By Globalization Partners
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China has the second-largest economy globally in terms of gross domestic product (GDP), and much of that success comes from the country’s talented labor force. Whether you’re expanding your business into new territory or seeking skilled international workers for an upcoming project, you have two options — securing long-term employees or hiring contractors in China. Though each could perform a vital role in your company, there are important differences between the two you must be aware of to avoid any legal ramifications.
This article explains more about hiring independent contractors in China, including how they differ from employees and guidance for paying them.
Employees vs. contractors
Many companies find success with a hybrid employment model where permanent employees are responsible for the business’s core operations and independent contractors complete short-term projects. These are the key differences between the two positions.
All companies must have a local presence in China to hire employees there, unless they are working with an Employer of Record (EOR) to act as the official employer without the need for a Chinese subsidiary. The Circular of the Ministry of Labor and Social Security on the Establishment of Employment Relationship defines a legal employee-employer relationship as one where:
- Both the hiring party and employee are legally qualified to act as such.
- The employee is subject to the company’s lawful regulations.
- The employee performs an essential task for the company that pays him or her in exchange.
Some provinces or regions may have additional criteria for defining the relationship. Employees are a part of your company’s payroll and are entitled to benefits, including insurance and paid time off. Because they are subject to your regulations, you determine their work schedule, the tasks they’re responsible for, and the amount they receive for their salary. Terminating an employee-employer relationship requires notice and often special severance pay.
Hiring employees is the best option if you’re looking for professionals you can invest in through ongoing training and bonuses to help them develop their skills and manage more projects as they grow. Along with managing all legal paperwork, your company is also responsible for withholding taxes from paychecks, providing a benefits package, and reimbursing work-related expenses.
An independent contractor in China is the right option if you need a skilled worker to fulfill a short-term need for your company, like a special project or temporary role. Contractors in China are not entitled to insurance, housing reserve, or paid leave like employees are. As such, the contractor exists beyond the company’s regulations and scheduling rules — the finished product is more important than the method used to produce it as long as the contractor upholds their end of the agreement in terms of quality and completion date.
The benefit of working with contractors is that they are very skilled in their area of expertise, and you can choose the best candidates for the project based on their experience, portfolio, and former clients. Likewise, the contractor is free to pursue other clients and industries upon completing your project, with no obligation required for either party.
Where to hire contractors in China
Employees are a critical and valuable asset for companies, but working with contractors may be necessary for specific projects, including localizing your company in a new market and needing assistance with branding, marketing, and labeling according to your chosen region’s laws.
Here is how to get contractors in China for your upcoming project or company transition:
- Search qualified candidates through online freelancer databases.
- Post a job listing on a virtual employment board for contractors.
- Analyze industry-specific recruitment resources.
- Contact local outsourcing companies in your chosen region of business.
Legal requirements for hiring Contractors in China
You are required to sign an indefinite formal employment agreement with your contractors if they have worked for your company for 10 years or longer or if you have signed two fixed-term agreements. The most important thing to remember when hiring and paying contractors in China is that you must take active steps to avoid misclassification. Misclassification is when you enlist the help of independent contractors but manage them as employees, therefore eliminating the obligation to pay them mandatory salaries or benefits. This is illegal and highly monitored throughout China.
According to Chinese labor laws, a contractor could be misclassified as a de facto employee if:
- Your company pays the individual a set salary and provides insurance or other social benefits.
- The contractor is required to follow all of your company’s regulations and is under your control.
- The contractor is performing an essential function for your company’s core business operations.
If your company is proven to have misclassified a contractor, you will face legal fees and liabilities. Since every city and tribunal in China has its own local labor laws, contact the governing body in your chosen region for more information about avoiding de facto misclassification.
1. Written contract
One of the easiest ways to avoid misclassification is to have a written contract with each independent contractor and employee. The contract must list all necessary information about the nature of your working relationship and mutual expectations, including the following:
- The scope of the project
- A list of expected tasks for the project to be considered complete
- The project’s start and end date
- The amount, delivery method, and payment structure of compensation
- Rights to any intellectual property (IP) created during the partnership
- Who is liable for which tasks and resources
- Non-disclosure statements (NDAs) or non-compete clauses, where applicable
- Guidelines for contract termination for each party
Written employment contracts are required for permanent employees and highly advisable for all contractor relationships. Unlike permanent employment contracts, project-based contracts are valid for the task at hand rather than an indefinite length of time. The contract is considered fulfilled upon project completion.
2. Benefits and insurance
Independent contractors are not entitled to receive insurance, pension, or benefits, including retirement, medical care, workers’ compensation, maternity leave, and life insurance. Contractors are responsible for securing their own insurance outside of an employment contract. Avoid extending benefits packages to contractors, which could put you at risk of misclassification.
3. Termination and severance
Whether your company decides to shift directions mid-project or your chosen contractors fail to uphold their contractual obligations, there may come a time you need to terminate an agreement. Contractors work on a project-by-project basis, so termination is easier and more flexible than terminating a permanent employee. Your employer-contractor contract should include a section for reasonable and at-will termination, including any necessary fees that may incur as a result.
