In principle, any company located anywhere in the world may employ a Chinese person to physically work in China. However, the labor contract will not be regulated by relevant Chinese legislation unless it is entered into via an invested entity on the Chinese mainland.
Representative offices (RO) in China cannot hire staff directly. Instead, Chinese staff must be seconded from an agency that will take the title of oﬃcial employer.
This is because an RO is not a capitalized legal entity in China. An employee must have the right to claim against their employer, and an RO is not a suitable entity to file claims against. By forcing ROs to employ staff through an agency (which itself is a capitalized legal entity in China), the interests of the employee are thereby protected.
If a company is qualified to hire employees directly and decides to do so, it should be specially noticed that employers are required to sign a written contract with their employees within one month starting from the employee’s first day of work at the company. If not, the employee is entitled to double salary.
Other things to pay attention to include:
- Probation period: The range of legitimate grounds for dismissing an employee is considerably wider during their probation period. The employer may also pay only 80 percent of the employee’s contractual salary during this time.
- Working hour system: In China, there are three main work hour systems-the standard work hour system, the comprehensive work hour system, and the non-fixed (flexible) work hour system. The latter two systems are considered ‘special work hour systems’, which require special approval and compliance requirements.
- Payment and tax: An employee’s salary package could include base salary, allowances, bonuses, non-monetary pension plans, and employer’s portion of social security contribution. The base salary should be stipulated in the labor contract. Employers are required to file individual income tax (IIT) for their employees on a monthly basis. The IIT system was reformed substantially in 2018.
- Mandatory social security: China’s social security system is made up of five different kinds of insurance-pension, medical, maternity, work-related injury, and unemployment, plus one housing fund. Although both employer and employee are obligated to make contributions, it is generally the employer’s responsibility to correctly calculate and withhold the payments for both parties. Employer’s obligation to make adequate and timely contributions cannot be alleviated or exempted by reaching mutual agreement with employees. Foreign employees working in China have been required to participate in China’s social insurance scheme as well starting from 2011, but this obligation can be exempted if they come from countries that have social insurance exemption agreements with China.
- Leave during the first year of employment: Employees are not entitled to any mandatory minimum number of leave days during their first year of employment (ever), except those public holidays such as Chinese New Year around February, and the National Day celebrations in early October.
- Regional variation: National laws are often intentionally broad and vague, leaving a lot of room for local interpretation or additional legislation. Regulations and practices differ per city on issues such as minimum wage, work visa policy, social security contributions, and maternity leave.
- No at-will termination: Terminating employees in China is both diﬃcult and expensive. Employees may resign with 30 days’ notice, but for employers, there are limited grounds for terminating an employee before their contract has come to an end.
- Non-fixed term contract after two fixed term contracts: After an employee finishes their second contract with your company, he or she generally shall be offered a lifetime contract as the third unless he or she wants another fixed term contract instead. Such non-fixed term contract can only be terminated if there are grounds for dismissal. Notably, some regions, such as Shanghai, offer more flexibility on this rule.
- Severance payments mandated by law: In practice, severance payments are even higher than the law prescribes, and can comprise a significant part of overall HR costs.
- Hiring foreign workers: China implements a tiered talents classification system for hiring foreign workers. Different classes of talents are subject to different administration. Foreigners who want to work at companies in China should arrive on a valid work visa (Z-visa or R-visa). Employers need to obtain and renew Foreigner’s Work Permit and Residence Permit for their foreign staffs in a timely manner.
Labor dispatch is an important form of supplementary employment in China. Unlike direct hiring, labor dispatch has a triangular form of employment relations, in which a host company hires dispatch workers from a dispatch agency. While dispatched workers work for and are supervised by the host company, the dispatch agency, which usually have considerable experience and knowledge of hiring local workers, is the de facto legal entity that is responsible for the administrative management of the employees.
Thus, labor dispatch is regarded as an effective method to help businesses save hiring costs, circumvent tedious administrative processes, and minimize risks and legal responsibilities for potential labor disputes.
Compared to direct hiring, labor dispatch is particularly attractive where:
- the business is not allowed to hire employee directly, either because the business is in the process of setup and hasn’t got its business license, or because the business is structured as a RO, which is legally required to recruit through dispatch agencies;
- business priority is given to revenue-generating activities over any other concerns, especially when the business is small-size and at its very early stage; or
- there is an inconsistent workflow for businesses in seasonal and project-based industries.
