The potential for a business to succeed in China is great. One of the secrets for achieving this is to abide by the relevant laws and regulations imposed by the government on business entities. One of the areas where the law figures prominently is on employees salaries.
While doing business in China is a promising and lucrative endeavor, there are risks that always come with it particularly in a country where laws are stringent.
In relation to payroll packages to be offered to employees, the employer’s main concern should be placed on the full compliance of the labor regulations and policies.
Just as with other countries, the employment laws imposed by the government aim to protect employee rights and entitlements. China labor statutes seek to ensure the equal and fair treatment of employees.
Unlike other governments, however, the labor laws in China are quite particular in the implementation of the policies. It basically dictates, though the labor regulations, what must be done.
One clear directive is the provision of a written employment contract between a full-time employee and the employer.
The creation of the employment agreement is far from simple.
There are different types of contracts to be executed depending on the employment and various terms must be included as prescribed by law, including the remuneration package.
Moreover, the structure of the business entity must also be considered to determine what employment contracts to create or which workers may be hired.
The following are examples of important considerations before an employer can finally offer a China salary package to its employee:
- WFOEs and other limited companies are able to execute employment agreements with Chinese workers directly;
- Those which are not limited companies, such as a Representative Office (RO), need to acquire the services of third-party local entities or “local service units”, such as a PEO, to be the one to hire and contract local employees;
- A proof of residence in the location where they intend to work will be required of any prospective employee in China;
- Employers are required to file social insurance for each employee on the very first day they will work;
- The duration of employment must be indicated in the employment contract, whether they are temporary or permanent employees; and,
- Various labor-related permits, VISA, and licenses are required from employees before they can work.
As regards the specifics involved in a salary package in China, the succeeding sections provided in this article are the most salient.
Employee Salary Package in China
An employee’s salary in China can be clearly exhibited in the payslip. It comprised of the base salary, net salary, bonuses, overtime pay, allowances, paid leaves, and deductions. The deductions consist of social benefits and taxes. These entries in an employee’s payslip in China will each be discussed in the next sections.
The base salary is the fixed amount the employer guarantees to pay the employee on a monthly basis. This amount must be indicated in the employment contract. However, this is different from the net salary since there are components to consider, including additions and deductions to the base salary.
The net salary refers to the actual amount that the employee will receive from the employer every month upon deducting the various mandatory social benefits and the income tax, and the addition of pertinent allowances, overtime pay, and bonuses.
In China, it is normal to have some misunderstandings as to the net pay received by the employees. It is therefore necessary to clearly explain to the employees the salary package they are bound to receive from the beginning of employment. The following table shows the net salaries typically offered to employees in the corresponding cities.
The employee’s total of the base salary plus the other entries in the payslip such as the overtime pay, bonuses, allowances, mandatory and non-mandatory benefits make up what is referred to as the total compensation and benefits package of the China employee.
Companies must be very careful about what they will include in the employment contract.
It is safer to indicate only those amounts that will be included in the base salary as any other payments promised in the contract legally bound the employer to pay. An alternative is to provide such payments to the employees in the form of bonuses.
Companies in China have the prerogative of granting employees with bonuses at any period during the year. Many provide an annual bonus during the Chinese New Year while others offer a 13th-month pay.
In order for employees to lessen their tax burden, the Individual Income Tax (IIT) law in China allows them to utilize a special tax treatment for their one-off yearly bonus. For employers, it is advisable to clearly inform employees from the outset that while bonuses are typically offered to employees, the company has no obligations to grant them.
Laws relating to overtime pay in China are complicated and at times shrouded with controversy due to complaints that arise. This is why it is important for employers to provide clear guidelines to their employees at the start of employment to avoid legal problems.
Employers should be well-versed with the laws about overtime pay and make sure that those mandated are implemented.
The following are the fundamental regulations on how overtime pay is calculated in China:
- For work performed beyond 8 hours in a workday, the overtime rate must be 1.5 times the contracted hourly salary of the employee;
- For work performed during weekends, the overtime rate is 2 times the contracted hourly salary; and,
- For work performed during legal Chinese holidays, the overtime rate is 3 times the contracted hourly salary.
The foregoing computations are provided under China’s Labor Law. While they appear to be clear-cut and easy to follow, the problems normally arise on issues on whether employees must be compelled to provide overtime work.
To avoid such issues, companies may choose to offer their employees an overtime structure, ie the Flexible Working Hour system or the Comprehensive Working Hour system. Employers who wish to adopt any of these systems should get prior approval from the government.
The Flexible system involves requiring an employee, eg a manager, to perform work for more than 40 hours in a week with no overtime pay. On the other hand, the Comprehensive system involves a predetermined agreement between employee and employer on the number of hours to be worked in excess of the normal hours, which will be stipulated in the employment contract.
Only the number of hour in excess of the agreed overtime hours will be paid. However, should there be specific regulations depending on the city or location, they should be followed.
