With one of the biggest economies in the world, China represents tremendous opportunity for many foreign businesses hoping to expand. However, many business owners are intimidated by the complex laws and regulations governing the operation of a business here, including how to compliantly handle payroll in China.
Here is what you need to know about payroll in China.
Selecting the Appropriate Structure
China allows foreigners to establish different types of businesses in the country. The three most common types of entities in China include:
- Wholly Foreign-Owned Enterprises (WFOE) – These structures are 100% foreign–owned, but setting them up is often time-consuming if you do not have a direct presence in China or an agency assisting in the application process. You will need to provide a scope of business statement, proof of your financial status, and a feasibility study, as well as appointing representatives to act on behalf of the company in China.
- Joint Ventures (JV) – These businesses consist of an agreement between a foreign business and a local Chinese business. This structure is a good option if you want to work in certain industries with more regulations on foreigners or if you want to gain a market advantage made possible through a partnership with a Chinese company. However, there are more regulations imposed on these types of entities in certain situations, so it’s best to check with an inbound investment advisor before committing to this type of entity.
- Representative offices (RO) – If you want to represent your company in China, you can set up a RO. ROs are limited considerably, however. They cannot be used to trade, import, export, manufacture, or even invoice other individuals or entities in China. They are only suitable for companies that require a liaison-only type structure.
An experienced PEO will assist you in deciding on the type of entity is best for your particular situation. Additionally, it should be able to help you secure other facilities, like office leases, and supply the proof of such to Chinese authorities to complete the registration process.
Compliance with Payroll and Employment Laws
Foreign businesses must be particularly careful to adhere to Chinese payroll and employment laws at all times. Some important things to understand about labor relations in China include:
Written Employment Agreements
Written employment agreements are mandatory in China. However, only WFOEs are eligible to directly sign employment contracts with Chinese workers. Other types of entities who want to hire employees legally must do so through a third party.
Employers are responsible for checking for proof of residence of employees who work in the city where the business is operating and for filing appropriate social insurance paperwork before the employee commences work.
Employees may be hired on a temporary basis or a permanent one. Temporary contracts are for a finite period of time or until a particular event occurs, such as a project is completed. Permanent contracts are for employees with no set end date. Foreign workers can only be employed if they have special permission from local labor authorities and if they have the necessary immigration documents, such as a work visa.
Local government agencies in China set applicable minimum wages. Labor bureaus establish standard minimum wages for certain types of jobs. As there are no uniform standards across the country, or even across provinces, it is best to consult a payroll and tax specialist to obtain the latest figures.
The standard workweek in China is 44 hours a week with no more than eight hours per day permitted. It is customary for there to be a two-hour lunch break from noon to 2 p.m. each day. Most workers have two days off each week. Salaries are usually paid on a monthly basis.
Employees may be required to work overtime but relevant trade unions must first agree unless the situation is an emergency. Overtime is limited to one hour per day or three hours per week and a maximum of 36 overtime hours per month.
Regular overtime pay is 1.5 times the hourly base rate. Overtime performed on rest days is two times the base hourly rate. Overtime work performed on holidays is paid at three times the hourly base rate.
Chinese workers receive 10 paid holidays each year, which usually include:
- The first three days of the Chinese lunar year
- Three days for International Labor Day on May 1, 2, and 3
- Three days for National Day on October 1, 2, and 3
- January 1
The Chinese government may also establish special holidays with little notice.
Employees receive between 5 and 15 days of paid annual leave, depending on how long they have worked for the employer. Many foreign employers provide two to four weeks of annual leave Employees may be required to take their entire leave each year. However, if the employee does not use all of the leave available in that year and does not agree to carry the leave forward, the employee is entitled to 200% of his or her normal wage for each day of leave he or she did not use.
Other Types of Leave
Employees may also be entitled to sick, maternity, or funeral leave.
Payment for a 13th month salary is not mandatory in China, but it is a standard business practice to provide it. The bonus is usually paid just before the Chinese New Year.
Sales employees often receive a commission plan. The written employment agreement should state how the bonus is determined and when it should be paid.
The employer is responsible for making the proper payments and deductions for:
- Workers’ compensation
- Health insurance
- Unemployment insurance
- Maternity benefits
Required deductions vary by region and city but may amount to as high as 40% of an employee’s salary. Employers are required to withhold approximately 15% of employees’ wages to pay for individual income taxes, and must pay them into the tax bureau by the 15th of each month. Other taxes may also be due on payments such as bonuses, shares, or severance.
Employees can terminate their employment contract with 30 days of advance written notice. Employers are also required to provide 30 days’ notice before terminating the employment relationship. The employer can choose to pay the employee’s wages during this period if he or she does not want to provide notice.
The employer is required to pay severance unless the employee failed to satisfy the conditions of employment, broke the law, or violated the company’s internal policies. The reasons for termination should be clearly documented. Severance entitlement can be a complicated matter, and depends on the type of contract issued to the employee.
Where to Get More Information
With decades of experience in the China, the team at New Horizons Global Partners can provide expert assistance with all payroll and broader employment matters. Our specialist team of HR, tax, and legal experts can advise on salary and benefits negotiation, statutory payment processing, termination and severance, along with a number of other issues.
Contact us today to find out more.