Depending on the terms you agreed upon, your company may or may not still be liable to pay the contractor some or all of the amount owed. Severance is not required unless you and the contractor both agreed to it in written terms. Should the contractor suffer a loss due to your company breaching the contract, he or she may be eligible to receive additional compensation or pursue legal action.
4. Intellectual property
Chinese law dictates that an individual who creates a copyrighted work is the rightful owner of said work unless the circumstance is “work made for hire,” or WFH. WFH includes items commissioned by a company for an employee or independent contractor to create as a part of an established written agreement between the two parties. In the case of WFH projects, the author and copyright holder is the paying party, such as the company that commissioned said work. China’s WFH law includes additional stipulations, including:
- The employer may have priority usage of the WFH over the employee it belongs to if using the project in normal business operations.
- The employee or contractor commissioned to complete WFH cannot allow the project to be used by another third party within two years of completion without asking permission from the initial paying company. Should the company agree, then the two parties will share the license fee.
- Any engineering or product design drawings, software, maps, or similar products created by an employee but paid for by the company with company resources are legally the company’s property.
- In most cases, the employer and the contractor or employee must sign a mutual agreement in the written contract detailing the copyright property ownership before beginning a WFH project.
The WFH IP protection also applies to some inventions for hire. In most cases, the employer will retain the patent application for the invention, but the employee will have patent ownership of the invention itself.
Tax practices and considerations
Companies are required to withhold tax payments from employee salaries to report and pay to the government. Independent contractors are not a part of your employee payroll and are responsible for calculating and paying their own taxes on time. Depending on your country of origin, your company may still be responsible for calculating and tracking all expenses and using the information when filing your corporate taxes.
How payroll works when paying contractors in China
When paying a contractor in China, you can agree to payment terms convenient for both of you, like payment per hour or a single payment to cover the project’s entire cost. China’s minimum wage varies across provinces, and local governments must update the amount regularly based on the local cost of living and new development in the region. The highest minimum wage per month is currently in Shanghai at RMB元2,480. Beijing’s minimum wage is RMB元24 per hour.
Popular payment structures for contractors include:
- Pre-payment: A pre-payment plan is where the company pays contractors for their services before they begin the project. Though this offers you no guarantee of the final product’s quality or completion time, it assures the contractors that they will be paid for their time. In many cases, the contractors may rely on pre-payment fees to supply the resources necessary to complete the task you’ve hired them for.
- Upon completion: Paying a contractor upon completion is a safe method of ensuring the final product or service hired meets your standards and all the terms of your written agreement, but some contractors may be hesitant to accept this payment structure without written assurance that they will be compensated for their time.
- Partial deposit: Protect your investment and the contractors’ time by paying the contractors an agreed-upon deposit amount before the project begins. Then submit final payment after they have finished and their performance or results have met your standards and the agreement in your written contract.
1. Currency and exchange rates
The RMB is the name of China’s official currency, while the Chinese Yuan (CNY) refers to the primary unit of RMB. Currency transfer fees and exchange rates vary depending on your province, country of origin, payment delivery method, and financial institution. For example, current conversion examples include:
- CNY¥1 is equal to US$0.16
- CNY¥1 is equal to MXN$3.12
- CNY¥1 is equal to GBP£0.11
- CNY¥1 is equal to CHF₣0.14
2. Payroll handling methods
How you pay an independent contractor depends on your preference, budget, timeline, and country of origin. Common options for non-employee transactions are:
- Direct deposits: Direct deposits, or bank transfers, let you deposit the amount owed directly into the contractor’s account through your financial institution. While this is a fast payment method, transfer fees and exchange rates apply.
- Paper checks: Paper checks are the only payment option in many of the world’s regions, but they are not the safest or quickest method available since they could get lost or destroyed in transit. The most significant advantage of a paper check is that it’s easier to stop payment on the check before it’s cashed, which is more challenging to do with a bank transfer or money order.
- Money orders: Money orders let you create documentation of your payment through a verifiable, safe transfer method, but it can be an inconvenient form of payment if you or the contractor do not live in a region with easy access to a bank or a post office that can process the order.
- Virtual wallets: Virtual wallets let you transfer funds from your company’s account to a contractor’s linked debit card or bank account. While fees still apply, this is a fast, safe, and globally recognized payment method.
Hire talented employees in China with help from Globalization Partners
Hiring an international contractor in China could be the perfect fit for your company’s upcoming project as long as you’re careful to avoid misclassification. A global EOR like Globalization Partners can help you navigate local labor laws to differentiate your contractors from permanent employees and avoid costly litigation. Globalization Partners lets you hire talented employees in China without the need for a local subsidiary. We’ll handle everything related to employment, including hiring, currency exchange, payroll, and human resources, and help you stay compliant with local labor laws.