Regional Business Intelligence from Dezan Shira...

2013

HUMAN RESOURCES ANDPAYROLL IN CHINA (Third Edition)

I. RecruitingProfessionals

II. HiringStaff

III. HandlingPayroll

IV. ManagingtheEmploymentRelationship

V. TerminatingtheEmploymentRelationship

VI. OrganizingVisas

Producedinassociationwith

ASIA BRIEFINGRegional Business Intelligence from Dezan Shira & Associates

This edition was updated by a number of professionals at Dezan Shira & Associates led by Adam Livermore, including Helen Kong and Sarah Wei. Eunice Ku acted as technical editor and Samantha Jones as managing editor.

The first two editions of the book were written by Adam Livermore and edited by Andy Scott, with valuable contributions from professionals at Dezan Shira and Associates including Lina Wang, Helen Kong, Sarah Wei, Carol Zhao, and Eunice Zhou.

Michael Maeder of Direct HR (a boutique recruitment firm specializing in the China market with a presence in Shanghai, Beijing, Shenzhen, Ningbo and Macau) contributed the first chapter, with assistance from Chun Liew and Derrick Wong.

The cover and contents of the book for all editions were designed and laid out by Chris Wei.

Follow us on Twitter @DezanShira, @AsiaBriefing

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Human Resources and Payroll in China - 3

IntroductionA firm understanding of China’s laws and regulations related to human resources and payroll management is essential for foreign investors who want to establish or are already running foreign-invested entities in China, local managers, and HR professionals who may need to explain complex points of China’s labor policies in English.

The first chapter of this guide focuses on specifics of the recruitment process in China. While the overall process for hiring people in China does not differ much from elsewhere in the world, there are a number of points that require special attention. The rest of the guide has been designed to cover the most important issues relating to managing a Chinese workforce in enough detail to satisfy the requirements and curiosity of most managers either working in China or involved in HR at headquarters abroad.

In China, there are a wide range of government institutions, and while key laws are drafted by the central government, numerous bylaws and regulations are instituted at a local level. The topic is too complex to be covered in complete detail in one book, so the term “guide” is quite appropriate for the nature of this book. It should serve as a useful reference; however, companies should still seek professional advice to deal with any specific situation they face relating to HR.

This publication is based on the knowledge of Dezan Shira & Associates, a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. Dezan Shira & Associates’ experienced business professionals are committed to improving the understanding and transparency of investing in emerging Asia.

Adam LivermoreManager, PayrollDezan Shira & AssociatesDalian [email protected]

“While the overall process for hiring people in China does not differ much from elsewhere in the world, there are a number of points that require special attention. ”

4 - Human Resources and Payroll in China

About Dezan Shira & Associates Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. Dezan Shira & Associates’ experienced business professionals are committed to improving the understanding and transparency of investing in emerging Asia.

Our offices

IndiaDelhi, Mumbai

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Shanghai, Hangzhou, Ningbo, Suzhou

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VietnamHanoi, Ho Chi Minh City

About Dezan Shira & Associates: Scan this QR code with your smart phone to visit: www.dezshira.com/offices.html


About Direct HR Direct HR is a Top 10 China-focused boutique recruitment firm servicing over 500 leading enterprises in China and with operational offices in Shanghai, Beijing, Shenzhen, Dalian, Ningbo and Macau. Direct HR applies a proven China recruitment procedure, characterized by high candidate attraction and rigorous selection procedures.

As a client, you can rely on us to introduce the best available professionals to fill positions in your company in a timely manner.

What our clients say about us:

Direct HR are professionals that have superlative work qualities as well as deep and detailed knowledge of the subject. They are trustworthy, consistent and reliable.

-Mr. Mah, HR Manager, John Bean Technologies

Direct HR is a customer centric consulting firm with good consideration of our needs. We have good experience with Direct HR in filling our openings with quality candidates and would recommend their service to other industrial companies.

-Mr. Chow, General Manager - Asia Pacific, TSI Instruments

We are very satisfied with the prompt service of Direct HR and that they could fill the open position with the right candidate within the shortest time. We have already contacted Direct HR again for our company expansion in China.

-Mr. Schultz, Director Operations, Interturbine Aviation

Our offices

ChinaBeijing, Dalian

Shanghai, Ningbo

Shenzhen

Macau


Contents1. Recruiting Professionals ...........................................9

1.1 Profiling ................................................................................................................................... 12

1.2 Candidate Identification ................................................................................................... 16

1.3 Selection ................................................................................................................................. 24

1.4 On-boarding ......................................................................................................................... 27

2. Hiring Staff .............................................................292.1 Contract Types ...................................................................................................................... 30

2.2 Designing a Labor Contract............................................................................................. 37

2.3 Structuring a Salary Package .......................................................................................... 40

2.4 Mandatory Benefits (Social Insurance) ........................................................................ 43

2.5 Creating a Company Rulebook ...................................................................................... 51

3. Handling Payroll .....................................................523.1 Calculating Overtime Payments .................................................................................... 53

3.2 Paying Mandatory Contributions (Social Insurance) .............................................. 55

3.3 Additional Payroll Costs .................................................................................................... 57

3.4 Distributing Salaries ........................................................................................................... 59

3.5 Calculating and Filing Individual Income Tax ........................................................... 60

3.6 Outsourcing Payroll ............................................................................................................ 66


4. Managing The Employment Relationship ...............704.1 Performing Periodic Appraisals ...................................................................................... 71

4.2 Long-Term Sick or Injured Employees ......................................................................... 73

4.3 Pregnant Employees .......................................................................................................... 77

4.4 Labor Unions ......................................................................................................................... 78

5. Terminating The Employment Relationship ............805.1 The Importance of Documentation .............................................................................. 81

5.2 Terminating During the Probation Period .................................................................. 82

5.3 Terminating During a Fixed-Term Contract ............................................................... 83

5.4 Terminating at the End of a Fixed-Term Contract .................................................... 87

5.5 Terminating During an Open-Term Contract ............................................................ 88

5.6 Severance Pay and its Tax Treatment ........................................................................... 89

5.7 Mass Layoffs .......................................................................................................................... 91

6. Organizing Visas .....................................................926.1 F Visa ........................................................................................................................................ 93

6.2 Z Visa and Residence Permit ........................................................................................... 94

6.3 Sending Chinese Staff to Work Abroad ....................................................................... 97

Contents (Cont.)

1. Recruiting Professionals

1.1 Profiling1.2 Candidate Identification 1.3 Selection1.4 On-boarding


Recruitment is defined as the profiling, attraction, search, selection and on-boarding of candidates for open positions. Due to China’s history of rapid economic and social development, managers encounter a unique set of challenges when seeking to recruit professionals in China. This chapter is meant to support human resource departments as well as functional and general managers in calibrating their recruitment activities to the Chinese market, with a focus on recruiting white collar and skilled senior technical professionals.

1.1 PROFILINGAnalyzecompanyneedsSpecifyjobcontentDefinejobtitleDefinecandidateprofileResearchcompensationdetails

1.2 CANDIDATE IDENTIFICATIONAttractionActive applying candidates

AdvertisingjobsonlineAdvertisingjobsofflineParticipatinginevents

SearchPassive candidates

ResearchdatabasesResearchtargetcompaniesContacttargetcandidatesInvolverecruitmentfirms

1.3 SELECTIONScreenCVsConductinterviewsManagecandidateexpectationsConductassessmentcentersConductreferencechecks

1.4 ON-BOARDINGSendcandidatesaletterofintentConsidercandidates’noticeperiodManagetimeandfeedbackConsiderimpactofhukouandlocation

China Recruitment Process

FOR MORE INFORMATIONHuman Resources & Payroll in China presented Adam Livermore answers popularquestions concerning HumanRelationsandPayrollinChina.Adamcrystalizes the current payroll andhumanrelationsconcernsinChina.Hetookthemostcommonmistakesfirms make when in China, andprovidesinformationtoallowfirmstoavoidthosemistakes.

www.dezshira.com/multimedia


What are the major recruitment challenges in China?

Challenges in the China recruiting process include:

• Hard-to-fill positions Rapid economic growth, insufficient capacity of the Chinese education system

and high demand for skilled labor have resulted in a shortfall in supply of professionals with multiple language abilities, in-depth technical and industry know-how, international exposure, and familiarity with global best practices.

• High personnel turn-over and recruitment uncertainty Professionals move quickly between jobs, particularly in first-tier cities such as

Shanghai, Beijing and Guangzhou. This common job-hopping trend, coupled with high drop-out rates during the on-boarding process, makes continuous recruitment planning a challenge.

• Low mobility of staff There is a general reluctance for professionals to relocate within China or to

accept a longer commute to the work place. Therefore, location is a particularly important factor to take into consideration when choosing to establish a foreign-invested entity.

• Misinterpretation of candidate credentials, profiles and presentations Personality characteristics, such as being straight-forward, (which might be

favorable in the Western hemisphere), or language skills, such as the ability to communicate fluently in English, are often misinterpreted or over-emphasized in the search for suitable candidates. Furthermore, academic credentials are often over-valued. The Chinese education system still emphasizes learning facts by heart rather than developing independent thinking and problem solving skills. Additionally, the frequent job changes of candidates are often incorrectly interpreted by companies as a sign of immaturity. From the perspective of the candidate, changing jobs has been considered for many years to be a means of rapidly gaining experience and a way to speed-up professional growth.

• CV and credentials fraud Falsifying credentials is a prevalent problem which recruiters face in China.

Particularly when CVs are provided by applicants in other languages than Chinese, these “translation mistakes” are a convenient means to ‘upgrade’ titles or certificates. Accordingly the employment risk is amplified and appropriate actions have to be taken to minimize these risks.

• Challenges in title and salary assignment Job titles are closely linked to social status in China; for example the title “manager”

is highly coveted. This, along with lack of detailed market data about salary levels and candidates’ unrealistic expectations of foreign salary levels, makes linking job title with the appropriate salary a challenge.

“Finding qualified staff, increase of labor costs and retaining qualified staff are the top 3 business challenges for most companies in China.”Chun LiewPartnerDirect HRShanghai [email protected]


1.1 ProfilingThe profiling stage is a critical planning phase in the recruitment process to develop a resource-efficient, fast and effective approach to ensure the suitability of a new hire within an organization. The cultural and experience gaps between Chinese and foreign managers in companies operating in China often results in conflicting assumptions with regards to job content and candidate qualification criteria during the hiring process. A well-executed profiling exercise will serve to bridge these gaps to minimize misunderstandings and avoid hiring unqualified employees.

Throughout the profiling stage, the HR representative should maintain close contact with the hiring manager. Strong communication is necessary when specifying the company needs, job content, job title, candidate profile and compensation details. Especially when the HR manager and hiring manager have different cultural backgrounds, good communication ensures that assumptions for the position are aligned and complications throughout the recruitment process are minimized.

Analyze company needsIn order to assess a company’s recruitment demands, an inventory has to be conducted of the functional areas which need to be covered. The defined functional areas are then broken down into specific job content, which are then categorized into distinct positions. Finally, the number of professionals needed is determined by the output required on the demand side as well as the market availability of professionals with the skill sets to cover areas of the pre-defined job content.

In China, companies have resorted to hiring more staff to counter high fluctuation of employees. Additionally, a prevailing scarcity exists for Chinese professionals with the necessary skill sets to fill senior technical and management roles. Accordingly, companies have been observed to hire a larger number of employees to fill such positions as compared to other more mature markets such as the United States and Europe. For example, a German engineering manager tends to have more years of experience, is more versatile and is able to handle a larger variety of tasks compared to a Chinese equivalent. This often results in a company separating what would be done by one manager in other markets into two or more distinct positions in China.

Specify job contentJob content should include the job’s objectives, responsibilities and duties. Due to the scarcity of versatile Chinese professionals, it is common in China for the originally defined job content to be adjusted after having reviewed the availability of skill sets in the labor market.

Define job titleDefining the right job title will have a significant impact on how well a company will be able to attract qualified candidates. For instance a job title at a multi-national company might be “team leader” or “senior engineer,” when a similar position would be designated as “manager” at a local Chinese company. A problem arises when candidates who would have considered the job opportunity for its content and compensation would decline it simply because they would have to downgrade themselves from a “manager” to a “non-manager” title. Many international companies have therefore implemented a unique system for job titles in China in which the title “manager” is integrated into more positions, and even new job titles are created which do not exist in any other country.


Generally, candidates in China expect faster promotions. Therefore, to facilitate this demand a company might consider adding more intermediate hierarchical levels. For example, whereas a company’s home market may only have “account managers,” this role could be split into “junior account managers” and “account managers” in China.A lower level of standardization exists in China when it comes to job titles and their related job content. This provides a certain flexibility for defining job titles within an organization.

Define candidate profileIt is increasingly common that companies in China are employing a mix of local and foreign staff for reasons such as communication, managerial experience and trust. The right mix of employees can positively enhance efficiency and create a better working environment. A general categorization will help employers in China to come up with the optimal mix for their workforce.

At present, many foreign companies in China are forced to hire professionals with less practical working experience and lower technical qualification compared to employees in their home country who fulfill the same role. The solution implemented by numerous foreign companies in China lies in hiring comparatively younger high-potentials who are able to handle a steep learning curve, and eventually undertake the required

Types of Employees to Recruit to Work in ChinaChina

cultural fit

Chinese language

ability

English language

ability

Other language

ability

Know-how of industry

best practices

Employment stability

Market availability

Salary expectations

LocalChinese(nooverseasexperience)

+++ +++ + - + + +++ +

Chinesereturnees(withinternationalexposure)

++ +++ ++ + ++ ++ + ++

OverseasChineseinAsia(e.g.Singapore,Taiwan,HongKong)

++ ++ +++ ++ ++ ++ ++ ++

OverseasChineseoutsideAsia(e.g.America,Europe)

+ + +++ ++ +++ ++ ++ +++

Foreigners(Non-Chinese)

- - +++ +++ +++ ++ ++ +++


responsibility on their own, while initially receiving guidance from a more experienced foreign professional. Besides listing candidate qualification criteria for a vacancy in an ideal candidate profile, it is advisable to scrutinize each qualification criteria by asking the following two questions:

1. Is the qualification criteria kick-out, required or preferred? Kick-out criteria = candidate should no longer be considered if any 1 is not fulfilled Required criteria = candidate may still be considered if only 1 or 2 are not fulfilled Preferred criteria = candidate will still be considered even if criteria is not fulfilled

2. What is the relative importance of the qualification compared to other criteria? These qualifying questions will provide a clearer picture of the vacancy internally

and through-out the selection process. A key benefit is that individuals responsible for the selection of suitable candidates will have a clearer framework within which they can assess candidates.

Candidate Profile: Senior Quality EngineerCandidate details KO Weight

Educationalbackground

REQ Bachelordegreeorhigher,majorincastingormechanicalengineering10

PRE Alternativelyaprofessionalcollegeeducationwithfocusoncasting

Professionalexperience

REQ Abovefouryearshands-onsupplierdevelopmentandproductionexperienceincastingAbovethreeyearsofqualitycontrolandassuranceexperienceincastingandmachiningIn-depthunderstandingofqualitycontrolandassuranceprocesses

KO

20

PRE KnowledgeofEUandinternationalregulationsandstandardsforcastingcomponentsincontrols,fittingsandinstruments

Technicalskills REQ In-depthandsolidknowledgeofmetallurgyIn-depthknow-howofcastingtechniques KO 20

PRE FamiliaritywithISO9000andPEDsystem

Softskills REQ StrongworkspiritandethicGoodcoordinationandcommunicationskillsGoodorganizingandplanningskills

20

PRE Goodcoachingskills

Languageskills REQ FluentinspokenandwrittenEnglish(TEM8)FluentinspokenandwrittenChinese

KO10

PRE KnowledgeofspokenGermanisaplus

Personalityrequirements

REQ Meticulous/paysattentiontodetailPunctualandprecise 10

PRE Astrongself-initiator

Motivationalrequirements

REQ WillingtotravelextensivelywithinChina5

PRE WillingtoliveandworkinNanjing

Desiredage PRE >28 3

Otherrequirements REQ Ingoodphysicalandmentalhealth2

PRE Drivinglicenseforpassengercars* REQ = required, PRE = preferred but not necessary, KO = Kick-out criteria (max. 3); Weight = Category importance (tot.= 100)


Research compensation detailsConducting research on compensation in China will allow a company to more effectively attract the best talents in the market. This can be done by engaging professional service providers. External data on compensation is also available on various job web sites or from comprehensive salary surveys which can be used as a reference to track main trends in the Chinese market.

It has to be taken into consideration that there is a large variance between salary reports from different sources in China. This is mainly due to the lack of region- and industry-specific data as well as differing assumptions on language requirements, international exposure, know-how of industry best practices and job content amongst companies.

Compensation Research ChannelsChannels Quality Price per report

(RMB)Comments Sources in China Website

Consultancies +++ >2,000 • Largesamplesource• Customizedreport• Detaileddatacollation

process• Suitableformiddle-

executivelevelpositions

HewittWatsonWyattMercerHudson

www.hewittassociates.com

www.watsonwyatt.com

www.mercer.com

www.hudson.com

Jobboards ++ >500 • Largesamplesource• Lesscustomizedreport• Suitableforentry-

middlelevelpositions

51JobChinaHRZhaopin

www.51job.com

www.chinahr.com

www.zhaopin.com

Websites + Free • Largesamplesource• Basedonanonymous

data• Suitableforquickand

roughbenchmarking

PayScale www.payscale.com

Governmentstatistics

++ Free • Largesamplesource• Reliabledata• Suitabletoobserve

markettrends

NationalBureauofStatisticsofChina

www.stats.gov.cn


1.2 Candidate IdentificationIn general, there are three types of candidates that can be identified during the recruitment process: active, passive database and passive direct contact.

Due to the high activity level of the recruitment market in China, many demanded candidates do not publish their information in generic databases as this might lead to them being overloaded with irrelevant job offers. Many of these candidates are therefore only approachable via direct contacting, and often only promote themselves via niche (e.g. industry-specific) channels and their personal network. This also has the benefit that the candidates are able to realize a higher market value compared with finding jobs via the generic strategies (actively applying, publishing profile in databases).

Professional clusters can be broken down in China according to major Chinese cities. For example Shanghai boasts industries such as automotive, banking and finance, IT and trading, so companies in these industries might consider concentrating on allocating resources in this region to find qualified professionals.

Job Candidate Types and Relevant CharacteristicsCandidate type Definition Pros Cons Comments Active Candidateswho

sendtheirresumetoapplyforanonlineand/orofflinejobadvertisement.

• Largepool• Interestedcandidates• Easytoobtaincandidate

profile

• Lowhitrate• Fraudsensitive• Marketingintensive• Timeconsumingscreening

Mostsuitableforjuniorpositionsandmassrecruitment

Passivedatabase Candidateswhohavepublishedtheirprofilesindatabasesandwhoarenotactivelyapplyingtoajobadvertisement.

• Largepool• Candidateprofiles

available• Detailedsearch

specificationspossibilities

• Costly• Lowcandidateinterest• Timeconsumingsearch

Mostsuitableforgenericmid-levelpositions

Passivedirectcontact

Candidateswhohavenotpublishedtheirprofilesindatabasesandwhoarenotactivelyapplyingtoajobadvertisement.

• Qualifiedpoolofcandidates

• Highhitrate• Lowerfraudsensitivity

• Difficulttoidentifyandcontacttargetcandidates

• Onlyabletoassesscandidatesuitabilityafterhavingobtainedthecandidate'sprofile

• Lowcandidateinterest• Resourceconsuming• Smallpool

Mostsuitableforexecutive-levelpositionsandspecialists


China E-recruitment Website Revenue Market Share (2011)

Others18.8%

51job36.7%

ChinaHR15.6%

Zhaopin28.9%

Attraction (active applying candidates)The usage rate of candidates searching for career opportunities on online recruitment channels in China is comparable with mature markets such as the United States and Europe. There are many online advertising channels that exist in China. According to statistics by iResearch.com, the total value of the e-recruitment market in China as of 2011 was valued at RMB2.18 billion, with the biggest online platforms being 51job (36.7 percent), Zhaopin (28.9 percent) and China HR (15.6 percent).