It should be noted that Article 41 of the Labor Law of China provides that employers may compel their employees to over more than eight hours a day upon consultation and agreement with the labor union.
However, overtime hours should not exceed three hours after the normal eight hours.
Moreover, the employee’s accumulated overtime hours should not be more than 36 hours in a month.
Despite such regulations, however, there are cases wherein employees in China work more than 36 hours in overtime. This is common among factories and is the source of labor disputes. Employers could be liable if found to be in violation of overtime regulations, thus the need to be cautious with the adherence to the law.
There are various types of allowances employers may provide their employees. Some of these allowances can be deducted by a foreign staff in China from their monthly salary before taxes are calculated.
This is a practice allowed by the Chinese Tax Bureau, as long as the following acts are followed:
- A clear indication of such allowance and its amount is provided in the employment contract or a board resolution (employment and payroll regulations vary from city to city in China); and,
- The employee in China should provide the employer with proof that the allowance provided was spent on the intended services as specified in the employment contract. This can be done through the presentation of the “fapiao” or official invoice, which must be provided to the employer upon completion of the transaction where the allowance was used.
The following are the types of allowances which may be deducted prior to tax calculations of a foreign employee’s monthly salary:
- Housing Allowance
- Meal Allowance
- Education Allowance for Children of Expat
- Travel Allowance
- Laundry Allowance
While there is no explicit law that places a cap on the amount of allowances within the foreign employee’s salary, it should nevertheless be a reasonable amount.
Currently, the majority of businesses in China have about 30% of their foreign employees’ salary classified as allowance. Given the constant changes in Chinese laws, it would be less risky to keep the allowance within or below the 30% level for taxation purposes.
Social Security and Housing Fund (Mandatory Benefits)
Deducted from the employees’ salaries are mandatory contributions, such as the social security and housing fund.
Given the variations in local regulations, the rights and rates relating to social benefits are highly individualized and depend on the location of employment and the residency status of the employee.
This means the calculation of social benefits differ from city to city or region to region in China and are extremely individualized.
The Public Housing Fund (PHF), also referred to as the Individual Housing Fund, is a social contribution imposed by the Chinese Government. While this is a mandated deduction, it is nevertheless favorable to employees since it serves as savings for the latter’s housing purchases.
Moreover, the employer also pays part of this fund, besides the employee. The portion paid by the employee is deducted from his gross salary. Contributions for the PHF will be accrued into the account of the employee. Both the maximum amount and the proportion of employee-employer contributions for the PHF vary depending on the location of the business.
Social insurance benefits are another mandatory deduction from the employee’s monthly salary.
There are five required forms of social insurance in China, as follows:
- Pension/retirement insurance
- Occupational/workplace insurance
- Maternity insurance
- Medical insurance
- Unemployment insurance
Both employees and employers provide contributions for all social insurance, except maternity insurance and occupational/workplace insurance, which are provided solely by the employer. An illustration of the percentages against salary of the foregoing mandatory benefits is shown in the table below.
The foregoing percentages of social insurance and PHF may vary based on adjustments imposed in each region or city. The amount is determined based on each city’s average salary of employees. Local governments normally implement changes as they deem fit.
Chinese Holidays and Leaves
Besides the mandated benefits, employees in China are also provided with leaves and holidays.
Ten paid holidays are granted to employees annually. This includes such holidays as Chinese New Year, International Labor Day and Spring Festival, to name a few. Some special holidays may be declared by the government as well.
Furthermore, employees may be granted by their employers with paid five to fifteen days annual leave. This is typically conducted on a sliding scale and is based on the employee’s length of service.
Besides the annual leave, the following types of leave may also be offered to employees:
- Sick Leave
- Funeral leave
- Marriage leave
Female employees are entitled to a paid maternity leave of 98 days (which can be as long as 3 months depending on local laws), while male employees are given paid paternity leave of 7 to 20 days, sometimes extended based on actual needs.
The required tax deductions of employees in China differ depending on the regulations in the particular city or region where the company is located. It is calculated and paid on a monthly basis by the employer for the employee.
The calculation of the individual income tax is based on the employee’s level of income and is computed progressively based on the tax rate illustrated below:
Most of the mandated social benefits are not taxable amounts. These contributions, as well as the mentioned allowances, are deducted before the computation of taxation. The PHF, on the other hand, involves a more complex calculation. Employees are not required to provide an annual declaration unless their yearly income is more than RMB 120,000.
We Can Make the Salary Package in China Easy for You
A Global PEO such as New Horizons Global Partners can assist you through the entire endeavor of providing employees with salary packages that are in accordance with the provisions of the law.
We are a certified and fully licensed entity in China which can perform various legal, HR, administrative, and fiscal requirements for a foreign company, including the structuring of salary packages in China.
We will also serve as the “employer of record,” making us legally liable for the employees. This considerably decreases the foreign company’s legal risks and liabilities, leaving the foreign investor free to focus on the more critical part of the business, in strategizing and in making a profit.