China has the world’s largest economy. Its annual GDP growth rate has averaged 9% over the past 60 years and reached an all-time high of 18.3% in 2021. Such incredible economic growth offers multiple benefits for business expansion into the Chinese market.
However, hiring employees in China poses many challenges for foreign companies. China has its own complex array of labor laws, and failing to comply with these laws can result in fees, back pay, or even the loss of your business license.
This guide outlines everything you need to know about compliantly hiring employees in China and conducting business in this market.
Foreign businesses can hire employees in China in three ways: establishing a legal entity, partnering with an employer of record in China, or engaging contractors.
Establish a legal entity in China
If a company has plans for long-term expansion into China, they may choose to establish a legal entity. To set up an entity and hire employees in China, you must first choose a legal structure for your business. Common structures include:
- Wholly Foreign-Owned Enterprise (WFOE)
- Joint Venture (JV)
- Representative Office
You must then file and register your business with the relevant Chinese governmental bodies.
Establishing a legal entity is a complex process that requires significant time and money. Many businesses opt to work with an employer of record in China instead, which allows them to have a legal presence in China without establishing a local entity.
Partner with an employer of record in China
An employer of record (EOR) in China is a third-party organization that hires, pays, and manages your distributed workforce on behalf of your company. Also regarded as a Foreign Enterprise Service Company (FESCO) in China, an EOR allows you to attract top talent in China and expedite the onboarding process without setting up a legal entity. This option lets you test the market before diving into long-term expansion.
An EOR partner is familiar with employment law in China. They handle everything from onboarding and payroll to risk mitigation so you can focus on overseeing day-to-day employee tasks and business operations while maintaining compliance with Chinese labor laws.
The relationship between the EOR, supported employee in China, and your company would look like the following:
Learn more: What Is an Employer of Record (EOR)?
Engage contractors in China
Some companies may decide to initiate their global hiring efforts by engaging contractors instead of hiring employees. However, according to employment law in China, it is illegal for foreign companies to hire contractors directly. Instead, they must also hire contractors through a local entity, which is usually more trouble than it’s worth.
Contractor agreements must include specific terms, such as:
- Project scope
- Tasks to be completed
- Start and end date of the project
- Non-disclosure statements (NDAs) or non-compete clauses
- Guidelines for contract termination
However, companies that engage contractors in China risk misclassification. For example, if you manage your contractors' working hours or methods, Chinese regulators would deem your talent as employees under Chinese law, and your business would face legal consequences.
Fixed-term contracts can be of any length. However, they can be renewed only once, and the term length dictates the maximum probationary period for the contract.
Chinese contract law is enforced with large fines, and local labor bureaus randomly audit foreign-owned enterprises to ensure they meet the required practices for hiring in China.
Payroll in China
Paying employees in China is relatively straightforward. Payroll follows similar cycles and regulations as other countries. However, there are some key differences:
- Cycle. Salaries are paid monthly and on the last workday of the month.
- Taxes. The tax year is the calendar year. Employers must file an employee’s income tax return monthly.
- Hours. A standard workday in China is eight hours per day, five days per week, for a 40-hour workweek. This applies only to specific positions and is subject to labor authority approval.
- Overtime. For work performed beyond the standard limits, employees receive 150% of their standard rate on a workday, 200% on Saturday or Sunday, and 300% on a public holiday.
- Contributions. Required employer contributions are governed by local rules and vary by province. For example, total contributions for payroll in Beijing, China, range from 27.16–28.68%.
Learn more in our complete guide to China labor laws.
Employee classification, permanent establishment, intellectual property protection, and China’s social credit system present unique risks for companies expanding into China.
Let’s look at each one in detail:
- Employee classification. Correctly classifying employees and contractors in China requires thorough knowledge of local labor laws. Foreign companies can suddenly find themselves saddled with fees, employee back pay, and criminal penalties for misclassifying their talent in China.
- Permanent establishment. Specific work conditions qualify a foreign business as a permanent establishment in China. If you satisfy any of these conditions, you are deemed a permanent establishment under local law and subject to local taxes.
- Intellectual property (IP). IP laws are not strict in China, making IP theft a low-risk, high-reward scheme. Foreign businesses operating in China should take proper steps to ensure their branding, patents, and other IP rights are wholly protected.
- Corporate social credit score penalties. Corporations doing business in China are assigned a social credit score—a qualitative score, based on a regular assessment of their business activities, that represents their trustworthiness. Poor scores result in limited business opportunities, while good scores warrant tax breaks and other rewards.
The intricacies of Chinese labor law present many noncompliance risks for foreign businesses. Before hiring in China, companies should conduct a thorough study of Chinese labor legislation or partner with an employer of record to guarantee compliance.
The Chinese market presents a wealth of opportunities and challenges for international businesses. While expanding into this market can be overwhelming, working with an experienced partner can make a world of difference.
Velocity Global’s industry-leading Employer of Record (EOR) solution handles onboarding, payroll, compliance, and ongoing HR management so you can focus on overseeing your employees’ day-to-day tasks and business operations.
With our global EOR solution, your business can be up and running in China quickly while operating in full compliance with local Chinese labor laws.
If you’re interested in quickly and compliantly hiring employees in China, get in touch with Velocity Global today to learn more.