Online Recruitment Channels Examples

Type SampleRegional strength

Industry strength

Target group

CommentsPrice per ad*

(RMB)

Generic

51Job.com EastChina,Shenzhen,Beijing

General Generic • LargemarketshareinChina

• About10to25activeapplicantsperday

• www.51job.com

30

ChinaHR.com

First-tiercitiesinChina

General Generic • LargemarketshareinChina


• www.chinahr.com

20

Zhaopin.com

NorthChina General Generic • LargemarketshareinChina


• www.zhaopin.com

20


Online Recruitment Channels Examples

Type SampleRegional strength

Industry strength

Target group

CommentsPrice per ad*

(RMB)

Regionspecific

ZJRC.com Zhejiang General Generic • OneofthegovernmentwebsitesinChinathatfocusonrecruitment

• www.zrjc.com

15

JobsDB.com HongKong General Generic • LargejobportalwhichspansacrossdifferentcitiesinAsiaandUSA

• www.jobsdb.com

180

Languagespecific

GermanChamberofCommerceWebsite(AHK)

Beijing,Shanghai,Guangzhou,HongKong

General Germanspeakingprofessionals

• Chinese-Germanspeakingprofessionals

• Germannativeprofessionals

• www.china.ahk.de

2,000

TheAmericanChamberofCommerce(AmCham)

Beijing,Tianjin,Wuhan

General Englishspeakingprofessionals

• Chinese-Englishspeakingprofessionals

• Americanprofessionals• www.amchamchina.

org

Onlyformembers(threefreepostingspermonth)

* Many online channels require companies to purchase package deals which include numerous job posting credits and numerous CV credits

Printed Media Recruitment Channel ExamplesType Sample Regional

strengthIndustry strength

Target group Comments Price per ad (RMB)

Generic ChinaTradeNewspaper(51job)

AllChina General Jobseekers StronglyfocusedontherecruitmentoftalentsinChina.

>450

Industryspecific

“oaotu”Magazine《产业经济报道》

AllChina Auto-motive

Management Analysisoftheoverallautoindustrytrends,country’spoliciesandregulations.

>500

Caijing《财经》

North,East,South

Finance Managementacademics

TracksthemostimportantaspectsofChina’seconomicreforms,developmentsandpolicychanges,aswellasmajoreventsinthecapitalmarkets.Italsooffersabroadinternationalperspectivethroughfirst-handreportingoninternationalpoliticalandeconomicissues.

>75,000

Regionspecific

JiefengDailyGroupNewspaper

Shanghai General JobSeekers IncludeupdatesoncurrentHRnewsandarticleswithdedicatedjobsection.

>1,000

theBeijinger Beijing General PeoplelivinginBeijing-Managers-Students

Englishlanguagemagazineaboutthecityandlifestyleforlocalsandexpatriates.

>4,800


Recruiting Event ExamplesType Sample Regional

strengthIndustry strength

Target group Comments Price for participation

(RMB)

Industryspecific

OrientExpress

Shanghai Auto-motive

Automotiveprofessionals

• Over1000participatingcandidates• Over20participatingcompanies• www.01hr.com

>600

Regionspecific

BJRC Beijing General Jobseekers • Over1000participatingcandidates• Over100participatingcompanies• www.bjrc.com

>380

NBRCW Ningbo General Jobseekers • Over100participatingcandidates• Over30participatingcompanies• www.nbrcw.com

>500

High-endspecific

ShenzhenTopTalentJobFair

Shenzhen General Seniormanagementandtechnicalspecialists

• Over3000participatingcandidates• 70-80participatingcompanies• www.dazhonghr.com

>4,000

CEIBSMeetandMatch

Shanghai General MBAstudentsandgraduates

AneventthatservesasaplatformforcompanyrepresentativestomeethighpotentialcandidatesfromtheCEIBSinshortpre-scheduledinterviews.http://ceibs.directhr.cn

Complimentary,byinvitationonly

Search (passive candidates)Online databases are also useful to reach passive candidates. Depending on the type of candidate, there are different databases (China-focused or international-focused).

Online Candidate Database Examples

Region Database UsersAbility to

specify search

Quantity of candidate

profiles

Number of candidates having know-how of

industry best practices

Price per profile (RMB)

China-focused

51Job.com Chinese Average-high >49Million Low-average RMB15ChinaHR.com Chinese Average-high >28Million Low-average RMB10Zhaopin.com Chinese Low >38Million Low RMB15Renren.com Chinese Low >150Million Low Free

International-focused

LinkedIn.com American/European

High >150Million Average-high RMB160/month,300profiles

Viadeo European(French)

High >35Million Average-high RMB90/month,unlimitedprofiles

Monster.com Global High >150Million Average-high RMB6,500/month,unlimitedprofiles

* Many databases require companies to purchase package deals which include numerous job posting credits and numerous CV credits


Research target companiesEstablish lists of “target companies” consisting of direct competitors and other firms who might have suitable candidates. This is followed by cold-calling target companies to obtain the name and contact details of the target candidates.

Legal noteNo statutory law exists against cold-calling. However, we recommend that companies engage a third party, usually a recruitment firm, to make the initial contact so that there is no clear connection to the company at this stage.

Contact target candidatesWhen contacting target candidates whose profiles are not known, the purpose of the call is to introduce the opportunity and obtain candidate interest for the job opportunity. When the candidate indicates interest, the next step is to have the candidate send his/her CV. Only at this stage will one be able to assess whether the candidate is suitable for the position or not. This means that a significant amount of resources are required to obtain profiles which are eventually not suitable for the position. In China, it may still occur that senior Chinese professionals do not have a digital resume; in such cases making a structured inventory via the phone may be a feasible alternative to obtain a short candidate profile.

When the profiles of target candidates are already on hand, one can beforehand do a proper CV screening before contacting the candidate to introduce the job opportunity and obtain candidate interest.

Involving recruitment firmsCompanies have a number of internally controllable channels to find the right candidates to fill vacant positions. However, it is more challenging to find qualified candidates for specialist and managerial positions as the supply of candidates becomes scarcer. Recruitment firms are often used to reach talents in the market who are generally passive candidates, and are not actively looking for a change in their career path. As being introduced via a third party comes natural to most Chinese in various social settings, they are receptive to being introduced to an employer by a recruitment firm. This is in contrast with other markets where candidates prefer direct contact with the employer and might consider intermediaries to be annoyance.

Companies considering engaging a search firm to find specialists or managers should decide whether to use a contingency or retained search agreement. There are two main differences between contingency and retained search: methodology of selecting candidates and payment.

FOR MORE INFORMATIONContact :Direct [email protected]


Pros and Cons of Involving Recruitment Firms in the Search ProcessPROS CONS

• IncreasespeedRecruitersaremoreaggressiveinthesearchprocessthancorporateteamstofindtherightcandidate.

• IncreasecandidatereachRecruiterswillbeabletofindandintroducecandidatesinamyriadofchannelsandnetworksthatmightnotbeaccessibletoanorganization.

• IncreaseconfidentialitySearchfirmscanbehiredtooperateinsecrecywhencompaniesdonotwanttodisclosetheirsearchforstrategicorcompetitivereasons.

• IncreaseassistanceinnegotiationprocessRecruitersaremorein-tunewiththecurrentmarkettrends,andcanthereforeofferadviceoncompensationandbenefits.

• ReplacementguaranteesRecruitmentfirmsoftenprovidecandidatereplacementguarantees,meaningthattherecruitmentfirmwillreplaceaselectedcandidatewholeavestheclientwithinacertainpre-definedtime-frame,withoutanyfurtherservicecharges.

• ReducedtalentpoolforlargesearchfirmsSearchfirmsoftenhaveagreementsnottorecruitfromtheirexistingclientsandthismightbeadownsideforlargerecruitmentfirmsthathaveabiglistofclienteleinaparticularindustry.

• IncreasedcostThecostoffillingavacancymayoftenbehigherviaarecruitmentfirmcomparedtoanin-housesearch.

• NeedforknowledgetransferHiringfirmswillhavetoinvesttimeintherelationshipwithrecruitmentfirmstohavetherecruitmentfirmsfullyunderstandthecompany,itsculture,thepositionandwhatthecompanybelievestheidealcandidateshouldlooklike.

Characteristics of Contingency and Retained SearchesContingency Search* Retained Search

Payment Transaction-oriented;paymentonlywhenacandidateishired

Consulting-oriented:progressivepaymentonapredeterminedamount

TimeRequired Fourtoeightweeks Eighttotwelveweeks

Exclusivity Eachcandidateisgenerallypresentedtomanyfirms,notnecessarilyexclusivewithonerecruitmentfirm

Exclusivewithonerecruitmentfirm,refinedsearchestofindafewsuitablecandidates

ConfidentialityLevel Moderate High,thereforemoresuitableforsensitiveissuessuchasreplacementpositions

ClientCommitmentLeveltoFulfillingVacancy

Moderate High

SuitabilitybyPosition Low-tomid-levelpositions Mid-tohigh-levelpositions*More commonly used in certain industries, e.g. IT, and first-tier regions.

TIANJINAutomotive, communications, IT, metalsBiotechnology, electronics and electricalequipment, energy, industrial machineryandparts,textile,transportationandlogistics

Breakdown of Professional

Clusters in China

BEIJINGAutomotive, chemicals, pharmaceuticals, ITBanking and finance, communications, elec-tronics and electrical equipment, industrialmachineryandparts,medicalproducts,metals

MACAUBanking and finance, tourismTrading,outsourcingservices

WUHANBanking and finance, IT, tradingAutomotive, biotechnology, manufacturing,metals,transportationandlogistics

ZHENGZHOUManufacturing, textilesBanking and finance, electronics and electri-calequipment

ZHUHAIElectronics and electrical equipment, manufacturing

JIANGMENIndustrial machinery and parts, manufac-turing, textileChemicalandpharmaceutical,electronicsandelectricalequipment,IT,metals

FOSHANManufacturing, metals

DONGGUANIndustrial machinery and parts, tradingElectronicsandelectricalequipment,IT,manufacturing,metals,textile

GUANGZHOUAutomotive, banking and finance, manufac-turingElectronics and electrical equipment, IT, pet-rochemical,transportationandlogistics

CHONGQINGAutomotive, manufacturing

CHENGDUIndustrial machinery and parts, IT, medical productsBanking and finance, electronics and electri-cal equipment, manufacturing, outsourcingservices

CHANGSHAAutomotive, industrial machinery and partsChemical and pharmaceutical, manufactur-ing,metals,textile

DALIANElectronics, electrical equipment,IT,manufacturing,petrochemicalBankingandfinance,industrialmachineryandparts,metals

SHENYANGIndustrial machinery and parts, manufacturing, tradingAutomotive, chemical and pharmaceutical, electronics andelectricalequipment,medicalproducts,metals

NANJINGElectronics and electrical equipment, metals, out-sourcing servicesAutomotive, biotechnology, chemical and pharma-ceutical,industrialmachineryandparts,IT,manufac-turing,petrochemical

YANGZHOUAutomotive, electronics and electrical equipment, textileChemicalandpharmaceutical,manufacturing,med-icalproducts,metals,petrochemical

SUZHOUChemical and pharmaceutical, industrial machin-ery and parts, IT Communications,petrochemical,textile

SHANGHAIAutomotive, banking and finance, IT, tradingBiotechnology, chemical and pharmaceutical, elec-tronicsandelectricalequipment,industrialmachin-eryandparts,manufacturing,metals,petrochemical,transportationandlogistics

HANGZHOUIT, manufacturing, textileAutomotive, chemical and pharmaceutical, com-munications, electronics and electrical equipment,medicalproducts,metals

NINGBOManufacturing, textile, tradingAutomotive,communications,electronicsandelec-trical equipment, industrial machinery and parts,metals,petrochemical

SHAOXINGIndustrial machinery and parts, textileChemicalandpharmaceutical,metals,petrochemical

WENZHOUElectronics and electrical equipment, manufacturingAutomotive, chemical and pharmaceutical, metals,textiles

SHENZHENBanking and finance, IT, manufacturingBiotechnology,communications,electronicsandelectricalequipment,textile,transportationandlogistics

HONG KONGBanking and finance, outsourcing services, tradingCommunications,electronicsandelectricalequip-ment,IT,transportationandlogistics


1.3 SelectionSelection in the recruitment process means choosing the most suitable profiles from a pool of potential candidates. This section illustrates some important insights in the selection process in China that should be taken into account.

Screen CVsCV screening should be done in relation to the candidate profile which has been defined during the profiling stage. Several China-specific candidate skills to be checked in an applicant’s CV include:

• Knowledge of Chinese business culture, laws and company structure• Intercultural exposure and competence (e.g. former working experience abroad)• Knowledge of global best practices• Work experience at foreign companies• English / Chinese language skills (e.g. certificates like TOEFL, CET)

Conduct interviews Due to the average high number of candidates screened per position, initial structured telephone interviews are often conducted by a company’s HR representative prior to face-to-face assessments to assess language skills and to clarify CV details. It is often a challenge for foreign managers to conduct an interview with a Chinese candidate due to communication and cultural barriers.

Typical Interview Structure in ChinaInterviewstages Warming-up (5-8min)–ofgreaterimportanceinChina

LongerwithChinesethanwithWesterncandidatesduetoChineseculturespecificbehaviorOfferteaIntroductoryquestionscreateamorerelaxedinterviewatmosphereforthecandidate

Introduction(2-4min)Allinterviewersshouldbeintroducedbynameandfunction

Companypresentation(5-10min)Presentingmaterialsshouldincludebilingualcompanyflyer,company’sstrategyinChinese,economicperformance,HRdevelopmentstrategyetc.

Candidate questions and answers (30-40min)–mostimportant/longestpartoftheinterviewIncludescareerdevelopment,formeremployment,projectwork,achievements,responsibilities

Ending(3-5min)CandidateshouldleavewithapositiveimpressionProvideclearindicationsonhowyouwillfollowupintermsoftime-lineandactivity

Legal noteNo statutory law exists regarding conducting interviews in China. Interviewers may pose questions on salary level as well as other personal questions with regards to age and marital status.


Manage candidate expectationsMany Chinese candidates see their peers quickly move up the corporate ladder and expect that the same should happen to them. For example, Chinese employees’ salary growth expectations rank among the highest in the world. More than half of Chinese employees expect a salary increase of more than 30 percent when changing jobs. As a comparison, the average salary increase expectation in Europe is between 10 percent to 20 percent.

Companies which are not able to meet candidate expectations experience high employee turnover rate., so clarifying salary, benefits and career development during the recruitment process improves employee retention and has a positive impact on candidate attraction.

Conduct assessment centersConducting assessment centers allows company representatives to obtain insights into various aspects of potential candidates such as behavioral, motivational, technical and aptitude attributes before making the final selection decision.

Conduct reference checksReference checks are carried out to verify information gathered about candidates during CV screenings and interviews. It is usually conducted after the final assessment interview and prior to making an offer to the candidate.

For the following reasons, reference checks are particularly important in China:

1. It is not common that candidates possess written evidence of previous employment or letters of recommendations

2. CV and credentials fraud is more commonly practiced to enhance individual competitiveness in China compared with other markets

Manipulated information might include personal data, qualification certificates, educational background, work experience, salary and reasons for leaving previous employers. Therefore, it is highly recommended to conduct reference checks before making a formal offer.

Legal noteNo statutory law exists against conducting reference checks. However we recommend that companies should use a third party, usually a recruitment firm, to perform activities including cold-calling to contact candidates, collecting background information and doing reference checks to improve efficiency and avoid any direct connection to the company.

In China, the most common practice to conduct reference checks is via the telephone. Due to the frequent job changes of professionals in China, former management may no longer be with the same company, making the process of validating reference checks more complex.


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1.4 On-boardingIn China the on-boarding process is a comparatively critical role in recruitment. It serves as an important means to reduce uncertainty for companies and candidates in the process of integrating a suitable professional into the organization. After a suitable candidate has been identified, the following steps should be taken into account:

Send candidates a letter of intentThe letter of intent or offer letter prior to signing the employment agreement is a good means to summarize the key employment conditions and to bridge the time period between identifying the right candidate and the eventual starting date in the position. The letter of intent should be kept within one to two pages and contains the most critical terms of employment. Additionally a check-list should be drafted, which describes the next steps to be taken and materials to be provided by the candidate. This will provide assurance to the candidate and might trigger a buy-in effect, so that the candidate mentally already “joins” the company before he signs the contract.

Consider candidates’ notice periodThe common contractual notice period for candidates in China is one month. For more senior positions companies often customize employment contracts and add longer notice periods. In order to terminate an employment contract, candidates need to provide a formal letter of resignation to their supervisor or the HR department. To reduce risk and remain in a comfortable negotiation position, a candidate typically expects a formal letter of intent from the new employer before he resigns from his existing position.

Manage time and feedbackAs the competition for skilled professionals in China is fierce, the assumption can be made that a candidate commonly has several employment options at hand. Therefore a rapid and transparent follow-up with candidates is critical as it reduces the employment uncertainty for the candidate and leaves a professional impression. In contrast to more developed markets, a structured on-boarding process is still not the rule in China. Therefore, a professional handling can be an important differentiation factor and increase the chance of hiring talents.

Verbal and even written commitment is often provided by candidates without them actually being committed to a position. A candidate who has agreed during the on-

On-boarding Process ChecklistLetter of intent Next steps Registration materials

• Formaltitle• Mainduties• Reportingline• Remunerationdetailsincludingbonus

structure• Socialwelfarestandard• Lengthofcontractandprobation

period• Commencementdate

• Healthchecks• Signingemploymentcontract• RegistrationwithHRdepartmenton

thestartingdate• Employmenthandbook• Trainingperiod

• IDcard• Copiesofacademiccertificates• Referenceletters• Laborhandbook• Residencecertificate• Housingfundaccountnumber• Passportpictures


boarding interview to start in the position might back-off at the last minute to accept an offer from another company. Therefore, the hiring managers should take this point into account in China and counter it by keeping positive contact with other (less) suitable candidates as long as possible. Rejections should be communicated clearly to avoid massive follow-up correspondence by rejected candidates, but in a positive manner, to maintain positive word-of-mouth.

When hiring Chinese employees, how do foreign-invested enterprises handle their personal files (dangan)?

Employers are responsible for “holding” their employees’ dangan (pronounced dang-an), personal files maintained for each Chinese individual.

A person’s dangan will usually contain the following information:

1. Educational background including academic performance, normally from high school onwards

2. Names of direct family members (parents, spouse and children)3. Location of hukou (to be introduced below) and any record of transfer4. Name of employer and period of employment5. Any periods when the individual was not employed6. Evidence of criminal record

The Chinese government does not allow foreign-invested enterprises (or smaller domestic enterprises) to hold these dangan themselves. In practice, what this means for foreign invested enterprises is that they must make a payment to either the government sponsored job center or some HR agent to store the dangan on their behalf.

When a new employee is hired, the dangan should be updated. Either a representative of the company or an HR agent should manage this process.

If the file is incomplete or if it is lost ,then this may affect the amount of state pension the individual can receive once they retire.

About Direct HR recruitment services: Scan this QR code with your smart phone to visit: http://english.directhr.net

2. Hiring Staff

2.1 Contract Types2.2 Designing a Labor Contract2.3 Structuring a Salary Package2.4 Mandatory Benefits (Social Insurance)2.5 Creating a Company Rulebook


Hiring staff is one of the first key decisions a company will come across. Before a company decides to employ significant numbers in China it should take into account all the issues introduced in this chapter. It may be acceptable, or even sensible, to hire a few employees without investing money in developing rulebooks, policies and complex salary structures, but as a company grows it needs to protect its interests and define employment relationships in a clear manner.

This chapter discusses some options available to companies, introduces a few concepts unique to China, explains the requirements of the social insurance system as they relate to employers and covers some other critical points that should be addressed.

2.1 Contract TypesOne of the first questions a manager will wish to consider when hiring staff is whether or not the company should offer a direct labor contract for a particular position.

When hiring in China, there are a number of points to take into account:

1. The nature of the job2. Is the position likely to be a permanent one?3. What kind of responsibilities will the employee have within the organization?4. The effect on the motivation and sense of belonging of the employee5. Whether or not the company is able to employ people directly in China

The first four points will be considered by employers all over the world. If the role is expected to be a permanent one carrying a large degree of responsibility, then the employer will generally look to hire the employee directly. If the role is transitory or “non-core”, then an employer will often look to second an employee from an agency, or outsource the role completely. These issues are equally relevant in China. The key point for the company will be how to accommodate the employment relationship within the Chinese Labor Contract Law.

In China there are four types of permissible employment relationship that can be entered into between a private company and an individual:

i) Job contractii) Part-time contractiii) Fixed-term labor contractiv) Open-term labor contract

In addition to these four types of contracts, which are all entered into directly between the employee and the employer, the following options are also available:

v) Dispatch of staff (secondment)vi) Outsourcing

FOR MORE INFORMATIONEstablishing and Running a Business in ChinaThis guide discusses foreigninvestment structures in terms ofsuitabilityandfeasibilitybybusinessgoal,documentationandprocedureforsetup,andneed-to-knowpointsfor analyzing and ensuring legalcompliance. This includes pre-investmentconsiderations,foreign-invested commercial enterprises,representative off ices, whollyforeign-owned enterprises, jointventures, mergers & acquisitions,makingchanges toan investment,andlegalduediligence.

www.asiabriefingmedia.com/store


When can an employee be hired directly?

