China has been for several decades, either a mystery or an obsession for both entrepreneurs and multinational companies. This giant was covered by a veil of misinformation, taboo. China has faced misconceptions with regards to the labor force, product quality, and even human dignity, with regards to International labor standards.
Now, as the giant unveils its legal system to the entire world, and although the current trade war may raise some level of concern, China is here to stay. There is never a better moment for truly understanding the nature of manufacturing products in China, and the way your company may interact both with the government and employees in terms of payroll and employment.
This is the main reason for writing today’s article on understanding employment and payroll in China. The purpose is to provide concise information on the challenges and advantages that can be found when moving part of the operations of your company to the People’s Republic of China. To better clarify these ideas, we will describe the employment environment.
Employment and Regulations in China
China follows some of the most common principles provided by the International Labor Organization. These principles include the right for every employee to be part of an organization or Union, limitations and age restrictions (16 years old minimum), and the principle of equality in compensation.
Other national regulations include guidance on maximum hours of work per week (44 hours), overtime, with its limitations and costs, and employee rights such as family, maternity and paternity leaves, to name a few. Additionally, several international conventions have been ratified in the matter, and domestic laws have been strengthened.
Although most of these guidelines are both uniform and mandatory legal standards in all the country, the same cannot be said about compensation, severance, and maternity leave, to name a few.
Please be advised that the standards on Guangzhou, are not the same as in Beijing, to mention two very popular industrial clusters.
There is, as above mentioned, a different treatment in every province, if not every city.
The wage system relies upon in three different aspects:
- Location: from wages to leaves, they are slightly different in every province.
- Profession of industry: In China, there is a different minimum wage for every profession. Salaries greatly vary depending on the line of work and tasks.
- Regulated professions: Some professionals can only work for domestic companies or companies where the government owns equity as these professions require a license to practice, among other requisites.
This greatly increases the possibility of making mistakes when trying to comply with salaries and compensation, as a company domiciled overseas. It is strongly suggested that you get advisory inside China or hire a company that will handle these matters for you entirely.
Additionally, by researching on these matters you can make an informed decision on where to locate your business, calculate the costs in advance, and plan your logistics in advance.
Note: As a foreign company you shall only hire employees in the city where your branch office is located.
As wages are somehow steady throughout China, almost every province has raised its minimum wage between 2015 and 2018 in all job classes. These changes were made both for full-time workers as for those who work on an hourly basis. Some provinces such as HUNAN eliminated these job classes, having a uniform minimum wage.
On the other hand, overtime compensation and extra costs are widely spread. It is divided into;
- overtime during weekdays, which arises to 1.5 times the salary for every extra hour
- overtime during weekends, which amount to 2 times the salary
- and overtime during holidays which consists of 3 times the payment for every extra hour.
When it comes to extra costs, which are part of the workers’ rights, the following are mandatory:
- medical and maternity fund
- unemployment and retirement insurance
- payments made for the retirement pension fund.
All of the above vary depending on the location of the company.
Some of these costs can increase by 100% depending on the selected province. Also, some of these do not exist or are not charged, such as Medical Treatment fund which is not collected in Guangzhou
The retirement pension is around 30% of the salary, being the most expensive of these extra costs. These numbers vary from province to province.
When employment termination is in place, it is important to establish the difference between just cause termination, unjustified termination. The general rule declares that employer shall pay 1 month of salary for every year that the employee has worked in the company. The wage upon such calculation is made is the last salary that the employee had on the last 6 months of employment.
In the event of a work-related injury, a settlement for medical expenses and worker compensation must be made.
Setting Up a Company or a Branch Office in China
As described in detail above, setting foot in China can be costly, complicated, and time exhausting. Even though this should not be a major problem, learning the basics of company formation can improve your chances to select the proper structure in the country.
This decision will also provide the last piece of the payroll/employment puzzle. As you have to be registered and approved by the Chinese government you have to choose wisely.
Three types of company structure can be created. They are very different and provide different scopes and limits.
On a Joint Venture, you will need a Chinese citizen to become part of the team, becoming your Chinese link or partner.
The last one is a Representative Office, which is the easiest one to settle but has too many limitations regarding product selling, service provision, and profit generation. Experts say that having a Representative office does not even feel like being in China as a real company.
As not all companies can deal with these complications, nor want to be fully liable in China, they tend to get the services of PEO’s (Professional Employer Organization) or EOR’s (Employee of Record).
These service providers act as employers and while being different from each other, they will both provide advisory and will take almost everything. This includes payrolls, workers compensation, insurances, tax filing, and the related costs and stress of these tasks.
We must conclude that deciding to move part of your production to China is merely 10% of the actual company formation. The lower salaries, great logistics, and the size of the market are great incentives, which are much more important than a few legal setbacks.
This article is a publication of NH Global Partners. The purpose of this article is to inform our clients and readers of business models that have different liabilities. It is not intended, nor should it be used, as a substitute for specific legal advice or professional legal counsel.