Employing Local Personnel in China

The employment of staff is a fundamental issue for companies entering China. 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:

a. File their staff employment and dismissal with relevant government bureaus

b. Maintain employees’ personnel files – a unique Chinese document that record all academic and employment history of an employee; the responsibility of maintaining the records is transferred from one employer to another when the employee changes jobs

c. Withhold and pay individual income tax on behalf of their employees

d. 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.

4.1: The Employment Contract
4.2: The Employee Personnel File & Staff Handbook
4.3: Basics of Compensation 
4.4: Terminating the Employment Relationship
4.5: Turning to HR Outsourcing services
4.6: Things to Note for HR Managers
4.7: Consequences of Breaking the Labor Contract Law
4.8: Key Components of a Sound Retention Plan

4.1: 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:

• Term of the employment contract & Probation period
• Job title and description
• Labor protection and working conditions
• Compensation
• Termination conditions
• Breach of contract provisions & disciplinary rules
• Other provisions such as Training Bond, Non-disclosure agreement, and Non-compete agreement

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4.2: The Employee Personnel File & Staff Handbook

Every employee in China owns a personnel file and a proof of employment history. The personnel file details 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 and Beijing, employers must withhold the employees’ staff handbooks 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.

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4.3: 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 1450 RMB/month and 1869 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.

* Applies to foreign workers holding valid work permits, excluding Housing Fund
**Applies to Medical Workplace & Maternity insurance

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) – Deductable -  IIT

IIT: Individual Income Tax - details can be found in the Individual Income Tax in China chapter

A detailed sample calculation of employee’s social benefits, income tax and net salary can be found in the downloadable pdf version of this handbook

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4.4: Terminating the Employment Relationship and Severance Payment

China’s Labor Law requires companies to pay severance unless the employer dismisses its staff with a specifically defined cause, such as that 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.

Severance payments are usually required unless the employee is dismissed with a specifically defined cause or if the contract is terminated by employee himself or herself without complications. However, Severance payments will not be required if the employee does not agree to renew the contract despite being offered the renewal with the same or better conditions than those stipulated in the current contract.

A specifically defined cause includes the following acts by the employee:

The employee:

• Proven not to be able to satisfy the conditions for employment during the probation period
• Materially breached the employer’s specified rules and regulations
• Caused substantial damage to the employer through serious negligence of duty or graft
• Is unable to complete conflicting tasks given by two different employers

If severance payments are required, they are generally equivalent to a month’s worth of salary per year of employment in the company. For employment periods of less than six months, half of a month’s salary shall then be paid as severance payment.

Nonetheless, companies should note that this is only applicable if the employee has been given at least 30 days of prior written notice, or one month’s wage in lieu of notice.

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4.5: 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 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 encompass 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
  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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4.6: Things to Note for HR Managers

1. Do set up company policies to regulate employees’ daily working behavior.
   

   An employee can only be dismissed without paying severance payment if he or she has been found to have seriously breached a company policy that has been acknowledged and signed by the employee. Hence, it is very important for employers to specify clauses to define acts that are harmful to the company in any way.
   
   

2. Do sign a binding contract with an employee if paid training is provided.
   

   An employee can be required to serve a certain period of time with the company if he or she has been provided with training paid by the company. The company is then entitled to demand payment for the training costs if the employee leaves the company prior to the contract expiration date.
   
   

3. Do set probation periods according to the regulations.
   

   The labor contract law requires probation periods to be not more than a month if the contract term is three months or more but less than a year, and not more than two months if the contract term is less than three years. If an employment contract has a term of at least three years or is open-ended, the probation period should not exceed six months.
   
   

4. Do not deduct salaries of employees for any reason other than those allowed by
   the labor law.
   

   Employers are not allowed to deduct an employee’s salary even if company policy has been breached. This is unless an agreement has been reached in writing by both parties.
   
   

5. Do not detain employees’ ID card or charge any deposit.
   

   It is illegal for companies to detain employee ID cards or require deposits to regulate their behavior. Instead, detailed company policies should be drafted as explained earlier.
   
   

6. Do not change job positions of employees without their consent.
   

   The employee is protected by the law from unilateral amendments to his or her job position by the company. Any amendments should be agreed upon and signed in an agreement by both parties.
   
   

7. Do not terminate employment with the employees during their medical or
   maternity leave.
   

   Companies are not allowed to terminate employment contracts with their employees during their medical or maternal leave other than those allowed by the labor law. However, they are allowed to make changes in the labor contract if the changes have been agreed by both parties in writing.
   

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4.7: Consequences of Breaching the Labor Contract Law

Companies are reminded not to breach the labor contract law or take advantage of their employees for short-term gains. While the employee may not retaliate during the period of employment for fear of losing their jobs, employers are actually liable for damages anytime until a year after the employee has left the company.

Foreign companies should also note that the labor rights of employees are well-publicized and understood in China. Hence, HR departments are advised to be well-versed with the new labor contract law and not breach any clauses intentionally or accidentally.

The labor contract law of China does not apply to foreign workers working in a foreign company in China. However, foreigners working in domestic companies are subjected to the labor contract law of China.

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4.8: Key Components of a Sound Retention Plan

A sound talent retention plan is the key to sustaining one’s success in China. Without talent
retention, continued implementation of strategies will be difficult and additional expenditures such as recruitment and training costs will be incurred.

1. Remuneration
   Salaries often reflect one’s social status in China. Hence, better opportunities are often synonymous with higher salaries. This is a root cause behind the worker retention problem in China. In fact, many talented managers have been poached by competitors on the basis of higher salaries. Thus, it is extremely important to keep salaries competitive with market levels, especially for senior positions.
   
   
2. Training and career development
   While competitive salaries offer a short-term solution to retaining talent, training and career development allow companies to align their long-term strategies to employees’ career goals. As foreign languages and specific skill sets are very relevant to one’s career progression, professional training in these areas tends to be highly sought after. Others include clearly specified promotion criteria as well as regular departmental rotation programs. However, employers should note that mentorship programs are now considered to be less desirable, as mentors often withhold important skills and knowledge from their apprentices in order to secure their own positions in the company.
   
   
3. Organizational culture
   In general, Chinese employees prefer flexible organizations that place greater emphasis on interpersonal relationships. This allows room for creativity and creates a friendly working environment on the basis of helping each other instead of following orders. Thus, it will be beneficial for foreign companies to adapt their cultures and inculcate a greater sense of ‘family’ in their China offices. This will create a sense of belonging to the company and instill greater teamwork among the employees.
   
   
4. Quality of relationship with employees
   Just as relationships are important in managing external parties in China, relationships are also necessary in managing and retaining employees. It is a common mistake for managers to distant themselves away from their subordinates. They should instead build genuine friendships with their subordinates such that the latter will remain loyal to the company even in times of difficulties or despite receiving better offers. However, managers should also note that such relationships work in both ways - they may eventually find it difficult to terminate non-performing employees as a result of the personal relationships that may be involved.

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