In principle, any company located anywhere in the world may employ a Chinese person to physically work in China. However, unless the employment contract is entered into via an invested entity on the Chinese mainland it will not be regulated by relevant Chinese legislation.1 The company will not be able to make mandatory benefit contributions to the employee in China or deduct individual income tax before paying salary to the employee.

Note that foreign companies that have established a representative office (RO) in China do not have the ability to hire staff directly. Instead, Chinese staff must be seconded from an agency that will take the title of official employer. Foreign staff working for ROs should have an employment relationship with the parent company abroad, and any disputes should be settled under the laws of that country.

The reason for restricting the right of an RO to employ staff is quite simple; it is not a capitalized legal entity in China. An employee must have the right to claim against their employer, and an RO will not be a suitable entity to claim against. By forcing ROs to employ staff through an agency (which is a capitalized legal entity in China), the interests of the employee are protected.

1 Article 2 of the Labor Law of the People’s Republic of China implemented on January 1, 1995

i) Job contract

In China it is possible to enter into an employment contract that allows a company to hire a person to implement a specific project. Once the project is completed, the employment relationship naturally comes to an end. The company should pay compensation in accordance with guidelines in the Labor Contract Law to the employee at this time.1

This type of contract is sometimes used for seasonal jobs where the scope of work can be defined very clearly. However, in most situations defining such a contract can be a challenge. How does one adequately define the completion of a project? What to do if the project is not completed for some reason? How should employees be compensated in such circumstances?

Unlike a contract with another company for provision of services to complete a project, the job contract forms an employer – employee relationship. As such, when there is a dispute the court will tend to protect the interests of the employee to a greater extent than those of the employer. In addition, no probation period is allowed for such a job contract.2 These considerations, combined with the difficulty of defining an appropriate contract scope, deter most employers from entering into job contracts with employees.

1 Article 22 of the Implementation Rules for the Labor Contract Law implemented on September 18, 2008

2 Article 19 of the Labor Contract Law implemented on January 1, 2008


ii) Part-time contract

The application of this type of contract is quite restricted in China. The main conditions are the following:

• The employee may not work for more than four hours a day• The employee may not work for more than 24 hours per week• No probation period allowed• Payment must be made to the employee at least every 15 days3

For these reasons, the part-time contract is used by employers only in limited circumstances. Such a contract could be appropriate for an office cleaner, or some other role where the tasks can be completed within a relatively short period of time each day.

Please note that part-time workers should be paid at least the minimum hourly wage.

iii) Fixed-term contract

The vast majority of employees hired in the private sector in China are given fixed-term contracts. Generally the contracts are for full-time positions (although they do not have to be). The key point to consider for employers is what length of contract to offer each staff member.

A fixed-term contract can be of any length.4 However, the length of fixed-term contract offered to an employee has a major effect on the subsequent employer-employee relationship:

• A fixed-term contract can only be renewed once. On the occasion of the second renewal the contract effectively becomes an open-term contract5

• The length of the fixed-term contract will determine the maximum length of the probation period that the company can offer to the employee6

Maximum Probation Periods by Contract PeriodContract Period Maximum Probation Period

Lessthan3months None

3monthsto1year 1month

Over1year,lessthan3years 2months

3+years(oropentermcontract) 6months

In cases where a company is acquired by another investor, the new owner is not able to insist that existing employees go through another period of probation.35 Similarly, a new probation period cannot be enforced if the employee is promoted or moved to another position within the organization.

3 Articles 68, 70 and 72 of the Labor Contract Law implemented on January 1, 2008

4 Article 13 of Labor Contract Law implemented on January 1, 2008



FOR MORE INFORMATIONContact :Dezan Shira and [email protected]


What are the benefits and risks of a probation period in an employment contract?

During a probation period, employers can pay 80 percent of the full salary as stipulated in the employment contract (no lower than minimum wage benchmark) and more easily terminate employees than under fixed-term contracts.

In contrast, an employee still within their probation period can resign from the company after giving just three days notice. Employers may want to consider this point if they offer employees a particularly long probation period (for instance, six months). It is not advisable to give a large amount of responsibility to an employee who is able to resign at such short notice.

iv) Open-term contract

An open-term contract is one that effectively guarantees an employee job security until retirement age, unless some exceptional circumstances affect the company or the individual. It can be quite difficult to terminate an employee who possesses an open-term contract.

When will an employer be required to offer an employee an open-term contract?

An employee who has been working continuously for the same employer for 10 years, or who has had their fixed-term employment contract renewed twice since the Labor Contract Law came into force in 2008 is deemed to hold an “open-term” contract.

An employee who has worked continuously for the same employer for a full year but has not concluded a written labor contract is also deemed to hold an “open-term” contract.1 If the company does not conclude open-term contracts to employees in these circumstances, the company is required to pay double the amount of the original labor remuneration to the employee on a monthly basis commencing from the date when it fails to conclude the open-term contract.2


2 Article 82 of Labor Contract Law of the People’s Republic of China implemented on January 1, 2008

v) Dispatch contract (secondment)

A dispatch contract (secondment) describes the situation in which an agency dispatches an employer to work at another organization. In China, the market for staff dispatch services is a very large and lucrative one including many organizations using the name “FESCO,” which stands for Foreign Enterprise Service Company.

Representative offices must recruit their Chinese employees through dispatch contracts, and dispatch agents can also be quite useful for other foreign-invested entities on occasion.


While a FESCO will not take liability for financial compensation – this will be quite clear in the initial agreement – in the case of a labor dispute (on issues such as performance, termination of the labor contract, salary payments, social insurances payment, training, labor protection, etc), the FESCO can get involved in the negotiation, arbitration and/or litigation. Many of these companies are state-owned and some of them have a strong legal team (especially for employment issues) and are familiar with local arbitration and litigation process. FESCO’s involvement in labor disputes can sometimes help to achieve a resolution.

In addition, FESCOs can also be useful for foreign-invested entities during the pre-incorporation period, during which preparation work often requires the assistance of Chinese employees. A foreign-invested entity cannot establish a legal contract under Chinese Labor Law with a Chinese individual before the entity obtains its business license. Some FESCOs (not all) will agree to hire the Chinese employee and dispatch them to the foreign-invested entity that is still under the process of incorporation, generally on the condition of a 3-4 month cash deposit of all salary and social insurance payments.

Labor Contract Law stipulates that workers dispatched from a FESCO should generally assume temporary, substitute or auxiliary positions. In the past, this directive has often been ignored and FESCOs have been used to hire a wide variety of Chinese workers upon the client’s request. However, recently drafted legislation regarding the obligation of employers to directly employ core staff has brought extra risk to companies employing a large portion of their employees through agencies, and many companies are now re-considering their approach to hiring in light of this new regulation.

Article 66 of the Amendment to the Labor Contract Law of the People’s Republic of China (Draft) is amended to read as follows: “labor dispatch shall exclusively apply to provisional, auxiliary or substitutive positions…a provisional position offered by the employer refers to a position that exists for no longer than six months; an auxiliary position offered by the employer refers to a position which is orientated to providing services to the positions of the primary business of the employer; a substitutive position refers to a position that is held by a labor dispatch worker on a substitutive basis during the time when the employee of the employer that originally holds the position is unable to hold the position because the employee is undergoing full-time training or on vacation.”

One thing to keep in mind about FESCOs is that, according to Labor Contract Law, they can only offer fixed-term contracts for at least two years. An employer may still terminate the employment relationship with the Chinese employees, following the stipulations of Labor Contract Law and the agreement signed with FESCO. According to legislation available as of July 2012, it is unclear whether an employee that is working under an agency contract will have the opportunity to achieve an open-term contract with the company after expiration of two fixed-term contracts. Options beyond a fixed-term contract include a service agreement or part-time arrangement based on relevant Chinese laws and regulations, which can be terminated more easily.

Furthermore, some FESCOs also carry out other services such as executive search work (headhunting) on behalf of their clients, which could create a conflict of interest between payroll clients (who supply confidential personal and salary information) and headhunting clients (for whom the knowledge of such confidential data is valuable).

“ In the case of a labor dispute, the FESCO can get involved in the negotiation, arbitration and/or litigation.”Victor ZhengBusiness Advisory ServicesDezan Shira & AssociatesShanghai [email protected]


vi) Outsourcing

Tasks that are most commonly outsourced are those that require specific specialist skills, a high degree of confidentiality or those that have a clear scope but incur major consequences when they are wrongly implemented. Good examples of such tasks are accounting, tax filing, HR administration and payroll processing work. Most small and medium-size companies will choose to completely outsource some or all of these functions, whereas some large companies will setup a separate entity to manage such “back-office” tasks on behalf of all the other entities in the region.

An outsourcing contract is fundamentally different from a secondment contract in several different ways:

• Responsibility for the behavior of the employee carrying out the task is maintained by the company contracted for the outsourcing.

• The role is often not a full-time one, and most of the work does not have to be completed on-site (working off-site improves the level of confidentiality). As the company does not need to hire a full-time internal resource for the role, outsourcing can often be a money-saving solution.

• The outsourcing company retains the right to use whichever resources it feels are best for each project. This ensures continuity in service provision.

• Often such tasks will use some special software which is licensed by the company contracted for the outsourcing. The company requesting the services does not need to pay for software licenses or development work.

The outsourcing solution works well for back-office tasks that are not industry specific. As outsourcers become more efficient, there is a growing trend for companies to use such services instead of relying on internal staff for functions unrelated to their fundamental business.

Beyond a labor contract, what additional agreements may be necessary?

Additional agreements, such as a confidentiality agreement or non-competition agreement, may be signed at the same time as the labor contract. Confidentiality agreements, which normally cover corporate secrets, may include terms relating to ownership of patents for inventions created by employees. A non-competition agreement, which aims to prevent an employee from working for a competitor after terminating the labor contract is usually used only for senior positions and can be signed for a maximum period of two years. Companies are obligated to continue paying a proportion of the employee’s salary after his/her departure from the company in order to maintain the effectiveness of the non-competition agreement.


Will the Real FESCO Please Stand Up?

Many foreign-invested companies and representative offices in China have a contract in place with a FESCO (Foreign Enterprise Service Company) for labor dispatch, payroll and/or additional services for Chinese employees.

A large proportion of managers at such companies assume that FESCO is a single organization, but in fact it is a generic term used by dozens of local HR companies around the country. There are often multiple competing “FESCO” organizations in each city; some subsidiaries or affiliates of companies in another part of the country, some partially state-owned and some 100 percent privately-owned.

The English term “FESCO” is a generic one, indicating nothing more than the type of service provided by the company. Because of the widely-held misconception that FESCO is one company, the “brand” is a powerful marketing tool, and the term is often casually used to refer to companies providing similar services.

There are a couple of other large players in this market providing similar services to FESCO, but using a different brand. One is called CIIC (China International Intellectech Corporation – Chinese name 中国国际技术智力合作公司). CIIC is a state-owned organization based in Beijing and has subsidiaries, affiliates or branches around the country. In this sense it has a larger network than any of the various FESCOs.

The other large player is known in English as China Star (Chinese name 中国四达

国际经济技术合作公司). Headquartered in Beijing, it also has branches in Shanghai, Shenzhen and Guangzhou.

It is important that foreign investors realize that FESCO is not a single organization and that organizations by other names can offer the same services. Many general managers operate under the misconception that their organization (especially if it is a representative office) has no negotiating power with FESCOs, and simply accept the quoted price they provide without question.


2.2 Designing a Labor ContractOnce a conclusion has been reached concerning the issue of what kind of contract the company wishes to enter into for a particular role (direct employment, secondment or outsourcing), the next step will be the drafting of the contract. Normally, employment agencies and outsourcing companies will have their own template for the services they provide, but the company will need to design a labor contract template for its directly-hired staff. As the majority of employees are employed on fixed-term labor contracts we will concentrate on this type of contract in our explanation below.

The first condition that should be met when employing Chinese employees is for a written labor contract to be completed within one month of the commencement of the employment relationship. If this condition is not observed, under the terms of the Labor Contract Law an employee may claim double salary for each of the months worked without a written labor contract after the first month.1 If the situation persists for a period of more than one year, the company is deemed to have provided the employee with an open-term contract.2

Secondly, when employing Chinese employees the contract should be drafted in the Chinese language. It is acceptable to include an English translation along with the Chinese text, but note that the Chinese version will take priority in case of any dispute. Therefore, it is advisable that contracts are either drafted in Chinese using a legally-trained professional before translating into English, or drafted in English and then translated into Chinese by a legally-trained professional.

Every local Labor Bureau has a template for a standard labor contract, but it is in Chinese only. It is possible to use this template for all the contracts you enter into, however we would not recommend this in every circumstance. A template designed with specific corporate requirements will offer more protection. We would suggest combining a standard template with a labor contract used in other countries where your company has large operations.

This document should be shown to a professional trained in Chinese Labor Law to add, remove or amend clauses as necessary. Certain clauses inserted into a draft labor contract may be inadmissible under Chinese law. Including such clauses in the final version of a labor contract will only provide a false sense of security to the employer; in the event of a dispute, any such clauses will be deemed illegal by the court.

What information should be included in any labor contract? The following is mandatory:3

1. Name of the company, address, name of the legal representative or a senior manager2. The name of the employee together with a valid address and identification number3. Commencement date and duration of the contract4. A description of the job and the location where it is to be implemented5. Working hours, vacation provided and length and frequency of break times6. Salary details7. Indication that the employer will contribute social insurance for the employee8. Labor protection, labor conditions and protection from occupational hazards




FOR MORE INFORMATIONInternational Related Party TransactionsIn this issue of China Briefing,we turn once again to the issueof international transactions,specifically those between relatedparties.

Including:• Service Agreements for HQ and

Subsidiaries• A Briefing Overview of China’s

TransferPricingObligations• Cross-borderRMBPilotSettlement

Project• Q&A:Howdoroyaltyremittances

work?



How much annual leave must be given?

The required minimum amount of annual leave in China (in addition to at least one rest day per week and the public holidays) is five days. This requirement only commences once the employee has worked for one continuous year.1 Therefore, it is not mandatory for the company to provide any annual leave to the employee in the first year of their employment if the employee has not worked in any other company for more than a year prior to joining.

In practice, the vast majority of foreign invested companies realize that their employees are more productive when allowed periodic breaks. Although annual leave periods are generally shorter than in the west, most employees working at foreign invested companies receive 15 to 25 days of annual leave per year.

1 Article 3, Rules on Employees’ Paid Time Off, State Council, implemented on January 1, 2008

There may be some other mandatory requirements depending on the location of the company entering into the labor contract. If important mandatory items are not adequately addressed in the labor contract, there is a possibility that the contract may be deemed by the authorities to represent an open-term contract.

There are a number of other clauses that may be beneficial to insert into certain contract templates. Examples are:

• Non-competition clauses• Confidentiality clauses• Allowances and benefits (particularly for foreign employees)• Length of probationary period• Stock options

We also recommend that some reference be made to the company rulebook in the employment contract. This makes a clear association between the signing of the employment contract by the employee and their observation of the company rules.

In certain cities, once the template has been drafted it should be taken to the local Labor Bureau for verification. If you fail to do this, the validity of some of the clauses may be challenged by your employees in the event of a dispute arising from the implementation of such a contract. Note that the approval should be renewed by the Labor Bureau every time an amendment is made to the template.

Finally, the contract should be chopped clearly using the Chinese entity’s company chop (and of course signed by the employee) before it is considered to be valid. Similar attention should be paid to safeguarding of labor contracts. Not only do such contracts contain confidential information, it could also be costly for the company if the contracts were lost or stolen.


When does a written labor contract need to be completed by?

According to the Labor Contract Law, an employer must ensure that it has completed a written labor contract with every staff member within one month of the employee commencing work.1

This is important because if such a contract is not in place by the end of the first month the employee shall have the right to claim double salary for the period in which the company remains out of compliance with this regulation. Therefore if the company does not fulfill this obligation with an employee until the end of the third month of their employment it shall be liable to pay two months of additional salary to that employee.

If the company neglects to complete such a contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous eleven months, they can also claim an open-term contract from the employer.2 This will mean that the employer loses the ability to terminate the contract of the employee at the end of the fixed-term contract.

Note here that the employment relationship is deemed to have started from the first day the employee works at the company, not from the date of signature of the contract. So as long as the employee can prove that they have physically been working for the company for over a month prior to signing an employment contract this will be sufficient to make a successful claim against the company. Of course, the simplest piece of evidence proving this will be the receipt of salary.

Therefore employers should not expect their employees to chase them for signing written labor contracts or open-term contracts – it could potentially be in their interests not to sign, especially in the event of a future dispute with the company. The company must take the initiative to ensure such contracts are signed promptly. A system should be put in place so that there is no possibility for any employee to be overlooked. One effective safety mechanism would be to only release salary to employees once written labor contracts are put in place. As salary is generally paid once per month, this would incentivize the employee to sign while ensuring the employer remains in compliance.1 Article 10 of the Labor Contract Law implemented on January 1, 2008

2 Article 14 and Article 82 of the Labor Contract Law implemented on January 1, 2008

What should be done at labor contract renewal, promotion or transfer?

Upon renewal of a labor contract, a labor contract renewal form should be filled out. It could include the following details:

• Name of employee, position, commencement and expiry date of labor contract• A self-evaluation by the employee of their performance• An evaluation by the supervisor of the employee’s performance.• The period covered by the renewal• The document should be signed and stamped by employee, supervisor and HR department

When the employee receives a promotion or a transfer, it is normally not necessary to rewrite the employment contract. More commonly the change is registered using a promotion or internal transfer form. This form will usually show the date, previous title and new title. Normally, it will not include any information about new salary details, and the company will reserve the right to place the employee back in the original position if they do not prove suitable during the evaluation period. This way, the company does not incur any immediate liability to guarantee a promoted employee a higher wage if it is discovered they are not suited to the position.


2.3 Structuring a Salary PackageStructure of the salary package payable for each position in a company should be given careful consideration. Certain employees need to be incentivized, while other roles require a more fixed form of salary. Furthermore, the employer should consider the amount of IIT that will be payable by the employee. This is particularly important if the company offers a “net” salary package to its employees.

Base Salary and BonusThe first component is base salary – a fixed amount that is guaranteed to be paid to the employee by the company. The initial base salary should be clearly stated in the labor contract.

It is also possible to include some one-off payments – many companies make a 13th month salary payment around Chinese New Year time. Please note that if this information is included in the labor contract the company is legally obligated to pay it.

An alternative option would be to pay this amount in the form of an annual bonus. It could be explained to staff that although the company will generally pay this amount under normal business circumstances, there is no obligation for the company to pay the bonus if corporate performance is below expectations. Under such conditions there is no need to include it in the labor contract.

Other bonuses can also be paid to staff at various points during the year. From a taxation perspective it is more efficient to combine bonus payments so that they are paid during the same month because in China employees are allowed to use a special tax treatment once a year to reduce their IIT burden.

Payment of Annual Bonus vs Quarterly BonusAnemployeewastransferredfromtheU.S.HQtoaChinasubsidiary.In2011,hestayedinChinafor365daysandwaspaidamonthlysalaryofRMB110,000.

QuarterlyBonusPayment AnnualBonusPayment

IIT Quarterlybonus=RMB50,000perquarter

IIT=RMB50,000×45%×3months+(RMB50,000×10%-RMB105)=RMB72,395

Thisisbecauseforthreeofthefourquartersthebonusmustbetreatedasadditionalsalary.

Annualbonus=RMB200,000

IIT=(RMB200,000×25%–RMB1005)=RMB48,995

IITsavings RMB72,395-RMB48,995=RMB23,400


AllowancesThe Chinese Tax Bureau allows foreign staff (including those from Hong Kong, Macau and Taiwan) to deduct certain “allowances” before calculating the tax burden on their monthly salary.1 There are two prerequisites to this:

1. In the employment contract (and sometimes also in a board resolution depending on the location of the company) there should be a clear reference to the amount being paid to the employee under the title of each specific allowance.

2. Each month the employee should produce evidence to show the company that this money was indeed spent on the services described in the contract; this is done using the ubiquitous “fapiao,” or official invoice, that should be received whenever an official monetary transaction is completed in China (in some cities, the name of the company must be clearly written on the fapiao for it to be permitted as a deduction).

