China – Employer of Record

Traditionally, clients hiring even one employee in China would be legally required to establish a representative office, branch office or subsidiary in China, and assess local labor law, prior to hiring their first employee in-country.  For clients hiring a small team in China, we offer an alternative solution.

Globalization Partners provides employee leasing and PEO service in China for clients that want to hire employees and run payroll in China.  Our Global Employer of Record Platform enables clients to run payroll in China while HR services, tax, and compliance management matters are lifted from your shoulders onto ours.

China, home to 1.35 billion people, is the most populous country in the world, and the second largest country by land area. China’s GDP is USD 9.4 trillion, making it the second largest economy in the world, and it ranks at 84 on the World Bank’s scale of ease of doing business. China’s largest exports are computers, broadcasting equipment, telephones, integrated circuits, and office machine parts.

The concept of “face” is highly important in Chinese culture. Face refers to the concepts of honor, reputation, and respect. Take care to not lessen a counterpart’s face in public through reprimands or exposure of mistakes. Giving public compliments and showing respect can increase face.  Avoid jokes, which can easily be misunderstood when translated and can result in loss of face, damaging your relationship. Exchanging business cards is important in China and one should be sure to take the time to read the card before putting it away. Chinese expect punctuality at meetings, and they often like to tackle the difficult issues first. The Chinese are known for being tough negotiators, so you should plan your strategy in advance and know where you are willing to compromise and where you will hold firm; they will be sure to capitalize on any weakness you show. Also be aware that Chinese are likely to be indirect in their objections. So listen to what they say and read the meaning behind it. Be patient, decisions can take a long time, and take the time to establish personal relationships which will greatly increase your success in China.

Basic facts about hiring in China

Written employment contracts are mandatory for full-time employees. Employers have one month to finalize contract terms, after which employees are entitled to twice their salary while they remain without a contract until they have been employed for one year. However, despite the penalty threat, it is not uncommon for local employers to forgo a written contract.

When negotiating terms of an employment contract and offer letter with an employee in China, it may be useful to keep the following standard benefits in China in mind:

Public Holidays 

7 national public holidays are celebrated in China, including:

  • New Year’s Day
  • Chinese New Year (Spring Festival)
  • QingMing Festival
  • Labor Day
  • Dragon Boat Festival
  • Mid-Autum Festival
  • National Day

The statutory minimum is to provide paid leave for the legally required holidays, however, market norm/best practice is to permit the employees a bit of flexibility around the Chinese New Year so that they can avoid the peak travel days. Offering employees an extra day off before and after the officially published dates is an excellent supplementary benefit.

Bonus

A 13th month salary or annual bonus is not required but is market norm in China. A commission plan may be seen as replacing this for a sales employee. When negotiating with employees, it is recommended to clearly state the monthly salary, how many months it will be paid, and the total annual salary.

Working hours

The Labor Law of the People’s Republic of China designates a five-day workweek of no more than 8 hours a day and no more than 44 hours a week. Offices are usually open from 8am to 6pm each day, with a two-hour lunch from noon to 2pm, although hours may vary from city to city. Government offices are open from 9am to 5pm and closed on weekends.

Vacation

Employees who have worked:

  • Less than one year receive no vacation
  • Between one year and less than 10 years are entitled to 5 days of paid annual leave.
  • At least 10 years but less than 20 years are entitled to 10 days of annual leave.
  • At least 20 years of work entitles employees to 15 days of annual leave
  • In practice, most foreign employers hiring mid-level to senior executives in China will provide 2-4 weeks of annual vacation days.
  • Employers can require employees to take their entire annual leave entitlement each year. If an employee does not use all of his or her annual leave in a certain year, and does not agree to carry the leave forward, then the employer must pay the employee 200% of the employee’s average daily wage for each day of unused annual leave, in addition to regular salary.

Sick Leave

  • Employees are entitled to between three and 24 months’ leave for medical treatment depending on the length of service with the employer and the number of years in general employment.
  • Sick pay should not be below 80% of the local minimum wage.
  • If the employee becomes injured or sick on the job, he/she is entitled to a maximum of 12 months’ leave at full pay for medical treatment.

Maternity/Paternity Leave

  • Women are generally entitled to a 98 day paid maternity leave, which they can take starting 15 days before child birth.
  • If the mother has a multiple birth, an additional 15 days is granted for each additional child.
  • Women who have children after the age of 24 are generally granted an additional “late maternity leave” of about 30 days. The actual number of days depends on the city.
  • Women may be entitled to receive full pay during their maternity leave. This is either paid through social security, or if the employer did not contribute to social security on her behalf, then it is to be paid by the employer.

Paternity leave varies widely, depending on location, but by statute does not exceed 14 days. In Shanghai, a male employee can expect 3 days of leave, while in Shenzhen he can expect 10 days if the mother is 23 or older.

Termination/Severance

A probation period may be agreed to between employer and employee in an employment contract. The maximum length of a probation period for an indefinite employment contract is up to 6 months.

  • The amount of notice for termination varies with length of service.
    • One month to two years employment requires a minimum of one week’s notice
    • More than two years employment requires notice of one week per year of completed service up to 12 weeks of notice.
  • Terminations must be with cause and be the reasons must be clearly documented.
  • Contracts may include a payment in lieu of notice (PILON) clause which allows employers to pay employees instead of requiring them to work their notice. Service of such notice (or payment in lieu) will satisfy an employee’s contractual rights, but further statutory rights against the employer may arise on termination. Much longer periods of contractual notice, binding on both parties, are common.
  • It is illegal to terminate a pregnant employee or one who is on maternity leave or breastfeeding.

Taxes

Statutory benefits in China include the five “insurances” and include health insurance, pension, worker’s compensation, unemployment insurance, and maternity benefits. Housing benefits are included on top of the five insurances.  The amounts vary by province and by the employee’s income bracket.

Health Insurance

Basic health and pension insurance is provided through the national system, however, supplementary health insurance may be provided to the employee.

Additional Benefits

Chinese employers contribute to a housing fund, similar to a 401k plan. The fund subsidizes employee real estate rent and purchasing cost. Some contributions are mandatory; however, employees normally negotiate for an increased housing fund rate.

  • Employers usually have to contribute between 5% and 25% of an employee’s annual salary.
  • Different cities have different policies related to the housing fund.

Issuing stock options to employees in China is complicated. We strongly recommend reviewing whether it is “worth” offering this benefit prior to offering stock options to your employees in China.

Bottom Line on benefits

In general, we recommend budgeting 20-30% for employer taxes on top of the total cost of an employee’s salary to estimate the total cost of compensation in China.

Employment Contracts

It legally required to put a strong employment contract in place in China which spells out the terms of the employee’s compensation, benefits, and termination requirements. An offer letter and employment contract in China should always state the salary and any compensation amounts in Chinese Yuan Renminbi rather than a foreign currency.

This information is provided as general accepted information and is not intended as advisory services.

Why Globalization Partners

Chinese employment law is complicated and setting up an office can be quite time consuming. Globalization Partners knows the best practices of HR administration in China and we can relieve you from the burden of dealing with Chinese bureaucracy and of establishing your own offices. With our Global Employer of Record Platform we reduce red tape and hassle so that you can concentrate on your operations. For clients using our employee leasing or PEO service in China, we may also be able to provide recruiting services in Shanghai or Beijing.

If you would like to discuss how Globalization Partners can provide a seamless employee leasing or PEO solution for hiring an employee in China, please contact us.