A firm understanding of China’s laws and regulations related to human resources and payroll management is essential for foreign investors who want to establish or are already running foreign invested entities in China. In principle, companies located anywhere in the world may hire 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.
There are also a wide range of government institutions involved in HR processes, and while key laws are drafted by the central government, numerous bylaws and regulations are instituted at the local level that investor should pay attention to.
Overview of HR and payroll requirements
| 1. | 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. |
| 2. | Working hour system | 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. |
| 3. | Payment and tax | An employee’s salary package should 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. |
| 4. | 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 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, but this obligation can be exempted if they come from countries that have social insurance exemption agreements with China. |
| 5. | 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. |
| 6. | 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. |
| 7. | No at-will termination | Terminating employees in China is both difficult and expensive. Employees may resign with 30 days’ notice after their probation period, but for employers, there are limited grounds for terminating an employee before their contract has come to an end. |
| 8. | 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. |
| 9. | 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. |
Human resource management in China
Labor laws
There are two primary sources of employment law instituted by the central government –the Labor Law (1995) which defines the rights and obligations of both parties and protect the legitimate rights and interests of workers, and the Labor Contract Law (2008) which was adopted to ensure an efficient implementation of the employment rules and principles mentioned in the labor law.
Other labor laws instituted centrally that investors should take note of when doing business in China include:
- Social Security Law;
- Labor Dispute Mediation and Arbitration Law;
- Employment Promotion Law;
- Labor Union Law;
- Law of the People’s Republic of China on Work Safety;
- Guideline for the Conclusion of Electronic Labor Contracts; and
- Women’s Protection Law.
Hiring employees
Hiring staff is one of the first key decisions a company will come across. Before employing significant numbers of employees, a company should first consider the challenges and employer obligations that may arise when opening or expanding a business.
An enterprise can hire employees through three options:
- Direct Hiring of employees;
- Labor Dispatch; and.
- Services Outsourcing.
Hiring foreign employees implies hiring non-Chinese nationals who do not have permanent residency in China to engage in social labor work in exchange for labor remuneration. 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 meet the following 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 a confirmed employer in China; and
- Hold a valid passport or any other international travel document.
China business visa and work permit
Foreign nationals visiting China need to acquire a visa before entering the country, except for special circumstances allowing for visa-free entry.
The administrative procedures for hiring foreign employees are slightly different depending on the intended working period in China. According to the revised Administrative Regulations on the Employment of Foreigners in China and the Entry-Exit Regulation (2013), the due procedures for a company to hire foreign employees who will work in China for over 90 days 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.
A Chinese visa grants the holder the right to enter China and stay in the country for a fixed number of days. There are several visa categories, depending on the reason the foreigner is coming to China.
Terminating employees
Terminating an employee in China is more difficult and often more expensive than in many other countries since the Chinese Labor Contract Law offers a high degree of protection to workers’ job security.
The range of legitimate grounds for dismissing an employee is considerably wider during their probation period. However, in other circumstances, there are limited grounds for terminating an employee before their contract has come to an end.
During the term of a labor contract, the employment relationship can be terminated either by mutual agreement or by unilateral termination with lawful causes. The unilateral termination includes immediate termination situations and termination with 30 days’ notice. In certain special circumstances, the employee could also be terminated by mass-layoff, or by automatic termination upon bankruptcy, revocation, or dissolution.
Part-time contracts can be terminated at will by both parties. For job contracts, the same rules for termination apply as for fixed-term contracts.
Payroll in China
Businesses in China have a diverse array of payroll needs whether they are traditional manufacturers employing workers in factories, or young tech startups experimenting with innovative new products and services. An employee’s salary package includes base salary, allowances, bonuses, non-monetary pension plans, and employer’s portion of social security contribution.
Wages and salary
A minimum wage is the lowest remuneration that employers can legally pay their employees. Generally, minimum wage doesn’t include overtime payment, allowance for special working environment, as well as different forms welfare, such as social security contributions.
Overtime is paid differently depending on the work hour system adopted by the employer, by either standard work hours, comprehensive work hours or non-fixed work hours. The standard work hour system requires that an employee’s normal working day should not exceed eight hours, that the normal working week not exceed 40 hours, and that each employee should be guaranteed at least one rest day per week. The majority of white-collar jobs in China now operate according to this model.
The company can also pay bonuses at various points throughout the year. Under Chinese IIT law, foreign employees can use a preferential IIT policy on fringe benefits valid till December 31, 2023.
Apart from salary, overtime, and bonuses, an employee may be entitled to several kinds of allowances benefits designed to retain staff.
China welfare system
China’s social security system is made up of five different kinds of insurance, plus one mandatory housing fund –
|
China Social Security System |
|||
|
Category |
Contribution* |
Description |
|
|
|
Employer rates |
Employee rates |
|
|
Pension insurance |
Around 16% |
Around 8% |
Designed to provide necessary financial support to individuals after their retirement |
|
Unemployment insurance |
0.5%-1% |
Around 0.5% |
Designed to provide financial support to individuals who faultlessly lost their job within certain period |
|
Medical insurance |
5%-12% |
Around 2% |
In the event of illness/non-occupational injury, an employee can have part of the treatment cost covered by medical insurance |
|
Work-related injury insurance** |
0.5%-2% |
- |
Designed to cover the cost of treatment should an occupational injury or illness occur |
|
Maternity insurance*** |
0.5%-1% |
- |
Designed to cover part of the female employee’s medical expense of childbirth and their salary during the maternity leave |
|
Housing fund |
5%-12%**** |
5%-12% |
Designed to ensure that workers save to purchase housing |
|
* The amount of contribution in each category is calculated by utilizing the employee’s payment base figure and multiplying it by different percentages required by each local government entity. **Depending on what kind of work is being carried out by the employee. ***Maternity insurance has been merged into medical insurance in most cities. The contribution rate of the employer shall be the sum of their original contribution rates to the medical insurance and the maternity insurance. The contribution rate of the employee shall be their original contribution rate to the medical insurance, considering employees don’t need to contribute to the maternity insurance. ***In certain cities, employer and employee are allowed to contribute more than 12 percent. |
|||
Whenever hiring new staff, employers need to register their employees with the local social insurance bureau and the housing fund bureau. 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.
Public holidays and leaves
Statutory annual leave in China is generally granted based on an employee’s work tenure and increases with the time spent with a business.
However, employees will be entitled to public holidays as set forth by the General Office of the State Council. The official holiday schedule is released for the next year in December.
Over public holidays, employees in China are also entitled to paid maternity leave, paternity leave, and sick leave.
Individual income tax
In China, it’s the employer’s responsibility to accurately calculate and withhold individual income tax (IIT) on employment income, including wages and salaries, bonuses, stock options, and allowances, before paying a net amount to its employee.
IIT in China is levied at a progressive rate, ranging from three percent for monthly taxable incomes of RMB 1,500 (US$240) or less, to 45 percent for taxable incomes greater than RMB 80,000 (US$12,725).
