China has the largest economy in the world. Its annual GDP growth rate has averaged 9% over the past 60 years and reached an all-time high of 18.3% in 2021. Such incredible economic growth offers multiple benefits for business expansion on the Chinese market.
However, hiring employees in China poses many challenges for foreign companies. China has its own complex set of labor laws, and failure to comply with these laws can result in fees, back payments, or even the loss of your business license.
This guide outlines everything you need to know about hiring compliant employees in China and doing business in this market. Let’s look.
How to Hire Employees in China
Foreign companies can hire employees in China in three ways: by creating a legal entity, by partnering with an official employer in China or by hiring subcontractors.
Establish a legal entity in China
If a company has long-term expansion plans in China, it may choose to set up a legal entity. To create an entity and hire employees in China, you must first choose a legal structure For Your Business. Common structures include:
- Wholly Foreign-Owned Enterprise (WFOE)
- Joint venture (JV)
- Representative office
You must then file and register your business with the relevant Chinese government agencies.
The creation of a legal entity is a complex process that requires a lot of time and money. Many companies choose to work with a formal employer in China instead, allowing them to have a legal presence in China without establishing a local entity.
Partner with an official employer in China
An Employer of Record (EoR) is a third-party organization that hires, pays, and manages your distributed workforce on behalf of your business. Also considered a Foreign Business Service Company (FESCO) in China, an EoR allows you to attract top talent to China and speed up the onboarding process without creating a legal entity. This option allows you to test the market before diving into a long-term expansion.
An EoR partner knows the labor law in China. They handle everything from onboarding and payroll to risk mitigation so you can focus on overseeing day-to-day employee duties and business operations while maintaining compliance with Chinese labor laws .
The relationship between the EoR, supported employee in China, and your company would look like this:
Learn more about what is an employer of record and how does it work.
Hire contractors in China
Some companies may decide to launch their hiring efforts globally by hiring contractors instead of hiring employees. However, according to labor law in China, it is illegal for foreign companies to hire subcontractors directly. Instead, they also have to hire contractors through a local entity, which is usually harder than it’s worth.
Contractor agreements should include specific terms, such as:
- Project scope
- Tasks to be completed
- Project start and end date
- Non-disclosure statements (NDAs) or non-competition clauses
- Guidelines for contract termination
However, companies that engage contractors in China risk being misranked. For example, if you manage the hours or working methods of your contractors, Chinese regulators would consider your talent to be employees under Chinese law, and your company would face legal consequences.
Labor Law in China: What International Employers Need to Know
Every employee have a work contract in China. They can be fixed term or indefinite and may be subject to a trial period.
Fixed-term contracts can be of any duration. However, they can only be renewed once and the duration of the contract determines the maximum trial period of the contract.
Chinese contract law is enforced with hefty fines, and local labor offices randomly audit foreign companies to ensure they follow the practices required for hiring in China.
Payroll in China
Paying employees in China is relatively simple. Payroll follows similar cycles and regulations as other countries. However, there are a few key differences:
- Cycle. Salaries are paid monthly and on the last working day of the month.
- Taxes. The tax year is the calendar year. Employers must file the employee’s tax return monthly.
- Hours. A standard working day in China is eight hours a day, five days a week, for a 40-hour work week. This only applies to specific positions and is subject to the approval of the labor authority.
- Over time. For work performed beyond the normal limits, employees are paid 150% of their normal rate on a working day, 200% on a Saturday or Sunday and 300% on a public holiday.
- Submissions. Required employer contributions are governed by local rules and vary by province. For example, total payroll contributions in Beijing, China range from 27.16 to 28.68%.
Learn more about Chinese labor law.
Risks Employers Might Face When Hiring in China
Employee classification, permanent establishment, intellectual property protection, and China’s social credit system present unique risks for businesses expanding into China.
Let’s look at each in detail:
- Classification of employees. The correct classification of employees and contractors in China requires a thorough knowledge of local labor laws. Foreign companies can suddenly find themselves saddled with fees, back pay and criminal penalties for misclassifying one’s talent in China.
- A permanent establishment. Specific working conditions qualify a foreign company as a permanent establishment in China. If you meet any of these conditions, you are considered a permanent establishment under local law and subject to local taxes.
- Intellectual Property (IP). Intellectual property laws are not strict in China, which makes stealing intellectual property a low-risk and high-reward scheme. Foreign companies operating in China should take appropriate measures to ensure that their brand image, patents and other intellectual property rights are fully protected.
- Business social credit score penalties. Companies doing business in China are assigned a social credit score–a qualitative score, based on a regular evaluation of their commercial activities, representative of their reliability. Bad scores translate to limited business opportunities, while good scores warrant tax breaks and other rewards.
The intricacies of Chinese labor law present many non-compliance risks for foreign companies. Before hiring in China, companies must conduct a thorough study of Chinese labor laws or partner with an employer of record to ensure compliance.
Simplify hiring employees in China
The Chinese market presents a multitude of opportunities and challenges for international companies. While expanding into this market can be overwhelming, working with an experienced partner can make all the difference.
Velocity Global’s Industry Leader Employer of record (EoR) The solution handles onboarding, payroll, compliance, and ongoing human resources management so you can focus on overseeing the day-to-day tasks and business operations of your employees.
With our global EoR solution, your business can be up and running in China within days while fully complying with local Chinese labor laws.
If you want to quickly and compliantly hire employees in China, get in touch with Velocity Global today to find out more. We are waiting for you.