Let’s look at the deductions that are allowable one-by-one:

a) Meal allowanceForeign employees are allowed to deduct a certain amount that they spend on meals each month from their taxable income. Most of the fapiaos submitted should be issued by restaurants; although for some portion of the allowance fapiaos issued by supermarkets may also be accepted. Please note that the fapiao should state that the product purchased was “meals” or “food.”

b) Housing allowanceThe amount spent on rental of an apartment may also be deducted. However please be aware that in China a private landlord will often be reluctant to issue an official fapiao because in order to obtain one, he/she must pay approximately 17 percent of the rental amount received to the Tax Bureau. If a fapiao is requested the landlord will likely charge a large premium on top of the originally negotiated rental amount. Foreign employees that require a fapiao should negotiate this with the landlord before signing the rental contract. Fapiao issuance should be clearly mentioned in the agreement. Foreign employees living in a serviced residence will not have this problem – the residence will be managed by a company that can issue a fapiao.

c) Laundry allowanceThis is fairly self-explanatory – an allowance for the dry cleaning of clothes etc.

d) Children’s education allowanceSome of the cost of a foreign employee’s education expense for the studying of Chinese language or relating to the education of their children can be deducted. Note that the education must be received here in China, and as with the other allowances above, a fapiao must be received.

e) Home visit allowanceEach year a foreign employee is allowed to deduct the cost of one or two return flights back to their home country (usually the cost of a ticket up to business class may be permitted). Note that flights to other destinations are normally not accepted. Cost of hotels and other expenses are also not accepted as this is considered a home visit allowance, not a vacation allowance.

1 Clarifications of the State Tax Bureau on Several Issues on Foreign Individual Income Tax, implemented on April 9, 1997


Example: Total Expenses, Net Salary and IIT by Social Insurance Contribution Payment Party

AcompanypaysanemployeeamonthlysalaryofRMB10,000permonth.Thecompany’ssocialinsurancecontributionis39%oftheemployee’smonthlysalary,whichtheemployee’scontributionis21%.

Companypaysonlysocialinsurancecontributionsrequiredofthecompany

Companypayssocialinsurancecontributionsrequiredbybothcompanyandemployee

Grosssalaryfortheemployee RMB10,000×(1-21%)=RMB7,900 RMB10,000

IITfortheemployee (RMB7,900–RMB3,500)×10%–RMB105=RMB335

(RMB10,000–RMB3,500)×20%–RMB555=RMB745

Netsalaryfortheemployee RMB10,000–RMB2,100–RMB335=RMB7,565

RMB10,000–RMB745=RMB9,255

Totalexpensesfortheemployer RMB10,000+(RMB10,000×39%)=RMB13,900

RMB10,000+(RMB10,000×(39%+21%))=RMB16,000

One key point is how much of a foreign employee’s salary can be allocated to allowances. This is something that is not clearly defined by the law, which stipulates that the allowances should be “reasonable.”2 In practice, many companies adopt a proportion of 30 percent of the total salary of the foreign employee and classify this portion as allowances. There is always the possibility that the tax office will challenge the company on this issue, so we recommend that the proportion of allowance should be set at or below this level.

Mandatory Benefits (Social Insurance)The next portion of the salary package is social insurance, often referred to in China as mandatory benefit. Contributions are made by both the employee and employer. The employee’s portion is deducted from their gross salary. The proportions and maximum contributions made by employer and employee vary depending on where the business is located.

Some employers choose to enroll their employees in additional pension plans or other types of wealth accumulation plans. This is legal, but please note that only the mandatory benefits specified in the IIT laws can be deducted before calculation of IIT.3

Defining Net SalaryNormally “net” is defined as the amount employees receive into their pocket each month after payment of IIT and the employee’s portion of social insurance. It is more commonly offered to blue-collar workers that may not understand the details of the Chinese social insurance or IIT systems.

Misunderstandings between managers and employees over the definition of “net” salary are commonplace. If your company intends to offer such packages to employees we suggest the HR Department draws up a clear example to explain to each employee how their salary package will be structured, and to show them how much money they will be able to take home every month.

The total of the base salary, allowances, bonuses, non-mandatory pension plans, and the employer’s portion of social insurance contribution are added together to form the total compensation and benefits (C&B) amount.

2 Article 1 of the Clarifications of the State Tax Bureau on Several Issues on Foreign Individual Income Tax, implemented

on April 9, 1997

3 Article 25 of the Implementation Rules for the Individual Income Tax Law implemented on March 1, 2008


2.4 Mandatory Benefits (Social Insurance)Social security in China is a complex topic because it is organized on a regional level. The formal social security system only covers urban workers, and partially covers rural workers that have come to the cities to work (the so-called “floating population”).

In this section we will introduce the various components of the Chinese social security system, some examples of contributions that need to be made by employees and employers in various cities, and the conditions under which employees can make claims.

China’s Social Security System is made up of five different kinds of insurance, plus one mandatory housing fund. The insurances are as follows:

Mandatory Benefit Types

MaternityMaternityleaveisusuallythreemonthsandpaternityleaveisgenerallylessthan15days.Inthecitiesinwhichmaternityinsuranceisapplicable,duringaperiodofmaternityorpaternityleave,salaryisnotrequiredtobepaid,rathertheemployeereceivesafixedsumfromthisinsurancefund.

PensionOnthepreconditionthatcontributionshavebeenmadeforatleast15years,uponreachingretirement,anindividualcanreceiveapensionbasedontheamountaccumulatedinhis/herindividualfund.

MedicalIntheeventofillness/injury,anemployeecanhavepartofthetreatmentcostcoveredbymedicalinsurance.Contributionsaccruetoacardthatcanbeusedforpharmacyorout-patientcostsingovernment-approvedhospitalsandclinics(excludesinternationalclinics).

Work-related InjuryThework-relatedinjuryfundcoversthecostoftreatmentshouldanoccupationalinjuryoccur.Theemployermustpaysomesalaryduringtheperiodofrehabilitationand,iftheemployeecannotreturntowork,compensationmustbepaid.

UnemploymentIntheeventofredundancy(notintheeventanemployeechoosestoresign),onthepreconditionthatanemployeehascontributedtounemploymentforatleastonecontinuousyear,theemployeemayclaimunemploymentbenefitsforamaximumof24months.

Housing FundDesignedtoensurethatworkerssavetopurchasehousing,moneyfromthisfundcanbeusedtopaytheinitialdown-paymentonahouse.Inmostcases,acompanydeterminesthecontributionrate(withinthelegalrange)whenopeningitssocialinsuranceaccount.

= “Five Social Insurances”


PensionPensions for workers in China are financed by contributions from both the employee and the employer. The portion contributed by the employer is normally higher than the portion contributed by the employee. As a general rule the employer’s contribution is usually between 10 percent to 22 percent of monthly salary. The employee will usually contribute around 8 percent.

Pension contributions made by the employees go directly into their “personal” pension accounts. The contributions made by the company go into a “social” account.1 The overall amount of pension that an individual can draw is based on the overall level of contributions over their working career. Once the personal account is empty, the individual’s pension will be 100 percent funded from the social account. In the event that the individual dies before the amount in the personal account is used up, the balance remaining in this account may be inherited by relatives.2

It is not possible for individuals in China to draw a pension unless they have made contributions for a minimum of 15 consecutive years.3 Even if an individual loses their job it will still be necessary for them to maintain social security contributions, at least at the minimum level stipulated by the authorities. In China the statutory retirement age for men is 60; for white collar female workers 55; and for blue collar female workers 50.4

Unemployment insuranceIn most large cities contributions are made by both the employee and the employer to this fund. The employer contribution can be as high as 2 percent of the individual’s monthly salary. If an individual becomes unemployed this insurance will pay a fixed amount every month on the condition that contributions have been made on behalf of the employee for a continuous one year period prior to the application. It will not be related to the amount of money paid by the individual or the company into the fund.5 Individuals may claim unemployment benefits for a maximum period of 24 months.6

Medical insuranceBoth employer and employee contribute to this fund. Proportions vary considerably between cities, but generally the company will be expected to contribute between 5 percent to 12 percent of the employee’s monthly salary, while the employee will contribute around 2 percent.

In the event an individual falls ill, they will go to the hospital and receive treatment. Usually just a base charge will have to be paid to the hospital up front by the individual, and the rest of the treatment expense should be received by the hospital from the insurance scheme. The precise portion covered by insurance can depend on the type of sickness or injury.

1 Article 4 of the Decisions of State Council on Establishing a Unified Basic Pension System for Employees Working in

Enterprises implemented on July 16, 1997

2 Ibid.

3 Article 5 of the Decisions of State Council on Establishing a Unified Basic Pension System for Employees working in

Enterprises implemented on July 16, 1997

4 Reply of Ministry of Labor on the Definition of Statutory Retirement Age for Employees working in Enterprises

implemented on May 11, 2001

5 Article 19 of Beijing Unemployment Insurance Regulations (No. 38 Order issued by Beijing Municipal Government

implemented on November 1, 1999

6 Article 17 of Beijing Unemployment Insurance Regulations (No. 38 Order issued by Beijing Municipal Government


FOR MORE INFORMATIONChina’s Social Insurance System presented by Adam Livermore Throughanintroductiontothefivedifferent typesofSocialSecurity inChina,AdamLivermore illuminatesthe current regulations, benefits,andconsequencesofChina’sSocialSecurity System.The five types ofSocial Security include: pension,medical insurance, unemploymentinsurance, work-related injuryinsurance,andmaternityinsurance.



Each individual covered by medical insurance is issued with a “medical treatment card” and every month a small amount of money is added to the balance in this card. Carriers of this card can make purchases from pharmacies or pay for treatment at hospitals if the balance on the card is sufficient.

Occupational injury insuranceContributions to this fund are made by the employer. Usually the premium is between 0.5 percent to 3 percent of the monthly salary of the employee, depending on what kind of work is being carried out by the employee.

In the event a worker experiences an injury at work, the employer will collect evidence of the incident and send it to the insurance company. Assuming everything is in order, the insurance company will reimburse the employer for the cost of the treatment. The company will remain liable for paying salary to the employee during the period of rehabilitation.7

Please note that if you have an employee that has a serious injury at work, the company can be liable for all the costs of treatment if the insurance premium has not been paid up to date. For this reason it is best to ensure that your new hires are registered with the Social Insurance Bureau and contributions are made promptly.

Maternity insuranceUsually only the employer makes a contribution of 0.5 percent to 1 percent. Under this system a female employee generally takes around four months of maternity leave during the period prior to and after the birth of her first child, depending on the location of the employee, age and other factors.8 During this period the insurance will cover the cost of her salary. The calculation of her salary will be based on the contributions made by the individual and the company over the past year, although recent legislation in certain cities has linked the amount of the payout to the average salary paid to employees in the company (rather than the earnings of the individual employee). A fixed amount towards the cost of the childbirth will also be paid out.9

As an associated point, the company may not terminate the contract of the employee from point of pregnancy until the baby reaches one year of age.10 If another employee has been hired for the position in the interim period then this person must also be retained at least until the end of the period of that employee’s fixed-term contract. If this is not possible then compensation should be paid to the employee in line with the Labor Contract Law.

Housing fundHousing fund, although in the strictest sense not a kind of social welfare, is generally included within the scope of social security, because the contributions are mandatory and come from both the employer and the employee (apart from in some special areas like Shenzhen, where the employee does not need to make a contribution).

As its name suggests, the housing fund is designed to ensure that workers save some money in order to purchase a house or an apartment. The employer will usually have to contribute between 7 percent and 20 percent of the employee’s salary. In many

7 Article 31 of Beijing Occupational Injury Insurance Clauses implemented on January 1, 2004

8 Article 14 of Beijing Enterprise Employee Maternity Insurance Regulations implemented on July 1, 2005

9 Ibid.



cities, the employee matches this contribution with an equal contribution of their own, although certain cities have different policies.

It is possible in many cities to make housing fund contributions in excess of 300 percent of the local social average salary to employees. The limit is generally 500 percent, although some cities do not set a limit at all. The portion over 300 percent will be deemed to be taxable income of the employee. The key point for employers to note is that if you hire employees earning a salary of higher than 300 percent of the local social average salary you should make sure to clarify in the offer letter that both employee and employer contributions will be limited by this cap. This can avoid potential problems in the future if the employee claims that higher contributions should be made.

When the employee wishes to purchase a house, the money in the housing fund can be used to pay the initial down-payment on the house, and it can also be used to subsequently pay back the loan to the bank. Furthermore, by producing evidence that funds have been accumulated in an individual’s housing fund the bank may provide a lower rate of interest on the loan. Upon retirement any remaining balance in the housing fund account can be withdrawn and used for any purpose by the individual.11

Contribution CalculationsMonthly contributions to the social security system are determined from a base figure. In most cities it is calculated as follows:12

Social security base = Previous year’s total income / 12

For new hires, the starting salary may be used as the social security base during the first year. Note that the base figure for social security contributions is capped at 300 percent of the social average salary for the location in which the employee pays social security.13 Therefore any employees earning more than this amount will actually pay a smaller percentage of their salary in social security contributions (employers will also have a smaller percentage burden).

The maximum base figures will generally be updated once per year for all employees. This usually happens in May. Sometimes the government will also adjust the percentages to be contributed by employee and company at this time. Note that although the maximum base figures will usually be updated during the middle of the year, the calculation of each individual employee’s base will be made based on their average salary during the period from January to December of the previous year.14

Participation by foreign employeesThe inclusion of foreigners into China’s social insurance system was formally indicated when the new Social Insurance Law was promulgated in October 2010. However, it was not until September 2011 that China’s Ministry of Human Resources and Social Security (MOHRSS) announced in the Interim Measures for Participation in the Social Insurance System by Foreigners Working within the Territory of China that foreigners should be included in the Chinese social insurance system starting from October 15, 2011. The Interim Measures require employers to undertake social insurance registration

11 Article 24 of the Regulation on the Administration of Housing Funds implemented on April 3, 1994 (and revised

on March 24, 2002)

12 Article 12 of the Beijing Social Pension Regulations implemented on January 1, 2007

13 Ibid.

14 Ibid.

“In Shanghai, social insurance inspections are random. The bureau will call a company a few days prior to the inspection so that all paperwork can be put in order. A company might undergo such an inspection once a year or once every 2-3 years, it’s hard to know.”Tina WangGroup HR ManagerDezan Shira & AssociatesShanghai [email protected]


for foreign employees within 30 days of applying for work permits.

In December 2011, MOHRSS issued a Notice on Guiding Measures for Foreigners Working in China to Participate in the Social Insurance specifically providing guidance on the issue of foreigners’ participation in China’s social insurance. The Notice requires foreigners who have been working in China prior to October 15 and who meet the participation requirements to register with the MOHRSS authorities by December 31, 2011, or late payment surcharges will be applied. It also provides that foreign employees who are nationals of countries that have concluded social insurance agreements with China can be exempted from certain Chinese social security contributions in accordance with these agreements as long as they produce proof that they participate in the relevant country’s social insurance within three months of receiving their work permits.

Subsequent to the promulgation of the above national regulations, various cities such as Beijing and Suzhou have issued local implementing rules requiring foreign employees to enroll in the social insurance scheme. However, the implementation of the scheme for foreigners remains uneven and uncertain across China.

SummaryContributions from the employee and employer can vary considerably depending on the city in which the amounts of contribution are being made. For a company that has employees based in a number of cities around the country this means that the overall cost to the company for an employee earning RMB10,000 in one city may be quite different to someone on the same salary based in another city, although the cost in first-tier cities such as Beijing and Shanghai tend to be similar.

Companies based in large cities may find that if they employ an individual from a regional city in their head office, the employee will request to have social security paid in the city where the company is based rather than in their hometown. The reason is simple – the employee will be able to earn more money via the pension and housing fund.

The opposite situation occurs as well. For example, if an employee is relocated from Shanghai to Shenyang the employee will likely request that social security continues to be paid in Shanghai. This is partly because the amount of pension and housing fund receivable in Shanghai will be higher. Additionally the employee will probably consider the fact that it is unlikely the company will employ them permanently in Shenyang; there is a strong likelihood of a return to Shanghai at some point.

The social security contribution can affect the total compensation and benefits (C&B) cost quite considerably. Companies should take this variance into consideration when deciding where to locate their operations. You will find that even within some cities there are different percentages and bases for contribution of social welfare.


0.5-2%

Employer Mandatory Benefit Minimum Contribution RangesSocial Insurances

Unemployment

Work-relatedInjury

Maternity

Medical

Pension

Housing Fund

0% 5% 10% 15% 20% 25%

*Penalties for noncompliance can be imposed @ 1‐3 times the outstanding liability. Interest is calculated @ 0.05% per day on the outstanding liability.

0.2-2%

0.5-2%

0.5-1%

5-12%

12-22%

5-20%

Employee Mandatory Benefit Minimum Contribution RangesSocial Insurances

Unemployment

Work-relatedInjury

Maternity

Medical

Pension

Housing Fund

0% 5% 10% 15% 20% 25%

0-1%

0%

0%

8%

5-20%

Example: Different Salary, Same Social Insurance ContributionsTwoemployeesworkinginBeijingmakedifferentsalaries,butbecauseofthesocialinsurancepaymentbase(RMB14,016),theirsocialinsurancecontributionsarethesametotalamount.

Employee 1 Employee 2

Monthlysalary RMB14,016 RMB20,000

Employersocialinsurancecontribution(44.3%)

RMB14,016×44.3%=RMB6,209 RMB14,016×44.3%=RMB6,209

Employeesocialinsurancecontribution(22.2%+RMB3)

RMB14,016×22.2%+3=RMB3,115 RMB14,016×22.2%+3=RMB3,115

Example: Different Cities, Similar Employer BurdenTheemployerburdenforanemployeewithamonthlysalaryofRMB10,000wouldbesimilarinBeijingandShanghaidespitedifferencesinsocialinsurancecontributionrates.InBeijing,theemployer’ssocialinsurancecontributionis44.3%,whiletheemployee’scontributionis22.2%+RMB3.InShanghai,theemployercontributionis44%andtheemployeecontributionis18%.Theemployee’smonthlysalaryisbelowthesocialinsurancebaseinbothcities.

Beijing Shanghai

Socialinsurancebase RMB14,016 RMB12,993

Employersocialinsurancecontribution RMB10,000x44.3%=RMB4,430 RMB10,000x44%=RMB4,400

Employeesocialinsurancecontribution RMB10,000x22.2%+RMB3=RMB2,226 RMB10,000x18%=RMB1,800

Netsalarypaid =10,000–2,226–322.4(IIT)=RMB7,451.6 =10,000–1,800–385(IIT)=RMB7,815

Totalemployer’sburden =10,000+4,430=RMB14,430 =10,000+4,400=RMB14,400


15

3

6

2

4

Mandatory Welfare Payments in Selected Cities (October 2012)C=CompanyI=Individual

1 Shenzhen pension contribution by company to non-Shenzhen hukou holders is 10%, not 11%

1 Beijing 2 Shanghai 3 GuangzhouC I C I C I

Pension 20% 8% 22% 8% 20% 8%

Injury 0.5% 0% 0.5% 0% 0.25-0.75% 0%

Maternity 0.8% 0% 0.8% 0% 0.85% 0%

Unemployment 1% 0.2% 1.7% 1% 2% 1%

Medical 10% 2%+RMB3 12% 2% 8%+RMB12.45 2%

Housing fund 12% 12% 7% 7% 5%-20% 5%-20%

4 Shenzhen 5 Dalian 6 HangzhouC I C I C I

Pension 11%1 8% 20% 8% 14% 8%

Injury 0.4% 0% 0.6-2% 0% 0.4-1.6% 0%

Maternity 0.5% 0% 0.8% 0% 0.8% 0%

Unemployment 0.4% 0% 2% 1% 2% 1%

Medical 6.5% 2% 8% 2% 11.5% 2%+RMB4

Housing fund 5-20% 5-20% 10,12or25% 10,12or15% 12% 12%


How do hukou influence social insurance participation today?

A hukou (pronounced hoo-kou) is a kind of domestic passport for all Chinese citizens. A hukou stipulates an employee’s home city/country and is either a rural hukou or an urban hukou, with the social insurance system applying only to the latter.

Previously, an employee working outside of his/her hukou area would generally not be able to participate in the mandatory fund benefits of the region of employment. If an employer wished to hire someone from outside the region of employment, the employer could pay mandatory benefit contributions through a branch office or through an employment agency (such as FESCO) in the employee’s hukou area.

Since last year when the social insurance system was expanded to include even foreign employees, hukou became mostly irrelevant when determining which local Social Insurance Bureau should receive payments made on behalf of an employee. The company should pay mandatory benefits in the city in which it is based. This way, should an employee want to access medical insurance funds at a local government-approved facility, they can do so conveniently. In addition, the company is familiar with the local government bureaus and can more easily assist the employee in resolving any difficulties in accessing benefits.

