Hiring employees in China can be a complex process, especially if you do not have an existing Chinese company and legal structure. China’s strict laws often attempt to force foreign companies that want to hire Chinese employees to form a company in the country. By having businesses form their own entity in China, the government is able to increase its tax revenue and potentially improve the life of its citizens.
Here, we discuss some of the options to hire an employee when you do not have a legal entity in China and the legal and other challenges you may confront with each option.
Hire the Employee Through a Chinese Company and Pay the Company
Some businesses may try to have an employee hired through an existing Chinese company and then pay the company.
With this arrangement, the company may pay the Chinese company an amount that equals the employee’s wages, taxes, and an administrative fee.
This arrangement is usually not legal and can result in significant financial penalties.
Additionally, the company can be banned from conducting any business in China in the future. Chinese regulators will likely see this option as a way to circumvent Chinese laws that require foreign companies with Chinese employees to form a Chinese entity.
Another disadvantage to this approach is that the employee that is technically employed by another company and paid by it may not truly represent the interests of the company. Additionally, it may be difficult to protect trade secrets from the company that the Chinese company does not misappropriate.
The Chinese company will likely face its own challenges and consequences. The Chinese company may be committing fraud by claiming the employee as its own. This action may subject the Chinese company to regulatory action by Chinese agencies. The Chinese government may be able to see that the company is receiving regular and recurring foreign currency payments.
Companies have tried this approach to their detriment. A foreign company that conducts this action can be banned from doing business with the company. Others report that the Chinese company that was acting as the employer suddenly stopped the arrangement because it was afraid of getting caught.
Hire the Employee and Pay the Employee
Other companies may try to get around Chinese rules and regulations by hiring the Chinese employee directly and then wiring the employee his or her paycheck each pay cycle.
While this arrangement was more common years ago, it is less common today due to the Chinese government’s ability to detect this scheme and make it come to an end.
When a Chinese resident receives recurring foreign currency payments, he or she will be in the precarious position of having to explain this. Additionally, this process usually circumvents tax authorities, so the employee can wind up owing significant amounts in taxes.
There are several problems with this approach.
The company risks running afoul of Chinese laws and being sanctioned. It also risks being banned from doing business in China. Many professionals with unique skillsets will refuse to work under this arrangement because they do not want to run the risks of disobeying Chinese law.
Others may agree to the arrangement but then suddenly inform the company that they cannot continue. This can cause disruption in the employment structure, especially if the employee was in the middle of working on an important project or who is the only person that knows exactly what he or she was working on and its progress.
Some companies are concerned about later trying to form a legal Chinese entity after they have disobeyed the law in this manner.
Employee Forms Domestic Company that Contracts with Company
Another approach is to have the employee form a domestic Chinese company. The company then contracts with the Chinese company. Rather than paying an employee, the company pays the formed Chinese company for the services it needs from the individual.
While this process is technically legal, it has many disadvantages.
This approach requires substantial investment by the individual in China. He or she must go through the entire process of establishing a business in China.
The company may want greater control of the individual in China and may want to treat him or her as an employee, but this approach takes the individual out of the employment relationship.
Additionally, it may be difficult for the company to protect its intellectual property with this arrangement.
Hire a Staffing Agency
Another option is to use a third-party staffing agency that directly hires the employee on behalf of the company.
The employee is technically the agency’s employee, so the host company does not have to worry about complying with Chinese employment laws.
However, these agencies are not always willing to work with foreign companies and may charge a substantial premium for providing this service. Furthermore, China’s labor law was amended in July of 2013 to restrict third-party staffing agencies for hiring individuals only for temporary, supplementary and backup jobs.
Viable Options to Hire Chinese Employees
Given all of the risks and disadvantages of the approaches discussed above, it is important to consider options that are actually viable.
Local subsidiaries must often be incorporated when employing a small team in China. A separate legal entity in China can provide staff with local office space, human resources administration that is based in China and direct control over business operations in China.
The New Horizons team can help identify the type of structure that is most appropriate for your business, given your goals and preferences.
The first option is to use a professional employer organization (PEO), which does not require a separate legal entity. The other options involve using some type of Chinese legal entities, ranging from less commitment and minimal structure to having a full, separate legal entity.
Professional Employer Organization
A PEO is the employer of record. As such, it takes on all compliance matters and employment liability.
It is responsible for paying employee wages, withholding taxes and payments to third parties, administering benefits and other administrative and human resources duties and responsibilities.
The PEO can help recruit top talent and help with the onboarding process. It then provides ongoing services to the foreign company while the company handles the daily management of the employee.
The Sales Office is the ideal structure when your company only needs a local presence to develop the business.
You may have existing relationships with Chinese partners who can provide you with import and export services and assist you with logistics. With this setup, you control all financial operations in your home country. No capital investment is necessary for this approach and the structure can be in place very quickly.
Companies often use this approach in conjunction with a PEO arrangement. Any employees are hired through the PEO, which is responsible for human resources functions and takes on employment liabilities.
The Representative Office is the flipside of the sales office. No business activity can be conducted in this type of office, but it manages its own human resources duties.
The company has all of the liabilities associated with directly hiring employees. The company has more control over hiring and payrolling a local team.
The company cannot hire staff in different cities. There must be a separate branch for each location where employees will be hired, or PEO services must be used.
A Joint Venture is a partnership between a foreign company and a local company in China. This option is often recommended when the support or experience of a local company is necessary.
The joint venture agreement establishes how profits will be shared, technology will be owned and how the business will be operated. The joint venture conducts business in China as a Chinese company according to the terms of the agreement.
It often takes significant time to establish a joint venture as both companies will engage in negotiations to customize the agreement to their needs.
Wholly Foreign Owned Enterprise
This option requires the most commitment from a foreign company. The Wholly Foreign-Owned Enterprise (WFOE) is a limited liability company that is owned entirely by a foreign company.
This option provides the greatest control over operations in China. The WFOE can conduct local business activities in China and can form direct relationships with customers and clients. The company takes on all responsibilities as the employer of record. The company is autonomous and has the greatest amount of flexibility.
Establishing a WFOE requires a significant investment in establishing a foreign legal entity. It may also take considerable time. Many businesses choose to use a PEO service to help enter the new market while the application for a WFOE is pending.
New Horizons Global Partners, China’s leading Corporate & HR Specialist
If you would like to establish a legal entity in order to hire local Chinese employees or would like more information on our PEO services, contact us by filling out the online contact form.