China General Interest
The employment of staff is a fundamental issue that all companies entering China need to be familiar with. China-based business consultants, JLJ Group, address some of the key issues companies face when employing staff in China.
What rules and regulations apply for the setting up of a labor contract? How do employees and employers pay social benefits and taxes? What are the differences between employing locals and foreigners? As Representative Offices aren’t allowed to hire local staff directly; how can they employ staff? How can HR outsourcing contribute to solve these issues? These are examples of questions puzzling companies as they begin the hiring process.
Generally, apart from the usual employment requirement, such as signing contracts with workers, meeting wage standards and issuing salary in a timely manner, employers in China are also obliged to:
- File their staff employment and dismissal with relevant government bureaus
- Maintain employees’ personnel file – a unique Chinese document that records all academic and employment history of an employee, and the responsibility of maintaining the records is transferred from one employer to another when the employee changes jobs
- Withhold and pay individual income tax on behalf of their employees
- Make monthly contributions to their employees’ social benefits and housing funds
Most of the above processes are complicated by the involvement of several government bureaus and tedious paperwork. For the unfamiliar, staffing their China operations may pose a challenge and many choose to rely on service providers and HR specialists to guide them though these HR administrations.
The Employment Contract
Under the People's Republic of China’s (PRC) Labor Law, all companies are required to sign employment contracts with their employees. While limited liability companies are allowed to sign employment contracts directly with local PRC staff, a representative office must engage authorized service providers to hire and dispatch the representative office’s local employees.
While there is no standard contract form, the agreement should include:
- Term of contract & Probation period
- Job title and description
- Labor protection and working conditions
- Compensation
- Termination conditions
- Breach of contract provisions & disciplinary rules
- Other provisions such as Training Bond, Non-disclosure agreement and Non-compete agreement
The Employee Personnel File & Staff Handbook
Every employee in China owns a personnel file and a proof of employment history. The personnel file details the employee’s education and employment history, and the responsibility of maintaining this file is transferred from one employer to the next when the employee changes jobs. Unlike the personnel file, regulations on the proof of employment history vary across regions. For Shanghai, employers must withhold the employees’ staff handbooks during the employment period. Rep. Offices, which are not allowed to hire local employees directly, must engage a local labor agency to maintain these files.
Basics of Compensation
Compensation is typically divided into four elements: base pay, incentives/bonuses, allowances and benefits.
Base Pay
Base pay is paid monthly and varies from 12-14 months. A 13-months pay scheme is common in China, with the additional month’s pay issued during the Spring Festival month (usually February). The minimum wage in Shanghai is 960 RMB/month (about 137 USD) but salaries for mid-level positions and experienced professionals are growing fast and may come close to rates in developed countries such as Germany or the US for a few positions. Due to the serious shortage of managerial talent, such competitive salaries are required to attract and retain good employees.
Incentive Pay
Incentives can be paid monthly, quarterly or annually and are increasingly tied to individual performance. While not required, most employers pay annual bonuses (“13th month pay”) at the Spring Festival. The concept of performance-based variable pay is now welcomed by many organizations and Chinese employees. Especially within China’s first tier cities, success and monetary reward through performance differentiation are concepts that employees usually appreciate.
Some of the incentives in use include: individual performance plans, team performance plans, cash profit sharing plans (payouts based on organizational profitability), comprehensive performance plans (awards based on the performance of the company, team and individuals), sales bonus plans, sales commissions as well as special recognition awards.
Allowances
Personal allowances are a somewhat unique and very important form of compensation in China. Although FIEs are not obliged to provide it, allowances are sometimes viewed to be more valuable than the cash equivalent in the Chinese culture. Cash allowances highly valued by employees include transportation, meals, clothing and child care allowances.
Benefits
Benefits for Chinese employees can be classified as mandatory or supplemental. Mandatory benefits contributions by both employers and employees are stipulated by the China Labor Law and comprise a significant portion of the total compensation. An example of the social benefits scheme widely adopted for Shanghai residents is detailed on the right. A gross salary minimum base of RMB 1975 and maximum cap of RMB 9876 applies for the calculation of social benefits contribution. For non-Shanghai residency employees, the standard contribution by employers is at RMB 246.90.
Increasingly common, supplemental benefits are voluntarily provided by the employer, especially for employees over certain pay levels.
| Social benefits | By employer | By employee |
| Pension insurance | 22% | 8% |
| Unemployment insurance | 2% | 1% |
| Medical insurance | 12% | 2% |
| Workplace insurance | 0.5% | - |
| Maternity insurance | 0.5% | - |
| Public housing fund | 7% | 7% |
| Total | 44% | 18% |
Individual Income Tax
Local employees are taxed on the basis of the balance of their monthly income after decocting their social benefits contribution, a standard deduction of RMB 2,000 and then applying the nine-grade progressive rate as shown in the table on the right. The employer is obliged to withhold the full tax amount and submit the taxes to the appropriate Chinese authorities on behalf of its employees.
| Taxable amount (RMB) | Tax rate | Quick deduction |
| Less than 500 | 5% | 0 |
| 501 - 2,000 | 10% | 25 |
| 2,001 - 5,000 | 15% | 125 |
| 5,001 - 20,000 | 20% | 375 |
| 20,001 - 40,000 | 25% | 1,375 |
| 40,001 - 60,000 | 30% | 3,375 |
| 60,001 - 80,000 | 35% | 6,375 |
| 80,001 - 100,000 | 40% | 10,375 |
| Over 100,000 | 45% | 15,375 |
Taxable Income = Gross Salary – Social Benefits – RMB2,000
IIT = Taxable Income x Tax Rate – Quick Deduction
Net Salary = Gross Salary – Social Benefits – IIT
For a sample calculation of social benefits, income tax and net salary please click here. The JLJ Group may be contacted via their website: www.jljgroup.com
May 17, 2009