Employing Local Personnel in China
In this article, we provide the information related to employing local personnel in China:
- Hiring local employees in China
- The employment contact
- The employee personnel file and employment booklet
- Basic of compensation
- Base salary
- Incentive pay
- individual income tax
- Employment relationship termination
- Turning to HR outsourcing service
Hiring local employees in China
The employment of staff is a fundamental issue that all foreign companies or Representative Office entering China need to be familiar with. What rules and regulations apply for the setting up of a labor contract? How do employees and employers pay social benefits and taxes? What are the differences between employing locals and foreigners? As Representative Offices or the foreign companies that has no legal entity in China aren’t allowed to hire local staff directly; ho
w can they employ staff? How can HR outsourcing contribute to solve these issues? These are examples of questions puzzling companies as they begin the hiring process.
Generally, apart from the usual employment requirement, such as signing contracts with employees, meeting salary standards and issuing salary in a timely manner, employers in China are also obliged to:
1. File their staff employment and dismissal with relevant government bureaus
2. Maintain employees’ personnel file ‘ a unique Chinese document that records all academic and employment history of an employee, and the responsibility of maintaining the records is transferred from one employer to another when the employee changes jobs
3. Withhold and pay individual income tax on behalf of their employees
4. Make monthly contributions to their employees’ social benefits and housing funds
Most of the above processes are complicated by the involvement of several government bureaus and tedious paperwork. For the unfamiliar, staffing their China operations may pose a challenge and many choose to rely on HR service providers and HR specialists to guide them though these HR administrations in China.
The employment contract
Under the People’s Republic of China’s (PRC) Labor Law, all companies are required to sign employment contracts with their employees. While limited liability companies are allowed to sign employment contracts directly with local PRC staff, Representative Offices or the foreign companies that has no legal entity in China must engage licensed HR service providers to hire and dispatch the local Chinese employees.
While there is no standard contract form, the agreement should include:
- Term of contract & Probation period
- Job title and description
- Labor protection and working conditions
- Termination conditions
- Breach of contract provisions & disciplinary rules
- Other provisions such as Training Bond, Non-disclosure agreement and Non-compete agreement
.The employee personnel file & employment booklet
Every employee in China owns a personnel file and a proof of employment history. The personnel file records the employee’s education and employment history, and the responsibility of maintaining this file is transferred from one employer to the next when the employee changes jobs. Unlike the personnel file, regulations on the proof of employment history vary across regions. For Shanghai, employers must withhold the employees’ employment booklet during the employment period. Rep. Offices, which are not allowed to hire local employees directly, must engage a local labor agency to maintain these files.
Basics of compensation
Compensation is typically divided into four elements: base pay, incentives/bonuses, allowances and benefits.
Base salary is paid monthly and varies from 12-14 months. A 13-months pay scheme is common in China, with the additional month’s pay issued during the Spring Festival month. Due to the serious shortage of managerial talent, competitive salaries are required to attract and retain good employees.
Incentives can be paid monthly, quarterly or annually and are increasingly tied to individual performance. While not required, most employers pay annual bonuses (’13th month salary’) at the Spring Festival. The concept of performance-based variable pay is now welcomed by many companies and Chinese employees. Especially within China’s first tier cities, success and monetary reward through performance differentiation are concepts that employees usually appreciate.
Some of the incentives in use include: individual performance plans, team performance plans, cash profit sharing plans (payouts based on organizational profitability), comprehensive performance plans (awards based on the performance of the company, team and individuals), sales bonus plans, sales commissions as well as special recognition awards.
Employee allowances are a somewhat unique and very important form of compensation in China. Although foreign invested companies are not obliged to provide it, allowances are sometimes viewed to be more valuable than the cash equivalent in the Chinese culture. Cash allowances highly valued by employees include transportation, meals, clothing, child care allowances, etc.
Benefits for Chinese employees can be classified as mandatory benefits or supplemental benefits. Mandatory benefits contributions by both employers and employees are stipulated by the China Labor Law and comprise a significant portion of the total compensation. An example of the social benefits scheme widely adopted for Shanghai residents in 2015 is detailed on the right. A gross salary minimum base of RMB 3,271 and maximum cap of RMB 16,353 applies for the calculation of social benefits contribution.
Individual income tax
Local Chinese employees are taxed on the basis of the balance of their monthly income after decocting their social benefits contribution, a standard deduction of RMB 3,500 and then applying the nine-grade progressive rate as shown in the table on the right. The employer is obliged to withhold the full tax amount and submit the taxes to the appropriate Chinese authorities on behalf of its employees.
Taxable Income = Gross Salary ‘ Social Benefits ‘ ‘3,500
IIT = Taxable Income x Tax Rate ‘ Quick Deduction
Net Salary = Gross Salary ‘ Social Benefits ‘ IIT
Employment relationship termination
China’s Labor Law requires companies to pay severance unless the employer dismisses its staff with a specifically defined cause, such as the employee failed to satisfy the conditions of the recruitment under the probationary period, seriously violated company regulations or committed a civil crime. In other situations, the employer will be required to give 30 days’ notice to the employee and/or pay compensations stipulated by the provincial governments. Severance pay is generally equivalent to one month’s salary per year of service. The labor law also requires companies to consult with the appropriate labor union if they wish to reduce their workforce.
Turning to HR outsourcing services
HR business processes are often resource-intensive and time-consuming. As a result, more and more companies are now choosing HR outsourcing as a cost-effective solution. Generally HR outsourcing services in China can be separated into two categories: HR Agency Services and Talent Dispatch Services.
HR Agency Services encompasses basic HR administration, such as: Employment & Dismissal, Payroll
& Individual Income Tax Administration, Social Insurance & Housing Fund Setup & Administration as well as Personnel File Management.
Talent Dispatching Services are used by Representative Offices or the foreign companies that has no legal entity in China to engage a licensed HR service provider in China to employ, sign labor contract and dispatch employee to their offices. The HR service provider will also provide all HR Agency Services mentioned above. Particularly for Representative Offices or the foreign companies that has no legal entity in China, Talent Dispatching is the only avenue to legally recruit local employees.
How HROne can be beneficial to your business
HROne’s service can handle the complete employee benefits for your company in compliance with the local policies and also can take care of the visa for your company’s expatriate employees. We can directly hire employees for a company not having a legal entity in China by our specialized Employee Leasing / Talent dispatching services.