A fundamental issue that all companies entering China need to be familiar with is the employment of staff. 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 aren’t allowed to hire local staff directly; how can they employ staff? How can HR outsourcing contribute to solve these issues? These are examples of questions puzzling many companies as they begin the hiring process.

 

Generally, apart from the usual employment requirement, such as signing contracts with workers, meeting wage 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.     Keep employees’ personnel files – 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 service providers and HR specialists to guide them though these HR administrations.

 Section 1: The Employment Contract
 Section 2: The Employee Personnel File & Staff Handbook
 Section 3: Basics of Compensation 
 Section 4: Terminating the Employment Relationship
 Section 5: Turning to HR Outsourcing services

 

 

 Section 1: 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 must engage authorized service providers to hire and dispatch the representative office’s local employees.  

 

While there is no standard contract form, the agreement should include:

 

(1) The name, domicile and legal representative or main person in charge of the Employer;
(2) The name, domicile and number of the resident ID card or other valid identity document of the Employee;
(3) The term of the employment contract;
(4) The job description and the place of work;
(5) Working hours, rest and leave;
(6) Labor compensation;
(7) Social insurance;
(8) Labor protection, working conditions and protection against occupational hazards; and
(9) Other matters which laws and statutes require to be included in employment contracts.

In addition to the requisite terms mentioned above, an Employer and a Employee may agree to stipulate other matters in the employment contract, such as probation period, training, confidentiality, supplementary insurance and benefits, etc.

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  Section 2: The Employee Personnel File & Staff Handbook

Every employee in China owns a personnel file. The personnel file is an official document detailing the employee’s personal information, such as the family address, phone number, emergency contact person, education and employment history. Responsibility of maintaining this file is transferred from one employer to the next when the employee changes jobs.

 

On the other hand, the staff handbook records and serves as proof to one’s employment history. However, it differs from the personnel file in that it is not a legal requirement in all cities. For instance, the local government of Beijing does not require the use of such a handbook. However, employers in Shanghai are required by law to withhold the handbook during the period of employment, while representative offices (which are not allowed to hire local employees directly) are to engage local labor agencies to maintain these books. 

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  Section 3: Basics of Compensation

Compensation is typically divided into four elements: base pay, incentives/bonuses, allowances and benefits.

Base Pay

Base pay 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 (usually February).  The minimum wage in Shanghai and Beijing is 960 RMB/month and 800 RMB/month respectively. However, salaries for mid-level positions and experienced professionals are growing fast and may come close to rates in developed countries such as Germany or the US for a few positions.  Due to the serious shortage of managerial talent, such competitive salaries are required to attract and retain good employees. 

 

Incentive Pay

Incentives can be paid monthly, quarterly or annually and are increasingly tied to individual performance. While not required, most employers pay annual bonuses (“13^th month pay”) at the Spring Festival. The concept of performance-based variable pay is now welcomed by many organizations 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.

 

Allowances

Personal allowances are a somewhat unique and very important form of compensation in China. Although FIEs 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 and child care allowances.

  

Benefits

Benefits for Chinese employees can be classified as mandatory or supplementary. 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 benefit schemes widely adopted for Shanghai and Beijing residents are detailed below. 

 

Supplementary benefits are in the form of a commercial insurance which the employer purchases from a commercial insurance company on behalf of their employees. The most common commercial insurance is health insurance which reimburses employees their medical costs above and over mandatory benefit reimbursements. Supplementary benefits are subject to individual income tax. 

Other common types of supplementary benefits are mobile phone allowance, transport and meal costs. These benefits are subject to individual income tax. 

From July 2009, non-Shanghai residents will be entitled to the urban social benefits scheme currently only enjoyed by Shanghai residents. For employees that hold rural Hukoui, another scheme applies whereby the standard contribution by employers is at RMB 246.90.  Increasingly common, supplemental benefits are voluntarily provided by the employer, especially for employees over certain pay levels.

 

The net salary of a Chinese employee will thus be computed as such

 

Net Salary = Gross Salary – Social Benefits (By Employee) – IIT

IIT: Individual Income Tax (refer to Individual Income Tax in China for more information on computation method)

 

A detailed sample calculation of employee’s social benefits, income tax and net salary can be found in Appendix A.

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  Section 4: Terminating the Employment Relationship

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.

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 Section 5: Turning to HR Outsourcing Services

HR business processes are often resource-intensive and time-consuming.  As a result, many companies are now choosing outsourcing as a cost-effective solution.  Generally, HR outsourcing services can be separated into two categories: HR Agency Services and Talent Dispatching Services.

 

HR Agency Services encompasses basic HR administration, such as: Employment & Dismissal, Payroll & Individual Income Tax Administration, Social Security & Housing Fund Setup & Administration as well as Personnel File Management. 

 

Talent Dispatching Services are used by companies and representative offices to engage an authorized third-party HR representative to employ, sign labor contract and dispatch staff to their offices.  The HR representative will also provide all HR Agency Services mentioned above.  Particularly for Representative Offices in China, Talent Dispatching is the only avenue to legally recruit local employees.

The details of typical services provided by HR Service Providers include:

• Labor contract (only applicable to Talent Dispatching Services)
  Sign labor contracts with its client’s employees, taking legal liability as the official employer.
  
• Employment & Dismissal
  Chinese law requires all labor contracts to be registered with the relevant authorities. The authorities would also have to be informed of any dismissal of employees.
  
• Payroll and Individual Income Tax Administration
  Issuance of salary to employees, as well as withholding and submitting taxes to the relevant government authorities on behalf of its client.
  
• Social insurance and benefits
  Administration of all social benefit and insurance payments on behalf for the client’s employees. Some providers may also be able to offer wide variety of insurance schemes, including group insurance provisions for additional coverage.
  
• Personnel file management: Each employee in China owns a personnel file, which contains resume, birth certificate, university degree, etc. The HR service provider collects and maintains the personnel file and all related certifications during the employee’s period of employment.
  
• Personnel file management
  Collects and maintains the personnel file and all related certifications during the employee’s employment period. Each employee in China owns a personnel file, which contains his or her resume, birth certificate, university degree, etc.
  
• Recruitment & Staffing
  Analysis of the job description, search planning and identification of best fit candidate for the client’s needs. Staffing solutions is also highly sought after service by companies in China.

A good HR service provider should also provide consultation on labor and HR related policies for the client, as well as assist in negotiating and managing labor disputes and emergencies during the employment term.

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For more information, please contact Katja Friendrich: katja.friedrich@jljgroup.com