Despite the popularity of the labor dispatch among FIEs, on the other hand, it leaves dispatched workers more vulnerable to exploitations. In practice, large manufacturing plants may employ the bulk of their workers ‘temporarily’ under the guise of a dispatch relationship, to save cost on employee welfare, or to abscond employer responsibility to the employees.
In view of this, China made two key legislative amendments to limit companies from taking advantage of labor dispatch:
- Firstly, the Labor Contract Law was amended, with effect from July 1, 2013, to strictly define labor dispatch as a form of supplementary employment only; and
- Secondly, the Interim Regulations on Labor Dispatch (Interim Regulations) was issued and came into effect on March 1, 2014, to the use of dispatching, remuneration, termination, and performance of labor contracts.
According to which, labor dispatch is only applicable for the following three types of positions:
- Temporary position: A position with a duration of no more than six months;
- Auxiliary position: A position that provides auxiliary services to the main or core business of the employer; and
- Replaceable position: A position that can be performed by a dispatched employee in place of a permanent employee during the period when such an employee is away from work for study, vacation or other reasons.
The applicable position type must be specified within the dispatch contract.
The Interim Regulations stipulate that the number of total dispatched employees used by an employer should not exceed 10 percent of its total number of employees, including regular employees and dispatched employees. ROs of foreign enterprises, however, are not subject to this restriction on dispatched employees’ positions.
Outsourcing is another form of supplementary employment in China. It’s traditionally applied to tasks that require specialist skills, a high degree of confidentiality, or those that have a clear scope but incur major consequences if incorrectly implemented, such as IT development, accounting, tax filing, HR administration, and payroll processing.
With labor dispatch facing increasing scrutiny, many companies tend to use outsourcing as a substitute to dispatching, as another alternative to avoid directly hiring employees.
Similar to labor dispatch, outsourcing can help businesses in China circumvent tedious administrative processes and still match workforce needs. Under this model, the client enterprise has no direct employment relationship with the outsourcing employees.
However, outsourcing has its special characteristics:
- The outsourcing task usually require a high level of specialization, confidentiality, or defined scope;
- The outsourcing agreement usually does not refer to specific employees or performance criteria, but rather defines the work that needs be done;
- The outsourcing tasks usually need to be processed with special software licensed by the outsourcing company, but the client enterprise usually does not need to pay for the software license or the development work; and
- The outsourcing company usually retains a high-level of autonomy to direct whichever resources it feels are best for each project.
Hiring foreign employees
Hiring foreign employees here means hiring non-Chinese nationals who do not have permanent residency in China to engage in social labor work in exchange for labor remuneration. That is to say, citizens of Hong Kong, Macao, and Taiwan do not need to go through the administrative procedures for hiring foreign employees – they are under the same treatment as mainland Chinese in employment management.
To be eligible for working in China, foreigners should generally satisfy the following basic criteria:
- Attained 18 years of age, and are healthy;
- Possess the requisite professional skill and the corresponding work experience for the work;
- Have no criminal record;
- Has confirmed employer in China; and
- Hold a valid passport or any other international travel document.
And according to the revised Administrative Regulations on the Employment of Foreigners in China and the Guideline for Applying Foreigner’s Work Permit in China (Trial Implementation), the major administrative procedures for hiring foreign employees include:
- Applying for ‘Notification Letter of Foreigner’s Work Permit in China’;
- Applying for Z-visa or R-visa;
- Applying for ‘Foreigner’s Work Permit’; and
- Applying for ‘Residence Permit’.
For foreigners working in China for no more than 90 days, the procedures are bit different. Currently, there are two different set of procedures, both of which are in effect for the moment.
The first one is stipulated in the Procedures for Foreigners Undertaking Short-term Work Assignments in China (Trial Implementation), under which what kind of activities are considered as short-term work and the specific visa requirements are strictly defined:
- Step 1: Applying for Employment License (or Approval Letter from the Cultural Department for commercial shows) and Short-Term Work Certificate.
- Step 2: Applying for invitation letter.
- Step 3: Applying for Z-visa
The second one is stipulated in the Guideline for Applying Foreigner’s Work Permit in China (Trial Implementation), under which Foreigner’s Work Permit in China (≤90 days) can be applied solely based on the number of days the foreigners plan to work in China:
- Under the new guideline, foreigners who plan to work in China for less than 90 days need to apply for the Foreigner’s Work Permit in China (≤90 days) or Invitation Letter for Foreign Experts Coming to China.
- The application procedure is quite similar to the application of Foreigner’s Work Permit in China (>90 days). However, the documents to be submitted for the application and the whole process are bit simplified.