulative number of working hours within a designated time frame, such as a week, month, quarter, or year, is tallied up. This is commonly seen in industries such as mining, construction, and tourism industries, where workers need to be present for extended periods to fulfil their job responsibilities effectively.
- Flexible work-hour system: This scheme caters to employees whose working hours are difficult to quantify. Under this arrangement, the emphasis is on outcomes rather than the actual number of hours worked, as in the case of senior management staff, for example. Employees are typically compensated through a fixed salary, usually on a monthly basis.
Individual Income Tax
The calculation of personal income tax, commonly referred to as Individual Income Tax (“IIT”) in China, is derived from an employee’s monthly taxable income. The applicable tax rate varies between 3 and 45 per cent, depending on the income bracket under which the employee’s earnings fall. All types of income, such as bonuses, stock options, subsidies, and other allowances are taken into account when calculating the employee’s total taxable income.
Employers are obligated to file IIT returns for employees every month. The employer bears the responsibility of calculating and withholding the correct amount of IIT from the employee’s income. The filing of IIT must be completed by the employer within the first 15 days of the month after the IIT has been withheld. This can be done via the online IIT system or by submitting the designated IIT tax withholding form to the local tax bureau.
In addition, employers must furnish employees with detailed information of the income composition and the amount of IIT withheld within two months following the end of the tax year. If an employee requests for access to this information at any time, the employer is legally obligated to provide it.
Employers have a legal obligation to ensure that all their employees are enrolled on social insurance schemes. Additionally, employers are required to deduct the correct amount of social insurance premiums from each employee’s monthly salary. Every month, it is the employer’s responsibility to make sure that both their share and the employee’s share of contributions are paid towards the relevant social insurance funds.
China’s social security system consists of a compulsory housing fund and five types of insurance, namely the following:
- Maternity insurance;
- Medical insurance;
- Pension insurance;
- Unemployment insurance; and
- Workplace personal injury insurance.
How CW can help
At CW, we have honed our expertise in supporting companies from all over the world in their search for top-tier local talent. We understand the various challenges and complexities that come with navigating the Chinese labour market, as well as ensuring legal compliance throughout the entire hiring process. With over thirty years’ experience, our team of seasoned professionals possesses extensive knowledge of local labour laws and regulations, cultural nuances, and human resource administration best practices.
We offer comprehensive recruitment services that cater to a wide range of roles – including accounting, human resources, and administrative functions – from entry to mid-level positions. Our talent acquisition process is meticulously designed, taking into account the unique dynamics of the current job market. Drawing on our expertise and analysing market trends, we ensure the selection of the most qualified and suitable candidates to meet your organisation’s staffing needs.
Find out more about our HR process outsourcing services.
Contact us to find out how we can help.