Hukou still has a small influence on mandatory benefit contribution rates, as employees are divided into the categories of permanent local residents and other residents (which includes Chinese with hukou from other cities and foreigners) and rates differ for certain insurances contribution.

Certain hukou locations are viewed as being the most highly desirable (particularly Beijing and Shanghai) for reasons related to children’s education, property purchases, international travel, etc. For key staff that a company wants to retain for the long-term, a company can endorse an employee’s application for a hukou change.

The full hukou transfer process takes about six months and involves several bureaus other than the Social Insurance Bureau. These bureaus include the Public Security Bureau, which must issue a new id card (shenfenzheng) for the employee before the Social Insurance Bureau will accept that employee’s application to make social insurance contributions as a local permanent resident.

The transfer of previously contributed social insurance funds between cities can vary in difficulty, depending on city tiers. Transferring funds between two first tier cities is of course the easiest, while a transfer to/from a third tier city can be more challenging.

No one can be sure what China’s hukou policy will be like in twenty years, but the law says that an individual can apply for a refund or transfer of the individual portion of their social insurance contributions back to their hometown. Note that only the funds contributed by the individual can be transferred; company contributions must stay in the city in which they were made.


2.5 Creating a Company RulebookA company rulebook clarifies an employer’s expectations and if necessary, makes it easier to demonstrate that an employee has broken a company rule and can be legally dismissed. As a guideline, we would normally suggest that any company with more than ten employees consider creating a company rulebook.

Contents of the company rulebook vary based on the industry in which the company is involved. Companies in the manufacturing industry will generally be more concerned about issues relating to promptness, length of breaks, safety of employees etc. Those in the business process outsourcing (BPO) market will be particularly concerned about the confidentiality of their clients’ information. Those in the food industry will pay most attention to hygiene.

The rulebook should bilingual, with the Chinese version considered valid. If a company has a trade union, the terms included in the rulebook shall be agreed with the union itself. Finally, the labor contract template should include a clear reference to the rulebook. This strengthens the company’s case if it needs to dismiss an employee based on rulebook infractions in the future.

1. Is the rulebook reasonable?A company may devise hundreds of rules in their rulebook, making it extremely hard for the employees to keep “in compliance”, and also increasing the workload of the HR division to supervise the rules. If a dispute arises and a judge considers that the company has set arbitrary rules in order to find reasons to dismiss employees then the employee is more likely to receive a sympathetic judgment. The employer should be prepared to explain exactly why each of the regulations should be included in the rulebook.

2. Is the severity of each infraction described in the rulebook?A rulebook should differentiate between a serious breach and a minor breach when determining how many warnings a company must give an employee before dismissing that person. Serious breaches can constitute immediate dismissal. Minor breaches are generally dealt with by issuing an official warning letter to the employee. The rulebook may stipulate that after a specified number of official warnings the employee is deemed to have committed a serious breach of the rulebook. In this way the company may gain the right to dismiss the employee without compensation, although we would like to stress that ultimately the decision on whether or not the infringements warrant dismissal could be challenged by the employee in a court.

3. Do you have evidence that your staff have read and agreed?Each employee should sign a document confirming that they have received a copy of, read, and understood the rulebook. If you amend the rulebook in the future, have the employees confirm once more. Provide a draft of the amended rulebook to employees, giving them a chance to provide comments and feedback for the company’s consideration (although there is no obligation to adopt any suggested adjustments). This not only improves the position of the company legally in the event of a dispute, but will ensure that employees read the rulebook more carefully.

About Dezan Shira & Associates business advisory services: Scan this QR code with your smart phone to visit: http://www.dezshira.com/businessadvisory.html

3. Handling Payroll

3.1 Calculating Overtime Payments3.2 Paying Mandatory Contributions (Social Insurance)3.3 Additional Payroll Costs3.4 Distributing Salaries3.5 Calculating and Filing Individual Income Tax3.6 Outsourcing Payroll


This chapter deals with the logistical process of managing the monthly payroll. Paying employees the correct amount of money by the required date may seem like a simple exercise; however, as payroll structures become more complex processing becomes more time consuming and more errors are made. Fundamental mistakes like continuing to pay salary or mandatory benefit to workers that have already left the company are surprisingly common. Such mistakes are financially damaging, but the consequences to the company can be even worse when it fails to pay the full amount owed to a valued staff member.

In the first sections of this chapter we take a look at each of the various aspects of the monthly payroll. At the end of the chapter we focus on a growing trend all over the world and particularly among foreign invested enterprises in China – outsourcing of payroll to improve the efficiency, accuracy, confidentiality and transparency of the process.

3.1 Calculating Overtime PaymentsOvertime can be expensive for employers. In China, employees are grouped into three categories working under different systems – the standard work hour system, the comprehensive work hour system and the non-fixed work hour system.

The standard work hour system requires that an employee’s normal working day should not exceed eight hours, and that the normal working week not exceed 40 hours. Each employee should be guaranteed at least one rest day.1 Most white-collar workers in China now operate under a five-day working week, although some domestic companies still utilize a six-day working week model.

The comprehensive work hour system does not refer to one week as the key factor in regulating working hours. Instead it takes a set period (usually a month, but not necessarily) as the base to calculate the number of working hours. Although the distribution of hours worked during this period may be quite irregular, the average number of working hours per day and per week should roughly correspond to the levels set out in the standard work hour system.2 Please note that before a company can implement this system it must submit its plan to the local Labor Bureau and receive approval.3 This system is normally used for blue-collar workers or other workers that require irregular shifts.

Under the non-fixed work-hour system employees do not generally receive overtime payments, because measurement of the time spent working is considered to be impractical. A company implementing this system for some of their employees should receive prior approval from the local Labor Bureau.4


2 Article 5 of Approval Measures for Adopting Non-fixed Working Hours System and Comprehensive Working

Hours implemented on January 1, 1995

3 Article 7 of Approval Measures for Adopting Non-fixed Working Hours System and Comprehensive Working

Hours implemented on January 1, 1995

4 Ibid.



Basic hourly salary is calculated by taking the basic monthly pay of the employee and dividing it by 174 (average number of working hours in the month).5

These are the mandatory minimum percentages paid to employees for the overtime they work, although some companies offer their employees higher rates than the statutory minimums.

Comprehensive Work Hour System OvertimeTime of Work % of Basic Hourly Salary

Extrahoursworkedoutsideofnormalshift 150%

Extrahoursworkedonpublicholidays 300%*

* This higher rate applies even if the standard shift for the worker is scheduled on a public holiday.6

An employee may work a maximum of three hours of overtime in any one weekday and a maximum of 36 hours of overtime in any one month.7 Assuming a company stipulates an eight hour work day, then on average in a month a worker shall work 174 hours. Adding this maximum 36 hour period of overtime means that (for an average-length month) an employer cannot legally require an employee to work for more than 210 hours during that month.

5 Article 2 of the Notice on the Monthly Working Hours and Salaries of an Employee promulgated by the Labor

Ministry and implemented on January 3, 2008

6 Article 13 of Preliminary Regulations on Salary Payment implemented on January 1, 1995 and Article 62 of the

Opinions of Ministry of Labor on Several Issues on Implementing the Labor Law of People’s Republic of China implemented

on August 4, 1995


Standard Work Hour System OvertimeTime of Work % of Basic Hourly Salary

Extrahoursworkedonweekdays 150%

Hoursworkedonweekends 200%

Hoursworkedonpublicholidays 300%


3.2 Paying Mandatory Contributions (Social Insurance)Although both employee and employer make contributions towards the social insurance funds in China, it is generally the case that the employer is responsible each month for withholding the contribution of the employee from gross salary, and making their contribution together with that of the employer.1

While the mandatory contributions into the state-sponsored pension plan and other social insurances are clearly specified by law, certain companies choose to base their housing fund payment to their employees on an amount exceeding 300 percent of the social average salary base for their city. This is acceptable in many areas of China, however the portion that is above the mandatory amount is taxable for individual income tax purposes, and this amount of tax should be deducted by the employer before payment of net salary to the employee.2

Below we will explain how to register at the Social Insurance Bureau and the Housing Fund Bureau and pay mandatory contributions on behalf of employees. As the process is slightly different across different cities in China, we use the situation in Beijing as an example.

Social Insurance Registration and Payment1. The company should first obtain a social insurance number. The following

documentation must be presented at the Social Insurance Bureau between the 1st and the 20th of the month (no social insurance numbers will be issued after the 20th):

• Company business license• Enterprise code certificate• Certificate of approval• ID of the legal representative or person in charge of the company• Social insurance information collection form • RMB Basic Account Opening Permit

If the employee is paid through a branch of the company, the following documentation is also required:

• Parent company’s business license and enterprise code certificate• Power of attorney affixed with company chops

2. After receiving a company social insurance number, details relating to the employees should be input into software provided by the Social Insurance Bureau. These details include salaries, as these will determine the base on which monthly contributions are made.

3. Information input into the software should be saved onto a USB flash drive and physically taken to the Social Insurance Bureau.

4. A contract should be completed with an eligible bank to ensure that the monthly social insurance contributions can be directly remitted to the Social Insurance Bureau

1 Article 12 of the Social Insurance Levy Temporary Clause implemented on January 22, 1999

2 Article 1 of Circular Caishui [2006] No.10 implemented on June 27, 2006

“After corporate account registration is complete, in Shenzhen, registration for local employees can be done online, while registration for the supporting documents for expatriate employees must be physically submitted at the Social Insurance Bureau.”Sisi XuSr ManagerCorporate Accounting ServicesDezan Shira & AssociatesShenzhen [email protected]


each month. In most cases, the first payment of social insurance contribution must be made via a check issued from the company, the funds cannot be automatically debited until the second month.

5. A monthly visit to the Social Insurance Bureau to register new employees and de-register employees who have left the company is often necessary, as these processes can not be handled online in many cities at time of writing.

Fines can be imposed by the Social Insurance Bureau for late payment of contributions by an employer.

Housing Fund Registration and PaymentThe nature of the housing fund is fundamentally different from the social insurances described above. All of the contributions made to this fund accrue to the individual, with none of the funds going to a social pool. For this reason, the housing fund is treated separately and governed by a different bureau.

The steps to complete the Housing Fund Bureau registration are:

1. A company account must be opened with the Housing Fund Bureau. To do this, the company should present the following information:

• Company business license (original and copy)• Enterprise code certificate (original and copy)• Certificate of approval (original and copy)• ID of the legal representative of the company (copy)• Power of attorney affixed with company chops (original)• Housing fund information collection form with company chop

2. Approval can generally be received immediately, and the company receives a special account number for payment of housing fund.

3. A contract must be signed between the Housing Fund Bureau, the company and an eligible bank to allow automatic contribution of housing fund each month. The first payment of housing fund contribution usually must be made via a check issued from the company – it cannot be automatically debited until the second month.

4. A monthly visit to the Housing Fund Bureau to register new employees and de-register employees who have left the company is often necessary, as these processes can not be handled online in many cities at time of writing.

Online systems for registration of employees with the Social Insurance Bureaus and Housing Fund Bureaus are still not available in many parts of China. Either someone in the company’s HR department needs to make frequent trips to both the Social Insurance Bureau and the Housing Fund Bureau, or the role could be outsourced. As a general rule, a company with less than 1,000 employees will normally find it worthwhile to outsource this function.


3.3 Additional Payroll CostsRegional AllowancesRegional allowances are localized mandatory payments that employers based in certain regions must pay to their employees as part of monthly payroll. We will just provide two examples of supplemental payments that companies based in certain locations need to make to their employees.

1. Allowances for winter heating fee – Northeast ChinaNortheast China is a cold place in the winter, with temperatures falling to below -30 degrees Celsius in some areas. Heating is supplied to all apartments during the winter, however there is a cost associated with this. The cost differs per city, but each household can expect to have to pay a fixed fee of around RMB2,000 to RMB4,000 for constant heating through the winter months. This fee can represent a few months of salary for some workers – not an inconsequential amount.

In an attempt to ensure that all households will have enough money to pay for their heating bill, the various local governments in the region require companies to provide a certain amount of money each month to each employee as a heating allowance.

An additional requirement in Dalian is that companies must also contribute another 2 percent of the average social salary of all employees with a Dalian hukou to a fund which will be used to help retired people pay their annual heating fee.1 This amount is paid together with the monthly social insurance contribution to the Social Insurance Bureau.

2. Summer heat allowance fee – Guangdong ProvinceIn contrast, the south of China is too hot in the summer. The Guangdong government has instituted a policy that requires companies to compensate their employees for working during the hot months. During the period June – October, companies should pay an additional RMB150 per month to their employees, regardless of whether they work indoors or outdoors.2

Although these additional fees do not appear to be high, especially by western standards, we include them in this chapter to highlight the fact that there are regional policies which affect the amount of compensation payable to employees.

Disabled Workers Employment Assistance Fund

In certain cities, employers are required to either employ a proportion of disabled workers or pay a certain amount into a fund to assist disabled people in finding work. Beijing and Shanghai both have policies in place governing payment into these funds, however the burden for the employer is quite different.

1 Dalian City Employee Heating Allowance Regulations implemented on September 30, 2005; Dalian City Council Code

No.80 implemented on September 15, 2006

2 Guangdong Province Administrative Measures on Paying High Temperature Allowance implemented on June 1, 2012



Disabled Workers Employment Assistance Fund Contributions

Beijing ShanghaiFeeExemption:Minimum%ofWorkforceasDisabledWorkers

1.6% 1.7%

FeeContributionAmountCalculation

Beijingsocialaverageannualsalaryforpreviousyear×60%×no.ofworkersemployed×1.7%

Actualaverageannualsalaryforthecompanyinpreviousyear×no.ofworkersemployed×1.6%

Comments Companiesthatdoemploysomedisabledworkersbutdonotmeettheexemptionrequirementwillpayareducedamountintothisfundbasedonthedifferencebetweenthepercentageofdisabledemployeesactuallyemployedandtheexemptionthreshold.

Theregulationmentionsaceilingfortheactualaverageannualsalaryforthecompany,howevertheamountofthisceilingisnotspecifiedanywhere.

Inpractice,thecollectionofthisfundisbeingimplementedusingaratherdifferentcalculationtothelegalbasis.Thesocialinsurancebasesofthecompany’semployeesarebeingusedasthereferencepointforcalculationofthefundcontribution.ThemaximumsocialinsurancebaseinShanghaiin2012isRMB12,993.Therefore,thecontributionsthecompanymakesforemployeesearningmorethanthemaximumsocialinsurancebasethisamountislimitedandthetotalcosttotheemployerislowerthantheamountcalculatedinaccordancewiththerelevantregulations.

Sources:

Notification of Implementation Measures Concerning the Management of Payment of Contributions to the Beijing City

Disabled Workers Employment Assistance Fund implemented on July 17, 2006

Implementation Measures for Methods of Organizing Employment for Disabled Workers in Shanghai City implemented

on June 22, 2000


3.4 Distributing SalariesThe vast majority of companies in China handle salary distribution via electronic funds transfer (EFT). EFT files can be uploaded through bank web sites by the HR manager and approved online for payment to employees by the finance manager. If the employees have bank accounts with the same bank as the company then the transactions should be processed immediately, otherwise there can be a short delay; normally of no more than one day.

Uploading one EFT file which includes details of each employee’s net take home pay saves time, and also has the advantage that individual salary details will not appear on the bank statement at the end of the month. Before the batch is processed, the bank will require approval from the finance manager at the company for the total amount of salary to be released. This is the figure that will appear on the company’s next bank statement. Only the person that uploaded the EFT file will know the contents of that file; usually the HR manager at the company.

Salary payments in China should be handled through the company’s main operating bank account if possible so that payments can easily be classified as salary payments.

For companies that use an international bank for their main bank account it is not always possible to process a batch EFT file. Therefore, all the salary details for each individual will appear on the statement. To avoid this situation, some companies setup a domestic bank account, first transferring the funds into this new account (specified as a payroll account) before remitting to their employees’ accounts. Another alternative is to pay a lump sum to a payroll agent, which will then pay salary, mandatory benefit and possibly IIT on behalf of the company. This method is not recommended as it causes an unnecessary delay in the monthly payroll process while the agent verifies that the funds have been received. There is also the risk that the agent fails to make the required payments.


3.5 Calculating and Filing Individual Income TaxPayment of individual income tax in China is based on not just salary income but a range of other income that an individual may receive. The responsibility of the employer is limited to deducting the IIT payable on salary income before paying a net amount to the employee. Any payments of IIT based on other sources of income are the responsibility of the individual.

As in most countries, IIT is a progressive tax – a higher proportion of tax is payable on earnings above a certain level, and it is payable monthly. The lowest level of IIT is 3 percent, levied on the portion of taxable monthly income between RMB1 and RMB1,500. The highest rate is 45 percent, payable on the portion of taxable monthly income above RMB80,000.1

IIT Rate by Monthly Taxable Income

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

35,000 9,000 4,500 1,500

80,000 ...

Tax Rate (%)

Monthly Taxable Income (RMB)

55,000

Individual Income Tax Rates and DeductionsMonthly Taxable Income (RMB) Tax Rate Deduction (RMB)

1,500orless 3% 0

1,500<TI≤4,500 10% 105

4,500<TI≤9,000 20% 555

9,000<TI≤35,000 25% 1,005

35,000<TI≤55,000 30% 2,755

55,000<TI≤80,000 35% 5,505

>80,000 45% 13,505

1 Tax Rate Table Supplement to the Individual Income Tax Law implemented on June 30, 2011

FOR MORE INFORMATIONTax, Accounting and Audit in ChinaA strong understanding of taxliabilitiesenablesforeigninvestorstomaximizethetaxefficiencyoftheirforeign investment while ensuringfullcompliancewithalltaxlawsandregulations.This guide overviewstaxesforbusinessesandindividuals,anddiscussesaccountingandauditin the China business context,including tax planning, corporatetaxes, individual income taxes,international transactions, auditand compliance and financial duediligence.



The actual IIT calculation for monthly salary income is fairly straightforward – the key point to address is what exactly constitutes taxable income?

Taxable income calculation for Chinese nationals:

Gross salary + other fringe benefits – employee social insurance contribution – employee mandatory housing fund contribution – RMB3,500

Included in fringe benefits are:

• Non-mandatory insurance policies• Various fixed allowances such as housing allowances• Contributions to corporate retirement funds or wealth accumulation funds

These fringe benefits should be distinguished from reimbursements, which are not part of gross income. Employees should provide official invoices to the company for reimbursement each month based on the actual amount of their expenses.

Taxable income calculation for non-Chinese nationals:

Gross salary + other fringe benefits – mandatory social welfare contributions in their home country – deductible allowances – RMB4,800

Individual income tax bonus treatmentAll employees, no matter whether Chinese or foreign, may take advantage of special tax “bonus” treatment during one month in every year. The tax treatment works as follows:

1. Divide total amount of bonus by 12 2. Cross-reference taxable rate and quick deduction amount 3. Apply percentage to total bonus amount and deduct the quick deduction amount

Let’s take a look at one example:

If a staff member receives RMB50,000 as an annual bonus, the tax treatment works as follows (please note that the calculations below assume that the employee will receive their current month’s salary and that this is over RMB3,500 for Chinese staff or RMB4,800 for foreign staff. If the current monthly salary is less than the tax deductible amount, then the annual bonus shall firstly offset the tax deductible amount and then follow the below calculation method):

1. First, divide the annual bonus by 12: RMB50,000 / 12 = RMB4,166.67. So the tax rate for the annual bonus is 10 percent with a quick deduction amount of RMB105.

2. Calculate the total IIT for the annual bonus: RMB50,000 x 10% - 105 = RMB4,895

3. For the annual bonus calculation there is no fixed tax deductible amount for either Chinese or foreigners (unlike for monthly salary, where RMB3,500 or RMB4,800 may be deducted)

One key point is that the annual bonus declaration can only be made on one of the twelve monthly IIT declaration forms during any calendar year. This does not mean


that the entire bonus must be received in one payment, or for one specific purpose. It is possible to combine the payment of several bonuses or allowances into the filing for one month. Although the employee can treat bonuses and allowances in this way during one month of the year, the standard salary payment for the month will still follow the normal IIT rules explained previously.

Foreign employees working for overseas entitiesNote that the calculations introduced above for foreign employees assume that they are contracted to and working for the Chinese entity. If they happen to be contracted to an affiliate based abroad, then their tax treatment is different – depending upon a number of factors including the number of days they have been based in China during the fiscal year. This treatment is quite complex and we will not explain it here in this guide.

