We recently recruited a Chinese business development manager for one of our clients. Normally speaking we put all of our employees on our own payroll, but this time we decided to outsource it to a large payroll service company to avoid hassles.
If you’re not familiar with payrolling: many companies use pay roll service companies to subcontract the payment of its employees and responsibilities for their official records in order to avoid the risks and paperwork of hiring an employee directly. This can especially be useful in China because of the country’s complicated labor laws.
I once again learned the hard way that rules and regulations change in China without prior notice and that if you’re not up-to-date you can expect some serious headaches.
Unfortunately, this time the payroll service company (one of the top three in China) we hired turned out not to be up-to-date with Chinese HR regulations.
To prevent you from experiencing the same headaches and problems I went through let me give you a quick update on what has changed in China’s payroll landscape.
Two options: dispatching and outsourcing
Recently (March 2014) the regulations concerning payrolling in China have changed and it is important to understand how this might affect your company and its employees.
Say goodbye to shared risks. Until recently you were able to use a payroll service company in China to share the risks of hiring an employee by signing a contract together:
Your company + pay rolling agency + employee = shared risks
If the case of a labor dispute, your company and the pay roll service company would jointly get involved in the negotiation, arbitration or litigation process.
This option is no longer available and any current such contract will no longer be valid from March 2016.
What options do you have? There are basically two options available to you now.
A) Signing a dispatch contract: with a dispatch contract you hire the pay rolling company to take care of all payments to your employee including salaries, bonuses, retirement, social security, etc. Note that YOU take all risks and that this service is mainly there to save you paperwork.
B) Getting an outsourcing contract: let’s say you want to recruit an employee for your operations in China but are not willing to take any risks. In this case an outsourcing contract is your best bet. This is also a viable option for companies that don’t have a registered entity in China but do want to send/hire in China. In this case, if you’re line of business falls within the scope of your payroller’s business license, the payroller can hire the employee for you and put him/her on their payroll. The disadvantage is that this service is costly, depending on the annual gross salary of the employee. Blue-collar workers are often on outsourcing contracts because they are subject to high risks on a daily basis.
Hiring foreign nationals to work for your Chinese entity
If you want to employ a foreign national to work for your business in China you are bound to certain restrictions that are partially related to your business entity.
Some quick facts
First, if you want to employ a foreign national to work for your Chinese entity you need to prove that you cannot find someone locally to fulfil the desired position.
In addition the foreign employee will have to possess (a) a bachelor degree and (b) 2 years of working experience.
As a company you cannot just hire as many foreign employees you want and the following quotas exist.
Wholly foreign owned enterprises: Do you have a WFOE? In that case your maximum foreign headcount is restricted to 10% of all employees (total number of employees x 10% = maximum amount of foreign employees).
If you’d like to recruit more foreign workers, consider signing an outsourcing contract with a payroll service company as described above.
Foreign representative office: If you have a REP office you can employ a maximum of 4 foreign nationals. Again, signing an outsourcing contract with a pay roll service company enables you to indirectly hire more foreign employees.
Domestic Chinese companies: Domestic Chinese companies are subject to the same regulations as WFOE’s and are therefore restricted to the 10% quota.
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