Employing in China: five things you need to know

Estimated reading time 3 minutes

With outstanding GDP growth over the past twenty years, the People’s Republic of China (PRC) is taking its place among the world’s top economies and attracting significant foreign investment.

But for businesses looking to expand into China, navigating labour law can be complex and unpredictable. Historically, mistrust (either real or perceived) by foreign investors towards the local workforce has prompted the Government to introduce various employment protections for Chinese workers, which can trip up incoming employers.

If you are considering taking on workers in China, here are five things you should know:

1. Labour laws vary across China - depending on location…

Each municipality has its own rules including levels of mandatory employee contributions, tax deductions, and fiscal obligations.  Chinese labour authorities have numerous discretionary powers and a preference towards local manpower which makes employment-related planning very challenging.  Companies are recommended to seek local advice.

2. ….But some rules are mandatory throughout the PRC

Mandatory employment protections include:

• protections for fixed term workers:  after a fixed-term contract has been renewed twice, the third contract must be an open-ended/permanent contract;
• mandatory six-month maximum probation periods; and
• mandatory severance payments: calculated on the basis of a month’s average salary multiplied by the number of years of continuous employment, for unlawful termination of a labour contract.

3. Outsourcing arrangements are increasingly regulated….

Points 1 and 2 above have caused businesses expanding into China to make increased use of outsourced hiring arrangements where they need to hire PRC nationals for a short period (‘Dispatched Workers’).  But, in turn, these arrangements have become increasingly regulated.

Dispatched Workers can only be provided by licensed agencies for a fixed two-year period and cannot exceed one tenth of the total number of employees. Further, such outsourcing requires the company to enter into a service contract with a licensed agency which bears all liabilities related to the worker (at a high service fee).

However, dispatch arrangements remain a preferred recruitment method especially for representative offices which, having no legal personality in China, could not otherwise hire any personnel except their Chief Representative.

4. …But direct employment comes with high costs too – which change frequently

As discouraging as the high fees of outsourcing may be, PRC employment rules impose several additional costs on employers which typically range between 30% and 40% of the gross salary of each employee, depending on the municipality. These include:

• mandatory contributions – such as social security, medical insurance, pension, unemployment benefits - for all employees; and
• housing funds for Chinese workers.

Contributions are calculated as fixed amounts per salary bracket – the highest of which is approximately 17,000 RMB (approximately €2,250).   In addition, the rate for each contributory item is likely to change regularly – sometimes multiple times per year.

5. Employee contributions can be complex to administer

Each employer must pay personal income tax and contributions on behalf of its employees on a monthly basis. This requires correct calculations factoring in potential overtime – which is paid according to a table set out in legislation – and means most companies use the expensive payroll services of licensed HR companies.

Further information

For further information or to discuss any of the issues raised, please contact Nicola Alessandro Cieri, RsA Asia, on +86 131 2795 6107 or +86 (0) 21 633 622 99, or at nc@rsa-tax.com.