In most large Chinese cities individual income tax can be filed online by the company each month. Physical filings are still generally required (with the exception of Beijing, Shanghai and a few other cities).

Less than 90 (183) days

Income paid by employer

in China(China-

sourced)

One year tofive years

Income paid by employer

in China(non-China

sourced)

90 (183) days to

one year

Income paid by overseas

employer(China-

sourced)

In China 5 years

continuously

In the 6th year, does

“residing for one year“

apply?

Tax on global

income from hereafter

Five year period is

reset and “90 (183) day

rule“ applies again

yes

no

China Residence and IIT Income Source Applicability Timeline

IIT online filingTo make online filings of IIT the company will generally require:

1. A special USB Key issued by the local Tax Bureau2. A piece of software installed on a computer to facilitate the online filing3. The details of the IIT amounts for each individual, organized into a format that can

be uploaded into the above mentioned software

At the beginning of the month, following the payment of salaries to employees there is a period of around two weeks during which the online IIT filing should be made. The precise deadline can be different depending on the city in which the company is located, although according to the national law filings should be completed within the first fifteen working days of the month.2 The USB key needs to be inserted into the computer on which the Tax Bureau software is installed. The pre-generated IIT file with the details of all the payments to be made by each employee can then be uploaded into this piece of software.

2 Article 9 of the Individual Income Tax Law implemented on March 1, 2008


The final step is to authorize the software to send the total amount of IIT to be paid by the company to the Tax Bureau. Note that the details of each individual’s payment are not sent to the Tax Bureau, but remain saved within the computer. This software should not be deleted from the computer, because physical tax filings that periodically must be made at the Tax Bureau are also generated using this software. Physical filings will include details of all the individual contributions made by each employee.

Upon submission of IIT the Tax Bureau will directly deduct the amount of IIT filed from the bank account of the company. The company must have signed an agreement with the Tax Bureau and their bank to allow the amount filed to automatically be debited. Most large domestic banks are able to facilitate these transactions, although at the time of writing of this guide foreign banks are still unable to do so.

Online filings can only be made during the window after the end of the month in which the salary was paid. If the company fails to meet the deadline for some reason it must make a physical filing. A fine will likely be imposed for any late filings.

Physical filingsDepending on the city, physical filings of IIT are necessary. Assuming online filings have already been made by the company, all that is required for the physical filing is:

1. Print out the details of the IIT payments from the Tax Bureau software for each individual for each of the months required

2. Stamp each document with the company chop3. Take to the local Tax Bureau for submission

It is also possible for companies to make physical filings every month instead of online filings. Although, this is obviously more time consuming, as the physical filing includes all the details of each individual employee’s tax payments. The person making the filing will be able to calculate the salaries on which they are based. Therefore, if physical filings are necessary they should be made either by the company’s HR manager or someone from outside your organization for reasons of confidentiality.

If physical filings are made, then the tax payment generally cannot be deducted directly from the company’s bank account, and a visit to the bank with a form issued and stamped by the Tax Bureau will be necessary. The bank should receive this form and the payment. The form will not include the details of each individual’s tax burden, so no particular confidentiality risk exists for the company at this stage.

At the time of writing this guide there are still some cities in which the only option for companies is to make a physical filing every month. It will likely take several more years before all of the urban areas in China are geared up to allow online filings.

FOR MORE INFORMATIONDouble Taxation Avoidance AgreementsThetechnicallanguagesurroundingdouble taxation, including the“substance over form” principle,“beneficial owner ” status, andthe concepts of “permanentestablishment” and“tax residency,”make the area a challenge fornon-specialists to navigate.Yet anunderstanding of these terms andthecircularsbehindthemiskeytoensuringthatabusinesscanbenefitunderdoubletaxationagreements.

Including:• DoubleTaxationAgreementsfor

ChinaInvestment• DTAInterpretation:Circular75and

China-SingaporeDTA• Q&A:WhatisthesituationinChina

forforeigncompanieswishingtoobtainDTArelief?



Example: Net Salary with and without Annual BonusAnemployeewastransferredfromaU.S.HQtoaChinasubsidiary.In2012,hestaysinChinafor365daysandhisannualsalary(afternon-taxabledeductions)isRMB1,320,000.

Monthlysalary RMB110,000 RMB80,000

Annualbonus 0 RMB360,000

IITpayableonsalary =[(110,000–4800)×45%–13,505]×12 =[(80,000–4,800)×35%–5,505]×12

IITpayableonbonus 0 =360,000/12=30,000Applicabletaxrate:25%.

TotalIIT =406,020 =360,000×25%–1,005=249,780+88,995=338,775

Who needs to make an annual declaration of their income?

The annual income declaration should be made no later than March by anyone who has income from specified sources in China in excess of RMB120,000 during the financial year (January 1 to December 31).1 This requirement has been introduced by the government to ensure that individuals earning significant income from China take personal responsibility for the amount of tax they pay.

This income does not all have to be derived from salary, it can also come from other sources such as commission, service fee, or interests. Foreigners that have stayed in China for less than 275 days during the calendar year are not required to make this declaration, even if the amount of personal income they have received from China in one form or another exceeds this amount.2

The most important information on the form is as follows:

• Name of individual and employer• Income from wages, taxable income, tax paid and tax still owed• List of other non-salary income• Signature of employee submitting information under the section clearly stating

that the information is complete and accurate

Since the details on this form are not limited to salary income but also include other forms of income the responsibility for submission of this form does not lie with the employer, but instead with the individual. At the end of the year the employer should inform the employee of the total amount of gross income paid by the company and the total amount of tax paid on behalf of the individual over the course of the year. If gross income, added to any other income earned from other sources during the year, exceeds RMB120,000 the individual should fill out and submit a declaration.

As mentioned above, the obligation to submit such a form extends to foreigners working in China. In situations where the salary details of the foreign employee cannot be disclosed to any local staff members, companies will often appoint a third-party agent to assist the foreign employee to make the declaration.

1 Article 6 of the Individual Income Tax Self Declaration Methodology (Trial) implemented on January 1, 2007

2 Article 4 of the Individual Income Tax Self Declaration Methodology (Trial) implemented on January 1, 2007 and

Article 3 of the Implementation Rules for the Individual Income Tax Law implemented on January 28, 1994 and

Revised on February 18, 2008

FOR MORE INFORMATIONAnnual Compliance and Audit for Expatriates and Foreign Investors in China InChina,JanuaryandFebruarybringsNewYear banquets, transportationchaos…and annual complianceprocedures.

Including:• AnnualComplianceProcedures• Ta x D e d u c t i b l e a n d N o n -

DeductibleExpenses• IndividualIncomeTaxFilingsand

Declarationsfor2011Earnings


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3.6 Outsourcing PayrollMore and more companies are turning to third parties to handle their payroll in China. Common reasons for doing this include:

• Increased efficiencyProviders should have their own software that can generate all the necessary reports required by the client, the bank and the Tax Bureau. This is more efficient and reliable than generating reports internally using relatively manual processes on software like Excel.

• Increased accuracy Running payroll through a manual system can often lead to mistakes. This presents a poor image of the company to its employees. It can also cost the company money if employees have been overpaid or are left on the payroll after they have left the company. Both of these phenomena are remarkably common.

• Increased transparency When there is a problem it is necessary to have a clear procedure in place to ensure that the source of the problem can be located and is reported to management. When companies handle payroll internally it will often be the case that such problems are rectified without any reporting to management. By outsourcing the payroll process, this possibility can be eliminated.

Problems with payroll come from one of two areas – incorrect input information or incorrect processing. In the first instance, the problem lies within the company’s inter-departmental reporting structures. As long as the problem is reported to management it can be investigated and dealt with. In the second instance, the problem lies with the setup of the payroll calculation software itself. If the company is outsourcing payroll management the provider should take responsibility for the error and the client should consider switching providers in the future.

• Increased confidentialityObviously, the more employees are aware of salary information the higher the risk that salary details will become public knowledge within the company. This is a particular risk in China, where the concept of confidentiality of salary information is not universally understood.

By outsourcing payroll there should only be a small core of senior people in the organization that are aware of the payroll details. The finance team will only need to know the total amount for the payroll every month, not the individual breakdown.

• Decreased liabilityOutsourcing payroll management reduces the risk that the company will make incorrect filings to the Tax Bureau. Assuming the correct information has been provided to the third party outsource by the agreed deadline, any responsibility for under-reporting of tax or penalty for late filing should be the duty of the outsourcing company.

• Decreased costWhile the costs of outsourcing are quite obvious, they should be carefully compared

“Outsourcing payroll processing allows for greater transparency, efficiency, accuracy, confidentiality, and continuity, as well as cost savings and ensured compliance with all laws and regulations.”Helen KongCorporate Accounting ServicesDezan Shira & Associates Dalian [email protected]


with the costs of running payroll internally. These can include staffing costs (HR / IT / managerial resources), software development costs and other miscellaneous costs. Mistakes made when processing payroll can cause discontent among a company’s staff and this can lead to an increase in staff turnover. This is a very significant cost for a company to burden.

Please bear in mind that outsourcing your payroll will not mean you can entirely disregard your internal HR costs. You will still need somebody internally to supply the input information to the provider and approve the payroll each month, as well as other HR tasks such as organizing the hiring of employees and ensuring observation of internal regulations.

The strategy behind outsourcing for many companies is similar and quite simple – removing most of the processing work. Internal HR teams should be as small as possible for confidentiality reasons and they should focus on strategic issues (defining skill sets for various positions, structuring salary packages) and communicative issues (identifying and solving problems that arise between senior management and employees).

Payroll processing procedureThere are several distinct steps during a payroll processing operation:

Step 1: Submission of payroll input information by companyThis should include all the information about people who have joined or left during the month, details of salary increases, bonuses and other allowances. Depending on the scope of the outsourcing work, the company may also need to provide time management sheets, mandatory benefit contributions and details of annual leave taken for each employee.

Step 2: Initial processing of “master report”At this stage the payroll processor checks all the information sent by the company before uploading it into the payroll processing software. After uploading is complete, the software can generate the “master report”. This file details all the components of salary for each individual, as well as figures for net salaries, IIT payments, social insurance contributions (for employee and employer) and total compensation and benefit costs for the employer. It also shows the total amount of money the company must prepare for payment of salary, IIT and social insurance payments. The payroll processor will send this file back to the internal HR manager at the company for approval.

Step 3: Approval of payroll dataThe internal HR manager will check the information on the master report, paying particular attention to the completeness of the input information sent to the payroll processor. Once everything is in order, the HR director will approve the payroll.

Step 4: Generation of all other payroll-related reportsThe payroll calculations are now approved and the payroll processor can run the other reports. These can include, but are not limited to, the following:

a) Electronic funds transfer (EFT) file b) Payslips (printed on special security paper)c) General ledger file for uploading into the financial systemd) Cost center reporte) IIT online filing document



Step 5: Processing of reportsThis will depend on the scope of the outsourcing work requested by the company. Usually the outsourcer will implement the following:

a) The EFT file will be sent to the bank via the secure online portal and using a password provided by the bank.

b) The payslips are couriered to the offices, or in some instances to the home addresses of employees.

c) The ledger file is sent back to the company’s HR department, and then forwarded to the finance team for consolidation into the general ledger.

d) The cost center report is also sent back to the HR department for reporting to management.

e) The IIT online filing document is uploaded into the Tax Bureau software at the beginning of the following month and subsequently filed.

Step 6: Transfer of fundsThe final step is approval of the payment of salary via online banking (finance team only needs to see the total amount, not the individual payments) and ensure that there are enough funds in the account to cover the payment of salary, mandatory benefit and individual income tax. As a general rule, the processing takes between six to ten working days each month, with the IIT online filing happening at the beginning of the following month.

Below we include some tips on how to identify a reliable payroll processing agent:

1. Agents should handle all interactions with your local HR team through e-mail and in English, allowing management to monitor what is happening

2. Agents should have a reliable software system that can meet the requirements of you organization

3. Agents should not have direct contact with anyone but the members of the HR team at the company and their supervisors.

4. Agents should process the payroll from a remote location, preferably not the same city as the client. Only one or two people should be involved in the processing work

5. Agents should not do any executive search operations as a side business; no company would want to entrust its employees’ salary records to a company that may misuse them for other purposes


Collectpayroll-relatedinformationfrominternalHRandotherservice

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Payroll Process Flow Chart

About Dezan Shira & Associates payroll services: Scan this QR code with your smart phone to visit: http://www.dezshira.com/payroll-services.html

4. Managing The Employment Relationship

4.1 Performing Periodic Appraisals4.2 Long-Term Sick or Injured Employees4.3 Pregnant Employees4.4 Labor Unions


The management of employees is not just about processing documents. Certain situations arise that require special consideration. Good communication and a clear understanding of the responsibilities of the employer are necessary to maintain a good relationship. Here, we explains the role of periodic appraisals and also describes in more detail two situations commonly encountered by employers – sick employees and pregnant employees. Finally, we take a look at the role trade unions play in labor relationships in China.

4.1 Performing Periodic AppraisalsOnce a company hires an employee it is important to regularly assess the performance of that individual. Of course, one of the main reasons for doing this is to provide feedback to the employee about their performance. This is not an issue specific to China, and is carried out by HR departments all over the world. The point we would like to address in this section is the relevance of the periodic appraisal to the continued employment of the individual concerned.

It is not easy to terminate the employment of an employee during the period of a fixed-term contract or an open-term contract without good cause. It may be necessary for the employer to prove that the employee is not suitable for the position, even after further training and support. Alternatively, the employer may need to prove that the employee has broken the rules of the company. For certain rules that are not considered to be serious infractions, it may be necessary for the company to provide several written warnings before officially dismissing an employee.

Regular appraisals can help to guide your employees away from behavior that is likely to cause friction with the company, and towards a more productive relationship for both parties. Many companies perform such appraisals at the end of the probation period and then at six-month intervals.

Here are some points to bear in mind:

1. Make a standard template for the appraisal. Once the document is completed it should be signed by the employee, the direct manager and HR and be kept in the employee’s file.

If there are any particular rules that the employee is regularly or periodically breaking, ensure that the manager mentions them explicitly somewhere on the appraisal form. Common problems include a tendency to arrive late for work, too much time spent surfing the internet at work etc. These should be clearly mentioned to the employee during the appraisal meeting. By pointing out rule infractions on the appraisal form it will come as less of a shock to an employee if the company has to issue an official warning for the same reason later on in the year.

2. Make sure managers are keeping their appraisals realistic and avoiding the temptation to give over-flattering appraisals to employees. Such unrealistic appraisals defeat the original objective of the system and can cause problems in the future as the employee may start to have an over-inflated sense of their importance to the company. It can make any procedures to terminate an employee in the future more difficult. Employees may cite such appraisals as evidence that they have been performing well.



3. When one party involved in the appraisal is a non-native Chinese speaker, the form should be filled out in both Chinese and in English to avoid misunderstandings. Furthermore, the employee should also fill out and submit a self-evaluation form, also signed by employee, direct manager and HR.

Naturally, there is a cost associated with drafting and maintaining all this information, but the costs associated with not preparing well can be much higher.

Evaluation by superior Categories Points Comments1.Professionalknowledgeandskilllevel

7 5 3 1

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3.Attitudetowork 7 5 3 1

4.Senseofresponsibility 7 5 3 1

5.Abilitytoworkinateam 7 5 3 1

6.Flexibility 7 5 3 1

7.Abilitytoreacttochangingcircumstances

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8.Communicationskills 7 5 3 1

9.Levelofmaturitydisplayedatwork

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10.Suitabilityofculturalvaluescomparedwiththoseofthecompany

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Overallevaluation

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ConverttostandardemployeestatusTransfertoalternativepositionDismiss

SignatureofSuperior: Date:

Remarks:Eachcategoryisevaluatedusingapointssystemasfollows: “7”=Excellent “5”=Good “3”=Average “1”=Poor

Approval / comments by employee

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Approvalsection-DirectManagershouldnotfillin

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Probation Evaluation Form (tobefilledoutbydirectmanager)Employee No. Name Department Position Probation Start - End Date


4.2 Long-Term Sick or Injured EmployeesIt is inevitable that as your company grows in China, a small portion of your workforce will fall ill or suffer some injury at some point. Assuming the employer and employee have been making their contributions under the social insurance system, at least some proportion of the hospital costs for any illness or injury will be covered by medical insurance, while the rest of the burden will fall on the individual. The responsibility for payment of the employee’s salary still remains with the employer. Some of the regulations stipulating this responsibility are made at a local level, so here we compare Shanghai and Beijing. Please note that these regulations apply to illnesses and injuries that were not received during the process of performing work on behalf of the employer.

ShanghaiRecuperation period (during which the employer is responsible for paying salary to the employee) is a minimum period of three months plus one month for every year of service to the company from the second year onward, with a maximum of 24 months.1

The amount paid is a proportion of the employee’s base salary. The proportion is higher during the first six months of the sickness or injury leave, and lower for subsequent months. The base salary is as stipulated in the employment contract, and does not have to include income classified as allowances, bonuses or overtime.2

The following points should also be taken into account:

• If the amount payable to the employee each month during illness or injury period is greater than the average social salary in Shanghai for that year (RMB4,331 in 2012) then the company may pay an amount equal to the average social salary amount3

• The minimum payment that should be made to an employee each month during the period of illness or injury should be no lower than 80 percent of the minimum wage (RMB1,450 in 2012) 4

• The minimum payment that should be made to the employee should not be lower than 40 percent of the average salary paid to all employees in the company, unless this amount is higher than the social average salary for Shanghai 5

• While the employer is in general entitled to terminate a labor contract after the completion of the illness / injury leave period (assuming the employee is still not capable to fulfill the responsibilities of the position), the employer should make a one-off payment equal to at least six months of salary to the employee as compensation for future medical expenses (note that this calculation of salary does not refer to base salary, but instead the average of the total monthly salary received over the previous twelve months, including allowances, overtime and bonuses; the regulation does not mention whether or not this shall be limited by 300 percent of the average social salary for Shanghai)6

1 Article 2 of the Standards for Recuperation Period in Shanghai for Employees Sustaining an Illness or Non-Work Related

Injury during the Labor Contract Period implemented on May 1, 2002

2 Article 1 of the Shanghai Labor Bureau’s Bulletin in Relation to Calculation of the Salary During the Sick Leave Period


3 Ibid.

4 Ibid.

5 Ibid.

6 Article 44 and Article 45 of Shanghai City Labor Contract Implementing Rules, Implemented on May 1, 2002


• The employer shall also pay one month of salary for every year worked as compensation to the employee when implementing such a termination; (as above, this is also calculated based on the average total monthly salary received over the previous twelve months; if monthly salary exceeded 300 percent of the average social salary for Shanghai then the calculation should be based on 300 percent of the average social salary figure)7

• If company rules stipulate that sick or injured employees should receive higher compensation than regulations indicate, these company rules must be followed

The total amount payable for such an employee could be roughly 18 months of the employee’s salary, although possibly lower if the employee is a particularly high-earner.

7 Article 40 and Article 46 of the Employment Contract Law implemented on January 1, 2008

Percentage of Salary Payable for Consecutive LeaveWithin a Six Month Period

Continuousworkingperiod<2years 60%ofemployee’ssalary

2years<continuousworkingperiod<4years 70%ofemployee'ssalary



8years<continuousworkingperiod 100%ofemployee'ssalary

In Excess of a Six Month Period

Continuousworkingperiod<1year 40%ofemployee’ssalary

1year<continuousworkingperiod<3years 50%ofemployee’ssalary

3years<continuousworkingperiod<6years 60%ofemployee’ssalaryPlease note: the above employee’s salary is defined as employee’s normal salary x 70%

Example: Employer Payments in Shanghai

An employee serving for a full six years would be eligible to receive salary for eight months after the commencement of an illness / injury (three months plus one month for every year after completion of the first full year). The employee would receive 56 percent (80 percent of 70 percent of their total salary) of their normal base salary for the first six months of their illness or injury. In the seventh and eighth months they would receive 42 percent (60 percent of 70 percent of their total salary). After this period, the employer would in most cases be able to terminate the labor contract with the individual.

If, at the end of the eight months sick / injury leave period the employee was unable to make a recovery, the company should burden the following:

• Payment of 64 percent of base salary for first six months of illness or injury, limited by the average social salary in Shanghai for that year

• Payment of 42 percent of base salary for the final two months of illness or injury, limited by average social salary in Shanghai for that year

• Payment of six months of full salary upon termination (medical expense compensation)

• Payment of six months of full salary upon termination (payable to all employees who are released by the company – one month for every year served). The monthly payment is limited by three times the monthly average social salary in Shanghai for that year.


