China Payroll Outsourcing Services Guide: What You Need To Know
China is the world’s most populous country and is one of the fastest-growing economies in the world. With such an enormous market, it makes sense that China would be a prime location for business expansion and investment.
China offers a unique opportunity to businesses looking to expand their reach; however, this opportunity comes with many challenges. Companies looking to enter the Chinese market must consider numerous factors including payroll, employment regulations, and more.
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Understanding Your Payroll Outsourcing China Options
In China, joint ventures (JVs), representative offices (ROs), and wholly foreign-owned enterprises (WFOEs) are the three most common business structures for multinational companies. While limitations exist on all of these, WFOEs are more popular as it lets businesses carry out long-term revenue-generating activities.
The best way to manage your China payroll will be closely tied to whether or not your business is set up in China and the type of business structure it is registered under.
Local Payroll Provider Services
China payroll, social insurance and individual income tax are complex and regulations vary by city, often changing with little notification. This pace of change combined with employee-friendly labour law makes effective payroll compliance difficult to achieve without specialised skillsets and systems. So when outsourcing your China payroll calculation, payments and filings to a local payroll provider, it is vital to ensure they are familiar with regulations across different cities as your company is still fully responsible for compliance with employment, immigration, tax and payroll regulations as the employer of record.
In-house Payroll
Businesses with the expertise to fulfil all tax, withholding, and payroll requirements can opt to run their own local payroll. This method is costly and requires updated knowledge of the local payroll, employment and tax laws. The company will also need accounting capabilities and potentially legal counsel to ensure full compliance with Chinese employment and tax laws.
Remote Payroll Solutions (PEO & EOR)
Under Chinese law, foreign companies are not allowed to hire (local and foreign) workers in China. In this case, a non-resident company can payroll its employees in China through a fully outsourced service like PEO or EOR. Under this agreement, employees are legally hired under the outsourcing partner and seconded back to the client company.
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Fully Outsourced Payroll Solution
In the case of multinational corporations where there is a desire to streamline operations across different locations, companies may partner with a multicountry payroll outsourcing solution. Managing all aspects of payroll, not unlike the local payroll provider, this option gives the added benefit of letting you align your backend HR processes across locations.
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Companies Hiring Employees in China
Employers need to be aware of China payroll issues when establishing a company in the country. One of the challenges is fully complying with the nation’s employment guidelines and taking the nuances across cities into account.
Types of Employment
Employees can be hired as full-time and part-time workers. Employers need to pay mandatory benefits for full-time employees. For part-time workers, their weekly working hours should be less than 24 hours. To legally employ foreign workers in China, workers need to have special permission from the local labour authorities and an employment certificate (work visa).
Employment Contracts in China
Chinese labour law requires employers to have signed employment agreements with all full-time employees, while part-time workers can be employed under oral contracts. Conditions for multinational companies differ depending on the business structure. Only WFOEs are allowed to sign employment contracts directly with Chinese workers. The only way for ROs to hire local employees is through a licensed third party (“local service unit”).
Contracts must specify:
- Employer details
- Employee details, including ID number
- Job description
- Terms and remuneration
- Social insurance
- Information around hazard prevention, safety and the working environment
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Understanding Mandatory Benefits in China
In China, both employers and employees need to contribute to mandatory benefits, this consists of five social insurances and one housing fund. Employers are responsible for contributing to all six benefits while employees are only responsible for four.
Many find the Chinese mandatory benefit contribution system challenging as it is very complicated. Contribution policies and bases differ depending on the individual province and city you operate in. Employer contributions range from 31.5% to 48% in relation to the employee’s salary while employee contributions range from 15.5% to 27%.
It is awfully important that foreign companies operating in China are compliant with PRC laws. Foreign companies need to be truly familiar with local policies in reference to where your company is located and be extra careful to note any policy updates and changes.
China Mandatory Benefits’ Contribution Base
When hiring an employee in China, employers are responsible for declaring mandatory benefits and contributions for the employee during the first month of employment through the local government system.
- For new employees: 1st month’s salary will be their contribution base
- For normal employees (2nd year of contribution): employees’ monthly average salary of the previous year will be their contribution base.
It is vital to note that the maximum and minimum contribution bases are adjusted each year for different cities which is announced by the local government annually.
China Mandatory Benefits Calculation Formula
Contribution Amount= Contribution Base x Contribution Rate
Mandatory Benefits’ Contribution Rates in China
Similarly, contribution rates vary from city to city. As an example, below are the Shanghai contribution rates for both employer and employee in 2021.
| Employer Rates | Employee Rates | |
| Pension Insurance | 16% | 8% |
| Unemployment Insurance | 1% | 1% |
| Medical insurance | 10% | 2% |
| Work-Related Injury | 0.16% to 1.52% | N/A |
| Maternity Insurance | 1% | N/A |
| Housing Fund* | 7% | 7% |
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Employee Leave, Vacations & Public Holidays
There are currently seven official public holidays in China. Weekends are usually swapped with the weekdays next to the actual holiday to create a longer vacation period. The two main Chinese holidays are Spring Festival (around Chinese New year) and the National Day. The Spring Festival lasts for 7 days, beginning around January or February, and is a time of great celebration. The National Day takes place in October and also provides 7 days off from work.
Employers should also note that occasionally special holidays will be established on short notice.
Employees are entitled to 5 to 15 days of paid annual leave on a sliding scale, depending on their length of working years. Employees are not entitled to leave for the first year and must keep working for at least 20 years for the same company to receive all 15 days of entitlement. Employees can apply for sick leave, maternity leave, and funeral leave as needed.
Organizations setting up payroll in China are wise to consult China’s Population and Family Planning Rules and other guidelines for complete and up-to-date information.
Severance & Employment Termination
Terminating employees in China can be trickier than expected due to the stringent termination regulations and regulations that protect against the dismissal of certain groups of persons.
Under the Dismissal Protection Act, employers have the option to offer employee’s severance pay in the letter of dismissal, which some see as a way to avoid disputes and labour court proceedings, especially in the case of a unilateral termination raised by the employer.
In most cases, employers opting to terminate employment would do so via mutual negotiation whereby the employer will have to propose a raised compensation. If the employee accepts, both parties will need to sign an agreement terminating the employment.
Employers should follow these steps to ensure full compliance:
Step 1 – Determine whether or not the termination is an early termination. If the termination takes place prior to the expiration of the first fixed-term contract, this is considered “early termination”.
Step 2 – For early terminations, employers should try to come to a mutual agreement with the employee on a few matters including termination date, severance payment, and any other necessary details. This is often seen as the safer option over a unilateral termination.
Step 3 – If a mutual agreement cannot be reached, consider the statutory obstacles to such termination and determine whether there is sufficient reason to support immediate termination for cause or a 30-day notice termination without cause.
If none of the above measures is taken, the dismissal is likely to be considered an illegal dismissal and may require additional compensation.
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