China, one of the historically fastest growing economies in the world, is continuing to rise in the world economy. The central government is committed to continuing empowering its growth and development. While its economy has moved past the phase where it experienced incredible, dramatic growth, analysts expect the economy to grow in the high single digits in the years to come. This growth, in addition to constantly rising local incomes, provides opportunities for foreign companies to increase their revenues by expanding into China.
When expanding into a new country, any company will need a local team to find the most success. Since each country has its own complex array of labor laws, a lot of research needs to be done before hiring your first employee. Here’s an introductory guide that will help you know everything about hiring in China.
Hiring in China: Establishing a Legal Entity
It is illegal, generally, for a foreign entity to hire a Chinese national without a legal presence in the country. Establishing a business in China can be a complex, lengthy process, and it differs depending on where you want to establish that business. Each region has its own process and requirements.
China does not allow companies to hire employees directly. Every new hire must go through an intermediary company. This began when China opened its markets in the 1990’s. As many government businesses closed down to make way for private investment, workers lost their jobs. China established a company, Foreign Enterprises Service Company Limited (FESCO), through which all foreign businesses needed to hire employees. The company’s purpose was to ensure that foreign companies did not have an advantage in recruiting over domestic ones.
Intermediary companies make hiring a difficult process as bureaucracy, paperwork, and processes can be complex and time-consuming. For example, you cannot simply extend a contract. It must go through an intermediary, use their contract format, and include their wages. You must also pay fees to the intermediary company that can be extremely costly.
Contract Options for Hiring in China
Every employee must have an employment contract in China. While the intermediary companies execute a contract, you should still know about the basic laws that govern them. Contracts may be fixed-term or open-ended. Canada’s trade commissioner strongly recommends to not use open-ended contracts because local labor law leans in favor of the employee, and dismissing an open-ended employee can be difficult and costly.
Contract law is enforced with large fines. If you do not have a contract with an employee within one month, you will incur a 200% penalty on the salary of the employee until the contract is signed. The same is true if a contract expires, is not renewed, but the employee still works for your team.
Fixed-term contracts are the best way to manage employees because it provides a way to dismiss an employee when the term of the contract is up. This is the easiest way to end the relationship if the employee’s performance is not matching your expectations. However, the minimum length of a fixed-term contract in China is two years.
All contracts in China may be subject to a probationary period, regulated by Chinese law. The maximum probation period for a fixed-term contract depends on the length of the contract.
- Two to three years: two months probation
- Greater than three years: six months probation
- Open-ended contract: six months probation
Each employee has an official personnel file, which follows the employee to whichever business for which he or she works. Local labor bureaus will do random searches of foreign-owned enterprises to ensure that hiring practices are met.
There Are More Agile International Hiring Methods
There is one option that avoids the headaches of opening a legal entity and dealing with the bureaucratic roadblock that is China’s employment system. This compliant option is to use an International PEO (Professional Employer Organization).
International PEO allows you to have a legal presence in China without establishing a foreign legal entity. An International PEO service manages employee onboarding, benefits, payroll, and on-going HR management. These services take care of all the legal work so you can focus on your success in-country while the International PEO eliminates legal risks involved in unwitting noncompliance.
To learn more about hiring in China or best practices for expanding globally, give us a call!