BeijingIn Beijing, recuperation period (during which the employer is responsible for paying salary to the employee) depends on both the employee’s cumulative working time at the current company and the employee’s cumulative number of working years.

Recuperation Period by Cumulative Number of Working YearsCumulative Working

Time at Current Company

Recuperation Period forCumulative No. of

Working Years Below 10

Recuperation Period forCumulative No. of

Working Years Above 10< 5 years 3 months 6 months

< 10 years 6 months 9 months

< 15 years 12 months

< 20 years 18 months

> 20 years 24 months

The recuperation period does not have to be taken all in one period. For example, the shortest recuperation period - three months - is calculated from the cumulative amount of sick leave taken during a six month period. An employee who comes back to work for a short time before taking another period of sick leave will still be deemed to have exhausted his recuperation period if three months of sick leave is used in any six month period.

In Beijing, the employer is only required to pay at least 80 percent of the minimum salary for the city of Beijing, unless anything in the labor contract specifies that a higher amount should be paid.

The following points should also be taken into account:

• While the employer is in general entitled to terminate a labor contract after the completion of the illness or injury leave period (assuming the employee has not recovered), it should make a one-off compensation payment to the employee equal to one month of salary for every year worked at the company.

• Further compensation for medical expenses should also be paid to the employee; irrespective of how long they worked at the company. This amount should be no lower than an amount equal to six months of salary and should be increased by at least 50 percent if the illness is defined as “serious” and by at least 100 percent if the illness is defined as “terminal.”

• The employer shall also pay one month of salary for every year worked as compensation to the employee when implementing such a termination (as above, this is also calculated based on the average total monthly salary received over the previous 12 months).

• If the internal company rules stipulate that sick / injured employees should receive higher compensation than the above regulations indicate, these internal rules must be followed.

The total amount payable for such an employee could rise to more than 24 months of the employee’s salary in Beijing. One major difference between Shanghai and Beijing is that the cost to the company during the recuperation period will be smaller compared to Shanghai, unless the labor contract signed with the employee specifies some more preferential treatment.


Example: Employer Payments in Beijing

An employee serving for a full six years in Beijing would be eligible to receive salary for six months after the commencement of an illness or injury. This is much lower than the payments necessary in Shanghai.

The employee would receive at least 80 percent of the Beijing minimum wage (80 percent of RMB1,260 in 2012) during their six month recuperation period. After this period, the employer would in most cases be able to terminate the labor contract with the individual.

If, at the end of the eight months sick / injury leave period the employee was unable to make a recovery, the company should burden the following:

• Payment of 80 percent of Beijing city minimum wage for six months• Payment of six months of full salary upon termination (economic assistance)• Payment of a further six months of full salary upon termination (medical expense

compensation), possibly rising to nine or twelve months depending on the definition of their condition

• Payment of six months of full salary upon termination (payable to all employees who are released by the company – one month for every year served); the monthly payment is limited by three times the monthly average social salary in Beijing for that year.


4.3 Pregnant EmployeesWhile an employer may be fortunate enough to avoid staff catching a serious illness or having an accident, it is probably too much to expect that a proportion of the female employees will not become pregnant at some point during their employment. This section explains the responsibilities of an employer towards pregnant employees. Please note that as with so many laws in China, there are many local regulations that further complicate the issue. We have based the following analysis on national rules, supplemented by the regulations issued by the Beijing local government.

Assuming the company has been paying social insurance contributions on behalf of its employees, the payment of salary to a pregnant employee during maternity leave will be burdened by the social insurance system. The salary paid to the employee will equal the individual’s current month mandatory benefit contribution base divided by 30 and multiplied by the number of maternity leave days.1

The employee will generally be allowed to receive this payment for a period of 98 days.2 There are various extensions to this period depending on the age of the mother at delivery, the difficulty of the birth, the number of babies delivered, etc. We will not detail them all here. She will also receive a lump-sum to cover some of the expense of the time spent in hospital for the childbirth. This amount will vary by region and also depend on the method by which the baby is delivered.

From the above we can see that the financial responsibility to the company during the pregnancy leave is not so great - the company does need to keep open the position for the employee.

As you would expect, an employer may not terminate a pregnant employee (it is irrelevant whether or not the company knew about the pregnancy at the time of the termination) unless they have adequate justification for it under the Labor Contract Law.

In certain cities like Shanghai, fathers are also allowed a short period of leave during the period immediately after the birth of a child. They may take three working days, during which period their salary will be burdened by the Social Insurance Bureau.3

We would like to mention one final point on pregnancy in China. Due to problems of over-population, until relatively recently it was only permitted for most Chinese women to give birth to one child.4 Although the current law allows couples that were both single children themselves to have two babies, many urban Chinese will still choose to have small families due to the high cost of raising more than one child.5 Many women will choose to rejoin the labor force after the maternity period. Therefore, we can conclude that compared with other countries, the direct financial effect on the company due to female employees taking pregnancy leave will be relatively low.

1 Article 15 of the Beijing Enterprise Employee’s Maternity Insurance Regulations implemented on July 1, 2005

2 Article 14 of the Beijing Enterprise Employee’s Maternity Insurance Regulations implemented on July 1, 2005

3 Article 33 of the Shanghai Population and Family Planning Regulations implemented on April 15, 2004

4 Article 18 of the Population and Family Planning Law implemented on September 1, 2002

5 Article 17 of the Beijing Population and Family Planning Clauses implemented on September 1, 2003

“A policy implemented in April 2012 extended payment of salary to pregnant employees from 90 to 98 days.”Sarah WeiHR & Admin ManagerDezan Shira & Associates Beijing [email protected]


4.4 Labor UnionsAs a country with a long socialist history, it would be natural to assume that trade unions wield a significant amount of power within China. In fact, there is one centralized organization called the All China Federation of Trade Unions (ACFTU) that as of December 2011 boasted approximately 258 million members. It is not a democratically run union with a high degree of accountability to its members, but instead an organ of the Communist Party of China.1 Labor unions not affiliated to the ACFTU are deemed illegal unless formal approval is received from the relevant authorities.2 At the present time, we are not aware of any cases in which non-ACFTU unions have been approved in mainland China.

Underneath the umbrella of the ACFTU, there are provincial, municipal and county level chapters. In many cities, small companies (with fewer than 25 employees) are required to register their employees with the local chapter of this union. China’s Trade Union Law stipulates that a fee of 2 percent of the employees’ salary is payable to the union each month (by the company on behalf of all employees – not deducted from the salary of employees).3 Note that this regulation is not being implemented in a uniform manner across the country, and there are a large number of both domestic and foreign-invested companies that do not affiliate their employees with the local chapter of the ACFTU.

Companies with over 25 employees are supposed to establish their own chapter of ACFTU specifically for their company, but a lot of companies take the view that this should only be implemented if there are requests from staff to form such a union. The current situation in most parts of China is that employees are either reluctant to express their wish to form such a union, or do not feel that the benefits are worthwhile. As a result, there are still many companies that have not formed trade unions.

If your employees are affiliated to the local chapter of ACFTU, this organization has the power to get involved to protect the interest of the employees in the event of any dispute. Apart from this point, there is minimal interference from the local chapter of ACFTU in the internal operations of the company.

If your company establishes its own ACFTU branch however, there are certain points to consider. Apart from the requirement to pay 2 percent of salary to the union fund, the following are the most important:

• When the company intends to unilaterally terminate the contract of one of the union members it must first inform the union; the union may write their opinion to the employer concerning the legality of the termination and the company has a responsibility to investigate the matter and reply to the union in writing4

• When drafting and amending rules and regulations of the employee rulebook and other company rules and regulations that may affect the workforce, employers must hold consultations with the labor union5

• When the company considers issues that will have a serious affect on the operation and development of the company, it should ask the opinion of the union. When

1 “Number of ACFTU affiliated members reaches 258 million”, China News July 18, 2012

2 Article 35 of the Administration Rules on the Registration of Social Unions issued by the State Council implemented

on October 25, 1998

3 Article 21 of the Trade Union Law implemented on October 27, 2001




meetings are held to discuss issues that will directly affect the interests of the employees (salary, work safety and hygiene, social insurance), a representative from the union should be in attendance6

• Unless there are some special circumstances, the president, deputy president and committee members of the labor union should not be dismissed from their employment while they remain in position at the labor union. If necessary, the term of the labor contract shall automatically be revised to equal the term of service at the union7

• A certain amount of time must be allowed during working hours for non-dedicated members of the labor union committee (there are very few foreign-invested companies with dedicated labor union representatives) to carry out their responsibilities; this time allowance should not exceed three days per month8

In theory, the ACFTU is designed to protect the interests of it members. It is debatable though, how proactive and effective the union is when getting involved in disputes on behalf of its members. As mentioned above, at a central level the ACFTU is not ultimately controlled by its members but by the Communist Party. At a local level the regional governments have a certain amount of influence. Even at a company level often the key roles in the union are taken by senior management personnel in the organization. Therefore, there are conflicts of interest throughout the union hierarchy.

To summarize, although labor unions are a factor that management needs to consider in China, they are not as powerful as in many other countries. Due to patchy implementation of laws around the country, many companies have not even been required to institute a labor union.




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5. Terminating The Employment Relationship

5.1 The Importance of Documentation5.2 Terminating During the Probation Period5.3 Terminating During a Fixed-Term Contract5.4 Terminating at the End of a Fixed-Term Contract5.5 Terminating During an Open-Term Contract5.6 Severance Pay and its Tax Treatment5.7 Mass Layoffs


This chapter focuses on issues relating to termination of staff – something that is never pleasant but occasionally necessary. With adequate preparation and clear understanding of the law, at least the drama can be reduced to some extent. There is also a more fundamental reason to make sure a termination is handled properly: labor disputes can be expensive for employers in China.

5.1 The Importance of DocumentationIn the case of an employment dispute, the burden of proof will fall primarily on the company, so it is critical that the employer organizes all documentation relating to its employment relationships in a thorough and consistent manner.

In the case of termination, to show that an employee is not properly fulfilling their job duties or has violated company rules, employment documentation from throughout the employment relationship may prove useful, including:

• Offer letter/letters of intent• Labor contract• Confidentiality agreement• Non-competition agreement• Employee handbook• Job description• Appraisal forms• Employee registration form

What should be on an employee registration form?

An employee registration form should make the employee personally responsible for the background information that they are providing to the company. It should be filled in and signed by the employee when the company issues the offer letter, and should include the following:

· Name of the employee, position applied for and proposed date of commencement· Contact details· Various personal information (including ID number)· Educational background and other professional certificates· Work history· Detail of any disciplinary action from a previous employer· Disclaimer relating to possible release of private information in the document· Reminder that employees must inform the company promptly about any change

to the information provided· Signature of employee

The company should add a section for authorization of references provided that should be signed separately by the employee. Without this authorization, the company could have problems confirming the validity of documents the applicant has provided to them. Many foreign universities will not release any information about their past students without such a signed authorization. For any applicants who have studied or worked abroad, we suggest that this section be translated into English as well and signed using both their English and Chinese names.



5.2 Terminating During the Probation PeriodBefore the introduction of the Labor Contract Law in 2008 it was relatively easy for an employer to dismiss an employee during the probation period. This led to an unfortunate situation where an individual would quit a job to join another company, only to be discarded within weeks for “not being appropriate for the position.”

Under the current Labor Contract Law, this situation has been re-balanced to the benefit of the employee. Article 39 states that:

“A company may dissolve the labor contract if the laborer is proved during the probation period not to satisfy the requirements of employment.”

Therefore, the burden is on the company to prove that an employee has not been able to meet the requirements of the position they were hired to fill. There are two aspects involved here:

1. The job description shown to the employee prior to being hired must be specific enough to give valid grounds to the employer for dismissing the employee if the employee proves to be unsatisfactory. It should clearly indicate the key roles that the employee will be expected to perform and the relevant skills that the employee should possess

2. The company must gather clear evidence to prove that the employee has not been able to meet the requirements that were established

The probation period appraisal form can be used as the basis for assessing the suitability of the employee and the degree to which they meet the requirements for the position. This will be a useful piece of evidence if the company wishes to dissolve the relationship at this point.

HR departments may also want to introduce more forms to make the appraisal process more specific. For instance, some companies have their managers sit down with employees during their first week and set tasks for which employees will be assessed during this probation period. These tasks are summarized in a document which is signed by the employee and employer. At the end of the probation period, the employee is assessed based on the degree to which these specific tasks were completed. Managing the probation period in this way further reduces the scope for dispute in the future, although there is a larger administrative burden on the managers involved.

Although many employees are not aware of their rights under the current Labor Contract Law, employers should prepare for the possibility that employees on probation will make a concerted effort to keep their positions during this period, because once the probation period is over it will be even harder for the company to terminate the contract. There will be some chance that employees facing dismissal during this period will look to the Labor Contract Law for protection. Companies should carefully consider to what extent they wish to document the details of employee performance during this period.


5.3 Terminating During a Fixed-Term ContractUpon completion of the probation period, the employee has a greater degree of job security, at least until the expiry of their first fixed-term contract. While the only additional requirement of the employee is to give the employer one month’s notice if they intend to resign from the position, the employer has a higher hurdle to overcome when terminating an employee.

First of all, let’s look at the circumstances under which an employer can terminate an employee immediately and with no additional compensation:1

1. The employee is deemed to commit a serious violation of the company’s internal regulations

The key here for the employer is to prove that some infraction of internal regulations is serious. The company should make clear in the company rulebook which type of infractions are considered to be serious. The company can claim in the rulebook that several minor infractions (for which official warnings must be issued) may constitute a serious violation, however such a claim may still be challengeable. Note that even if the company designates a certain infraction as serious, it may still need to provide justification for doing so to a judge in the event that there is a challenge from the employee.

2. The company suffers a serious loss that can be attributable to the conduct of the employee.

In this situation the company would have to convince the judge that the loss came about because of the negligence or inappropriate conduct of the employee, as well as that the loss can be considered serious.

3. The employee is convicted of a criminal offence during the term of the labor contract.

Note that the employer may not terminate the contract due to the employee having an existing criminal record when joining the company. It is the responsibility of the employer to find out whether or not a potential employee has been prosecuted for a criminal offence in the past. It should be possible to find this information on the dangan of the individual.

In practice, the employer may only know about the conviction of an employee if a prosecution for a criminal offence in some way involves the employer, or if they are informed by the court or some other authority during the prosecution process.

4. Labor contract signed by employer under false assumptions or coercion from the employee

The most common situation falling under this category is due to misrepresentation of information on the resume by job applicants. For instance, falsely claiming to have a degree or other qualification is a relatively common phenomenon. We


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would suggest employers to insist that prospective employees present originals of graduation certificates and licenses obtained and also sign a copy of each one to be held by the employer’s HR department. Additionally, the company should ask the employee to sign an “authorization of reference / qualification confirmation” document. Such a document allows the company to request details about the employee from educational establishments and previous employers. It also acts as a deterrent for potential employees to make false claims about job history or educational background.

5. Employer’s interests harmed due to the employee taking up a post at a separate entity

If the employer discovers that an employee is working on behalf of another company and that this activity is having a negative effect on their job performance, the employer must first request the employee to terminate the second position. Only in the event that the individual refuses to stop carrying out the second role may the employer terminate the labor contract.

Note that these are the only five instances in which an employee can be summarily dismissed without additional compensation.

Next, let’s consider the conditions under which an employee can be dismissed with 30 days notice and compensation (based on length of service – to be defined in detail below):

1. The employer and the employee reach an agreement, and it was the employer that first proposed the termination.

2. The employee is sick or is injured for a non-work-related reason and cannot resume their original position after the expiration of the prescribed time period for medical treatment, nor can they assume any other position arranged by the employer. (Note that compensation payable under such a situation will be higher).

3. The employee is incompetent for the position and is still incompetent after training or being assigned to another position.

4. The objective situation on which the conclusion of the employment contract is based has changed considerably, making it impossible to perform the employment contract, and no agreement on changing the contents of the employment contract has been reached after negotiations between the employer and the employee.

5. The employer is being restructured according to the Enterprise Bankruptcy Law.6. The employer encounters serious difficulties in production and business operations.7. The employer changes its products, makes important technological renovations,

or adjusts the way of business operations, and it is still necessary to lay off some employees after modifying the employment contract.

8. Other objective economic situations on which the employment contract is based change substantially, making it impossible to perform the employment contract.

At this point, we should clarify the minimum (mandatory) compensation that should be payable to employees dismissed under any of these circumstances.


Compensation by Period of ServiceService period (X) Compensation

0＜X＜6months(butoutofprobationperiod) Averagemonthlywage*0.56months≤X≤1year Averagemonthlywage*11year＜X＜1.5years Averagemonthlywage*1.51.5years≤X≤3years Averagemonthlywage*2X>3years Averagemonthlywage*No.offullyearsserved(maximumof12)

Additional points:

• The “average monthly wage” is calculated based on the average salary paid to the employee over the previous 12 months;2 it does not include social insurance contributions made by the employer

• If this average monthly wage exceeds 300 percent of the average social salary in the area where the business operates, 300 percent of the average social salary will be adopted to calculate compensation to the employee3

• Any employees that have worked for the employer for more than 12 years are not eligible to receive more than an amount equal to 12 months salary as compensation4

• Certain cities have a slightly different method of calculation from the above example, so HR managers should enquire with the relevant authority when necessary

In situations where the employer cannot make a clear case for a termination based on any of the above legal requirements, the cost to the employer is likely to be higher. For employees on contracts nearing expiry it will often be quicker and easier to pay the employee for the remainder of the contract (plus compensation for service time) rather than get involved in an arbitration process.

In cases where the employee has a long time remaining on a contract it is recommended that the employer gather as much material as possible concerning the shortcomings of the employee concerned before taking any action. During a dispute the arbitration panel will take into account the evidence provided by both sides concerning job performance before making a decision on how much compensation to award to the employee.

There is a common misconception that in the event an employer unilaterally terminates an employee’s contract with no valid reason, the liability of the employer is limited to twice the amount of compensation payable under the conditions that the termination was made in accordance with the law. This has arisen from Article 87 of the Labor Contract Law, which states that the employer can violate the law and still only be liable for double compensation based on the provisions under Article 47. However, Article 48 of this law stipulates that if an employer terminates a labor contract in violation of the law, the employee can require continued performance of the contract. Only in the event that the employee does not demand continued performance, or if continued performance becomes “impossible” should the company pay double compensation to the employee.


3 Ibid.

4 Ibid.


The potential cost to the employer of terminating an employee during a fixed-term contract could in fact be quite high.

Components would potentially include:• Payment of salary for remainder of the contract term (not limited by 300 percent of

average social salary provision)• Legally stipulated compensation at the end of the contract term (one month of

compensation for each year of service after January 1, 2008 when the current law came into force)

• Any court costs incurred

As a final point, an employer is not able to dismiss an employee that is on recuperation leave, a pregnant employee or a female employee with a child under one year of age.5 An exception to this rule would be the case where a pregnant employee is summarily dismissed based on one of the five scenarios explained above.

Average Monthly Social Salary in Various Cities Around China – 2012City Amount (RMB) City Amount (RMB)

Beijing 4,672 Ningbo 3,179

Chengdu 2,834 Qingdao 2,730

Dalian 4,144 Shanghai 4,331

Guangzhou 4,789 Suzhou 4,305

Hangzhou 2,978 Xian 3,473

Nanjing 4,248 Zhongshan 4,035Sources: Various Social Insurance BureausNote: Written documentation hard to obtain, please use as a general guide only



5.4 Terminating at the End of a Fixed-Term ContractThe expiry of a fixed-term contract provides an important opportunity for the employer to evaluate the contribution of the employee and come to a decision on whether or not to renew them.

It is relatively straightforward for an employer to terminate an employee at this stage. The employer does not need to give the employee a reason for the company’s decision. However, employers should bear in mind the following points:

• If the employer does not provide a new contract to the employee by the end of the contract term, and the employee still works in the company after this point, the labor relationship effectively continues – the employer shall take liability for absence of the labor contract.

• If the employer elects not to renew the contract at the end of the period, the company must still pay economic compensation to the employee. One month of compensation should be paid to the employee for each year of service at the company (please note that the calculation for years of service shall commence from January 1, 2008, when the current Labor Contract Law was implemented – this only relates to compensation payable at the end of a fixed-term contract, not compensation payable when a contract is terminated during the period of a fixed-term contract, which was covered in the previous section).

• If the employer offers the employee a renewed contract on equal or better terms to the expired contract but the employee refuses to accept it, the employer is not required to pay any compensation to the employee

The company should have a clear understanding of which employees are approaching the expiry of their fixed-term contracts. Around two months before the expiration the relevant managers should come to an agreement on whether or not to retain the employee. Both the performance of the employee and current and anticipated future business conditions should be considered when making the decision.

At this time there is some debate about whether or not the employer is entitled to dissolve the labor relationship at the conclusion on the second fixed-term contract. Common sense would suggest that the employer should be able to do this, however the terminology in the Labor Contract Law is vague and introduces a degree of uncertainty. No clarification of this point has yet been provided by the government. As a result, a lot of disputes relating to this issue have arisen. The lack of clarification from the central government suggests that it is happy to see such disputes administered locally (and therefore affected by the specific situation in that area) rather than at the national level.

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5.5 Terminating During an Open-Term ContractAfter the second renewal of a fixed-term contract, or once the employee has worked for the employer for a consecutive period of ten years, an employer is obligated to offer the employee an open-term contract. Effectively, this means that the employer no longer has any opportunity to terminate the contract of the employee without a valid reason.

If the company is terminating employees due to adverse business conditions instead of employee misconduct, the company must bear in mind the following important points:

• The company should give priority to retaining employees with open-term contracts or relatively long-term fixed contracts, or those that are the sole wage earner in their family or have a dependent for which they are responsible1

• If the company carries out hiring activity within six months of terminating employees due to adverse business conditions, it should give preference to re-hiring those previously dismissed employees2

• The company may not terminate employees who have worked for the company for more than 15 years and have less than five years remaining until retirement3

As you can see, employees with open-term contracts are well protected by the law. Employers should try to ensure that only productive, responsible employees are rewarded with the security offered by such contracts.


2 Ibid.



5.6 Severance Pay and its Tax TreatmentSome companies will offer to pay their employees more than the mandatory severance payment amounts for various reasons. These may include:

• The company wishes to maintain a good relationship with the employee even after the employment relationship is broken

• The company wishes to show to other employees that it treats all staff well in order to maintain their levels of motivation

• The company appeals for voluntary redundancies

As a result, severance payments can be quite significant. While there will be no tax on severance payments for most employees, those who receive quite a large sum will have some tax burden, and employees who have received a very large sum and worked for a short period shall have a relatively larger tax burden.

Individual income tax laws prescribe a special treatment for severance payments.1 As the terminated employee may have no income in the coming months, the IIT burden is far lower than in the situation where an employee receives a similar amount as a salary or even as a bonus. Below, we explain the steps for making the calculation.

1. Decide on an amount for the total compensation package that will be provided to the employee. The amount should be paid in one lump sum to the employee in order to be able to take full advantage of the termination IIT calculation.

2. Deduct an amount equal to 300 percent of the annual social average salary for the region in which the company is based from the total compensation package.

3. Divide the remaining amount by the number of full years the employee has spent with the company (maximum of 12).

4. Deduct RMB3,500 (RMB4,800 for non-mainland Chinese) from the amount derived in step 3 above.

5. Refer to the IIT percentage and quick deduction amount relating to the income level derived in step 4 above.

6. Multiply the amount in step 4 above with the IIT percentage.

7. Deduct the quick deduction amount from the figure derived in step 6 above.

8. Multiply the amount in step 7 by the number of full years served by the employee at the company (maximum of 12). This will be the termination IIT burden for the employee.

Note that any tax burden payable by the employee on money received as part of a termination package should be deducted by the company before payment of the remaining amount to the employee.

1 Notice in Relation to Levying Individual Income Tax on Employee’s Severance Pay implemented on October 1, 2001

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Example: IIT on Severance PayAnemployeeworkedforaBeijing-basedcompanyfor20yearsandwasrecentlymaderedundant.ThecompanyagreestopaytheemployeeonelumpsumseverancepaymentofRMB560,000.Thepreviousyear’saveragesocialsalaryinBeijingisRMB56,061.

Tax-exemptSeverancePay

56,061x3=RMB168,183

Multiplyannualsocialsalaryby3

TaxableSeverancePay

560,000–168,183=RMB391,817

Subtractlumpsumseverancepaybytaxexemptseverancepay

IIT (391,817÷12)-3,500=RMB29,151

DetermineincomeleveltowhichIITrateisapplicable

(29,151x25%–1,005)x12=RMB75,393

DeterminetotalIITburden


5.7 Mass LayoffsA mass layoff is defined as being when a company terminates the labor contracts of at least 20 employees or a number of employees equal to 10 percent of its total workforce, whichever is lower.1

There are several situations in which a company may implement a mass layoff, namely:2

1. The company undergoes restructuring under the enterprise bankruptcy law2. The company suffers serious problems with production or other business operations3. The enterprise changes products, makes important technological renovation, or

adjusts the methods of its business operation, and it is still necessary to lay off the number of employees after changing the labor contract

4. Other major changes occur in the objective economic environment relied upon at the time of conclusion of the labor contracts, rendering them non-performable

Three of these four conditions have been left relatively vague in the Labor Contract Law, which gives the courts quite a lot of discretion concerning how to define them. We can expect the interpretation of these terms to vary quite widely across different areas of the country.

The process for implementing a mass layoff is as follows:

• Company explains the circumstances of the mass layoff to its labor union or directly to the staff 30 days before the intended implementation of the layoff

• The opinions of the labor union or the employees are taken into account by the board of the company

• The company reports the implementation of the mass layoff to the local labor administration department

• Once the 30 day period expires, the mass layoff can be implemented

Note that the government will not usually get actively involved in the mass layoff process, however it is important that companies follow the above procedure carefully. If the mass layoff is not implemented properly, the government may apply penalties and the employees may also claim additional compensation if their contracts have not been terminated in the appropriate way.


2 Ibid.

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6. Organizing Visas

6.1 F Visa6.2 Z Visa and Residence Permit6.3 Sending Chinese Staff to Work Abroad


One final important point for companies is to ensure that their employees have the right paperwork, allowing them to do their job legally in the country where they are employed. Here, we focus on the processes involved in getting working visas for foreign employees in China.

Visas are an inconvenience for expatriate workers all over the world, and of course China is no exception. Fortunately, under normal circumstances it is unusual for foreign employees to be refused a Chinese visa. However, the process for obtaining the most convenient visa for long-term employees (the Z visa) can be time consuming and bureaucratic.

The other option for a foreigner who needs to visit China for a very short trip (usually less than 28 days) will be to apply for a tourist (L) visa. Such visas can generally be issued at very short notice and do not require a letter of invitation, however extending them can often cause problems.

6.1 F VisaThe F visa, commonly referred to as a business visa, is used by foreign businesspeople who come to China on business but are not employed at a Chinese entity (either domestic or foreign-invested).

In order to receive an F visa, the foreigner must be invited by a company that is established in mainland China. Therefore, before the formal incorporation of their foreign-invested company in China, foreign staff that the company wishes to send to work in China will generally need to apply for an F visa. If your company does not have a Chinese partner that can issue the necessary invitation, there are many agents that are prepared to organize this for you and manage the F visa application process on your employee’s behalf.

There are several different variations of F visa. They can be single-entry, double-entry or multiple-entry. The main inconvenience of an F visa is the maximum period of time the holder may spend inside China on any one visit. This period may be as short as one month or as long as six months. Unfortunately, it is hard to guarantee which kind of F visa the Chinese government may be prepared to issue to an individual employee. The final decision can be based on several factors, and the Immigration Bureau is not required to explain its final decision to the applicant.

Therefore, F visas are most suitable for employees who will:

• Spend less than six months in China during any one calendar year• Be frequently flying in and out of China• Not be holding a formal senior position at an entity based in China• Not be paid by a company incorporated in China

F visas can be renewed, however there is always the risk that the Immigration Bureau may refuse the application. This risk grows if the foreigner has resided in China almost permanently for a long period of time, as the Immigration Bureau may conclude that such an applicant is effectively working in China.



6.2 Z Visa and Residence Permit

The Z visa is usually referred to as a working visa. It is used by foreigners who are actually employed by a company that has been incorporated in China (either domestic or foreign invested). An employee that possesses a Z visa may subsequently apply for a residence permit. The residence permit allows the foreigner an unlimited number of trips into and out of China during the term, which is usually for one year.

Applying for a Z visa will allow the holder more flexibility and also virtually eliminate the risk of not being able to extend the visa (assuming the employer’s China entity remains in compliance with relevant laws). On the other hand, the application procedure is more time-consuming and expensive. It is not necessary for employees on occasional, relatively short-term business trips to go through the process to obtain a Z visa. Once the parent company has established a foreign-invested entity in China, this entity is capable of issuing the invitation letter which an employee requires to apply for an F visa.

Employees working at companies in China should arrive in China on a Z visa. Unless this precondition is met, the employees will not be able to obtain residence permits which allow them to reside in China and travel in and out as they wish during the specified term. In this section we will explain the general process for obtaining a Z visa. Please note that the precise procedures will vary from city to city inside China, and possibly from embassy to embassy outside China.

Applying for a Z Visa

Step 1 - Application for an Alien Employment Work Permit from Labor Bureau This step can be handled by the coordinator at the company that will be employing the foreigner. The following documentation is usually necessary:

• Application form• Business license (original and copy)• Curriculum vitae of the foreign employee• Final degree / diploma• Health check report• Offer letter• Copy of passport of the foreign employee• Two passport size photos

Some of these documents will need to be affixed with the company chop.

Normally the issuance of the Alien Employment Work Permit can be completed quite quickly, although this is not necessarily the case in certain smaller cities where the government is not used to issuing such documents.

Step 2 – Application for an official invitation letter

Unlike the F visa, it is necessary to submit an official invitation letter issued by one of the organs of the government to receive a Z visa. Precisely which bureau will issue this document depends on the city in which the employee will be based. As in Step 1, the


local coordinator at the company can handle this procedure on behalf of the foreign employee. The following documentation is usually necessary:

• Application form• Copy of passport of the foreign employee

Both of the documents will need to be affixed with the company chop before submission. Issuance of the invitation letter usually can be completed within a few days.

Step 3 – Application for Z visa

This application must be made from overseas through a Chinese embassy or consulate. The requirements of the embassy or consulate can vary considerably depending on the nationality and personal circumstances of the applicant. We will not attempt to list them here. Please note that the application for a Z visa generally must happen at a consulate / embassy in the home country of the applicant or another country in which the applicant has legal residency. It will usually take several days to issue the Z visa, which will be attached to the passport of the applicant.

Once the individual has achieved the Z visa, they may come to China to take up the employment. Once they arrive, some procedures will still need to be completed. These will be introduced in the following section.

Applying for a Residence PermitReceipt of a residence permit into the passport of the employee working at the China-based company signifies the completion of the visa issuance process. The permit is normally valid for a full year and allows the applicant to travel into and out of China as regularly as they require. Not only the employee but also their dependents may receive such a residence permit (note that dependents do not need to be included at earlier stages of the application process – they can come to China on a tourist (L) visa instead of a Z visa).

Usually, in order to receive the residence permit, an applicant must submit the following documentation:

• Application form• Application letter• Two passport size photos for each applicant• Certificate of service at the Chinese entity• Alien employment certificate from the Labor Bureau• Health check report for all applicants over 18 years old• Passports for each of the applicants• Business license of the Chinese company (original and copy)• Enterprise code certificate of the Chinese company (original and copy)• Accommodation registration certificate (original and copy)• Apartment lease agreement (N/A if living in a hotel)• Marriage certificate• Certificate evidencing relationship of relatives accompanying applicant

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Please pay attention to the following points:

1. The accommodation registration certificate should be achieved from the police station closest to the residence of the foreigner. It should be applied for no later than 24 hours after the foreigner arrives in the city, otherwise a penalty may be applied.

2. In the event that a spouse or children will also be applying for a residence permit together with the employee, both the marriage certificate and the relatives’ relationship certificate should be notarized by an authorized notary in the home country of the applicant and then verified by a Chinese embassy or consulate based in that country. Note that these individuals should arrive in China using a tourist (L) visa. They will be permitted to receive a residence permit without going through any of the previous steps.

Renewing a Residence Permit

Renewing a residence permit / Z visa is not as difficult nor as time consuming as making the initial application. The most important point is that the company is organized enough internally to know when each foreign employee’s visa will expire. Overstaying a visa in China can cause extra cost and problems, both for the company and the employee. We will explain the process for renewal in Beijing. Note that processes elsewhere in the country may be slightly different. There are two basic steps involved:

1. Renewal of the alien employment certificate at the Labor Bureau

The following documents need to be arranged:

• Labor contract of the employee• Copy of the company’s business license• Passport of the employee• Registration form for renewal

The process for renewal should take around one working week. Note that it will likely take longer during the Chinese holiday periods in February and October.

2. Renewal of residence permit / Z Visa

The following documents need to be arranged:

• Original of the company’s business license• Passport• Passport photo• Alien employment certificate• Application form

This process for renewal should take about one working week. We would recommend that visa applications and renewals be coordinated by a reliable agent, unless your organization is already structured to effectively manage the visa.


6.3 Sending Chinese Staff to Work AbroadEvery country has its own regulations about what documentation needs to be submitted for various visa types. Chambers of Commerce in China, including the American, German and Australian Chambers, can be extremely helpful in coordinating visa applications for Chinese staff to work abroad and advising employers what supporting documentation is necessary.

This documentation may include:

• Letters confirming employment at the entity in China

• Paper payslips (preferably on security paper) issued to the employee for past months which will show length of employment and amount of salary received

• Letters explaining details of the work carried out at the China entity, reasons why the company would like to send the employee abroad and future prospects for the employee at the China entity upon returning from the United States

This documentation should be stamped with the company chop and include the name of a person at the company who can be contacted by a consular official.

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Further Reading – ChinaAn Introduction to Doing Business in China (First Edition)China is now experiencing a “second wave” of foreign investment bringing greater quantities of foreign investment from SMEs. This publication is designed to introduce the fundamentals of investing in China to everyone considering investing in the opportunities this rising nation presents.

40 pagesPublished: June, 2012Next update: June, 2013

Tax, Accounting and Audit in China (Fifth Edition)A strong understanding of tax liabilities enables foreign investors to maximize the tax efficiency of their foreign investment while ensuring full compliance with all tax laws and regulations. This guide overviews taxes for businesses and individuals, and discusses accounting and audit in the China business context, including tax planning, corporate taxes, individual income taxes, international transactions, audit and compliance and financial due diligence.

80 pages (est.)Sixth edition to be released: February 2013Related publications: The China Tax Guide, published April 2011

Establishing and Running a Business in China (First Edition)This guide discusses foreign investment structures in terms of suitability and feasibility by business goal, documentation and procedure for setup, and need-to-know points for analyzing and ensuring legal compliance. This includes pre-investment considerations, foreign-invested commercial enterprises, representative offices, wholly foreign-owned enterprises, joint ventures, mergers & acquisitions, making changes to an investment, and legal due diligence.

175 pages (est.)First edition to be released: May 2013Related publications: Setting Up Wholly Foreign-owned Enterprises in China, May 2011; Setting Up Representative Offices in China, May 2011; Setting up Joint Ventures in China, May 2011; Mergers and Acquisitions in China, June 2011

Intellectual Property Rights in China (Second Edition)This guide is an overview of all aspects of IPR protection in China, from covering protocol for dealing with trade fairs, to the application processes for trademarks, patents, copyright and licensing, as well as dealing with infringements and enforcement.

50 pagesPublished: April 2011

Transfer Pricing in China (Second Edition)This guide is an overview of all aspects of transfer pricing in China, including designing and implementing a transfer pricing system, disclosures and documentation, risk management, audits and enforcement, advance pricing arrangements, cost sharing agreements, and thin capitalization.

80 pagesPublished: April 2011

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Further Reading – AsiaAn Introduction to Doing Business in India (First Edition)Set to become the third largest economy in the world by 2025, India presents enormous opportunities for foreign investors. This publication introduces the fundamentals of foreign investment in India, including establishing and running a business; tax and accounting; and human resources and payroll.

30 pagesPublished: September, 2012Next update: September, 2013

Doing Business in India (Second Edition)India was ranked the second most attractive FDI destination in the world in 2010, according to the World Investment Prospects Survey. This guide discusses how to do business in India, including key sectors for FDI, investment policy and procedure, a demographic and geographic overview and India and China compared.

158 pagesPublished: August, 2011Next update: September, 2013

An Introduction to Doing Business in Vietnam (First Edition)In a tough global economy, major foreign investors continue to prioritize their investments into Vietnam, and many SMEs are following in step, acting on the business potential that Vietnam holds for companies of all sizes and a variety of industries. This publication introduces the fundamentals of investment, including establishing and running a business; tax and accounting; and human resources and payroll.

32 pagesPublished: August, 2012Next update: August, 2013

Doing Business in Vietnam (First Edition)While China’s economy is projected to replace that of the U.S. by 2050 and India expected to take third place, a more low-key Vietnam is also on the rise. This guide discusses all aspects of business in the country, including foreign investment trends, legal set-up and tax structures and industries by geographic region.

173 pagesPublished: May, 2012Next update: March, 2014

An Introduction to Doing Business in Singapore (First Edition)In a global economy dominated by huge industrial powers, the city-state of Singapore has carved out its competitive niche as a destination for regional headquarters, branch offices and holding companies for doing business all across Asia. This publication introduces the fundamentals of foreign investment in Singapore, including establishing and running a business; tax and accounting; and human resources and payroll.

25 pagesPublished: August, 2012Next update: August, 2013

ASIA BRIEFING BUSINESS GUIDESwww.asiabriefingmedia.com/store

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@ASEANBriefingDiscover the latest foreign direct investment news affecting the ASEAN region.

Introducing ASEAN BriefingAsia Briefing Ltd. is proud to announce the launch of its latest regional publishing title, “ASEAN Briefing,” covering foreign direct investment news, commentary and advice relating to doing business both with and within the economic organization known as the Association of Southeast Asian Nations (ASEAN). Particular focus is placed on issues involving business, politics, tax, accounting, finance, trade, investment legalities and the regulatory environment within ASEAN’s 10 member nations, namely:

• Brunei• Cambodia• Indonesia• Laos• Malaysia• Myanmar• Philippines• Singapore• Thailand• Vietnam

Scan this QR code with your smartphone to visit the ASEAN Briefing website:http://bit.ly/KSNUyL?=qr

Related reading from ASEAN BriefingEstablishment of BO/LO in India by Foreign Entities

With the objective of achieving greater transparency and procedural clarity, the Reserve Bank of India (“RBI”) issues the Master Circular on the Establishment of Branch/Liaison Offices in India by Foreign Entities every year on July 2 with a sunset clause of one year, laying down the eligibility criteria and procedural guidelines for setting up...

Important Changes to Vietnam’s Tax Regulations

Vietnam’s government has made some important changes to the country’s tax regulations over the first four months of 2012, and has issued Circular 06, which took effect from March 1, providing a detailed guidance on some key changes to VAT rules.

The China Alternative – Singapore

The China Alternative is our series on other foreign investment destinations in emerging Asia that may soon be competing with China in terms of labor costs, infrastructure and operational capacity. In this issue we look at Singapore.

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Corporate Establishment, Tax, Accounting & Payroll �roughout Asia

Scan this QR code with your smartphone to visit us at: www.dezshira.com

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. Dezan Shira & Associates’ experienced business professionals are committed to improving the understanding and transparency of investing in emerging Asia.

DisclaimerThe contents of this brochure are for general information only. For advice on your business, please contact a qualified professional advisor. Copyright 2012, Asia Briefing Media. No reproduction, copying or translation of materials without prior permission of the publisher.

Contact

@DezanShira Stay up to date on regulatory reforms and legal updates.

Beijing: +86 10 6566 [email protected]

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Qingdao: +86 532 6677 [email protected]

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Ningbo: +86 574 8733 [email protected]

Suzhou: +86 512 8686 [email protected]

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China

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Mumbai: +91 22 3953 [email protected]

India

Ho Chi Minh City: +84 8 6299 [email protected]

Hanoi: +84 4 3946 [email protected]

Vietnam

HUMAN RESOURCES AND PAYROLL IN CHINA

Chinese law places significant obligations on employers to remain legally compliant in all labor matters. In this guide, we address the major issues in managing employment relationships in China.

Including:

• Recruiting Professionals• Hiring Staff• Handling Payroll • Managing the Employment Relationship• Terminating the Employment Relationship• Organizing Visas

Within these topics, we address labor contracts, company rulebooks, salary packages, social insurance contributions, special circumstances for employees (extended sickness or pregnancy), termination and severance pay, and visas for foreign staff and Chinese staff being sent to work abroad.

© 2013 Asia Briefing Ltd, a Dezan Shira Group company. All rights reserved. Unit 1618, 16/F, Miramar Tower132 Nathan Road, TsimshatsuiKowloonHONG KONG

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