Understanding Payroll in China: What Global Companies Need to Know About China Payroll
Mar 2, 2017
With a population of 1.37 billion and the world’s largest global economy, China is a powerhouse in the global business landscape. China produced $21.27 trillion in 2016 (based on purchasing power parity) and consistently ranks among the top three economies in the world for both imports and exports.
Yet conducting business in China comes with many challenges and uncertainties. China is currently facing a multitude of economic and financial stability issues, including a slowing GDP growth, high corporate debt, a low standard of living, and a potentially overheated property market. In addition, the oncoming policy proposals of a new U.S. presidential administration will likely fuel further instability.
Regardless of the many uncertainties involved, establishing or maintaining operations in China can be hugely influential to the success of many multinational companies – especially those focused on manufacturing, energy, real estate, or commodities trading. One key piece of executing business successfully is managing payroll in China in line with the country’s complex payroll laws, tax requirements, employment considerations, and more.
Getting Started with China Payroll
Shanghai, Beijing, and Guangzhou are the major business, government, and industrial centers of China, so many global companies opt to set up in one of those cities. Once an organization has selected an office location, the proof of lease is required to register the business with the Chinese government.
Joint ventures (JVs), representative offices (ROs), and wholly foreign owned enterprises (WFOEs) are the three most common business structures for multinational companies in China. Because there are significant limitations on JVs and ROs, WFOEs are the most popular for those intending to conduct revenue-generating business in China long-term. Unfortunately, WFOEs are the most complicated entities to set up – requiring a minimal capital investment in a Chinese bank and approximately six weeks’ time for approval.
The amount of capital required to establish a WFOE varies depending on the nature, size, and location of the company’s Chinese office, and is subject taxation by Chinese authorities. Companies also need to supply a feasibility study, a scope-of-business statement, and proof of their financial status (with a Chinese bank) to receive government approval.
One of the biggest risks employers face in executing China payroll is not fully complying with the nation’s employment guidelines. China has different laws and regulations concerning treatment of employees, but the basic principles of China’s labor laws are the fair and equal treatment of employees regardless of race or sex, no employment for children under the age of 16, and the right for workers to organize.
Under Chinese labor law, all employees are required to sign employment agreements with employers. Yet the stipulations multinational companies must adhere to depend on their business structures – for example, only limited companies (such as WFOEs) are eligible to sign employment contracts directly with Chinese workers. If the company is a Representative Office (RO), then it can only hire local employees through a licensed third party known as a “local service unit.”
Employees are generally required to have proof of residence in the city in which they apply for employment, and employers must file the appropriate social insurance paperwork on an employee’s first day. Employees may be hired on a permanent or temporary basis; a temporary contract can be for a fixed period of time or until the occurrence of a certain event. Workers from abroad can be employed only with special permission from the local labor authorities and after obtaining an employment certificate (or work visa) for the employee.
Compensation & Severance Considerations
Minimum wages are set by local government agencies across China, and the country’s labor bureaus set standard minimum wages for certain types of jobs. Though many employers flout the standardized national guidelines, China has an eight-hour work day with an average working week no more than 44 hours long and (generally) two days off per week. Salaries are generally paid monthly.
Due to the many labor agreements affecting Chinese employers, overtime work may be required of employees only after consultation with any applicable trade unions (unless the situation is an emergency). Following any required consultations, overtime work is limited to one hour per day, or three hours per week, with a maximum of no more than 36 hours per month. Normal overtime pay is set at 150% of normal wages; overtime work performed on ‘rest days’ (weekends) must be paid at 200% of normal wages, and extra work performed on holidays must be paid at 300% of normal wages.
An employee may terminate employment with 30 days’ written notice. Employers must provide 30-day advance notice to an employee to part ways with mutual consent, and must pay severance unless the employee failed to satisfy the conditions of his or her employment contract and/or violated any laws or company policies. Severance is calculated as one month's salary for every year of service. (The employer can pay one extra month’s salary beyond the severance pay requirement in the event that they do not want to comply with the 30-day advance notice period.)
In many parts of China, it is customary to pay the salary on a 13-month basis, with the final month paid just prior to the Chinese New Year. Though this is optional – and would be laid out in the employment contract – many employees simply expect this as a ‘New Year’s Bonus,’ so a failure to include it in the organizational compensation plans may cause problems in the labor force. Some companies also provide 14th- and 15th-month bonuses, adjusted according to performance reviews.
Due to major problems with fraud and bribery in China, Western companies should be sensitive about commission-based bonuses, “spiff” award programs, or other incentive-based compensation arrangements. Working with a local partner (in addition to their global payroll solution) can help multinational organizations mitigate risk and deploy compensation programs that comply with legal and cultural norms.
Taxes, Benefits & Withholdings
Required tax deductions vary from region to region (and even city to city) across China, but they usually total around 40 percent of an employee’s salary. Since all employees pay income tax, China mandates that employers withhold around 15 percent of employees’ wages for individual income taxes and pay, paying them to China’s tax bureau before the 15th of each month. Employers are also required to withhold and pay a shares tax, bonus tax, or severance tax when applicable.
Employers and employees are required to contribute to China’s mandatory social insurance schemes – pension insurance, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance – as well as to its ‘Housing Fund,’ which allows Chinese employees to save money towards purchasing their own home. (Note: Employee contributions may not be required for injury and maternity insurance.)
The amount of social insurance and Housing Fund contributions are adjusted each year for every city or region, with the amount determined using the average salary in each city. Respective government officials often implement the changes at different times, placing an important administrative burden on employers to stay abreast of all required payroll compliance guidelines. The required withholdings must be paid to the Bureau of Labor Insurance, National Health Insurance Council, and the Employee Pension Board before the 15th of the following month.
Leave, Vacations & Holidays
As in most other Asian countries, workers in China receive about 10 paid holidays per year. These generally include the first three days of the traditional Chinese lunar calendar (for “Spring Festival” or Chinese New Year, sometime between late January to late February), three days for International Labor Day on May 1-3, and three days for National Day from October 1-3. They also receive a paid holiday for January First on the Western calendar and China’s government occasionally establishes special holidays on short notice.
Employees are entitled to between 5 and 15 days of paid annual leave at a sliding scale based on their length of service to the employer. Employees can also apply for sick leave, marriage leave, and funeral leave, when applicable.
Women are generally entitled to 98 days of maternity leave, paid by the employer, though certain provincial regulations extend the amount of leave available (in some instances, by as many as three months). Fathers are entitled to 7-20 days of paternity leave, with some extensions permissible. Prior to 2016, parental leave was subject to certain ‘late marriage’ and ‘late maternity’ stipulations and was only available once in a Chinese individual’s lifetime (due to the previous ‘one-child’ policy). Those stipulations no longer apply now that China has a two-child policy, but organizations setting up payroll in China are wise to consult China’s Population and Family Planning Rules and other guidelines for complete information.
|Date||China's Public Holiday Schedule|
|January 1st||New Year's Day|
|Eve of 1st Lunar Month||Chinese New Year's Eve|
|1st - 4th day of 1st lunar month||Chinese New Year Holiday|
|April 1st - 2nd||Ching Ming Holiday|
|May 1st||Labor Day|
|May 27th - 29th||Dragon Boat Festival|
|October 1st - 3rd||National Day Holiday|
|October 4th||Moon Festival/Mid Autumn Festival|
|October 5th - 6th||National Day Holiday|
China's well-established industrial clusters, highly efficient and skilled labor force, and firm infrastructure systems pose many advantages for expanding global companies. So despite the many uncertainties multinational organizations face when it comes to doing business in China, the country will remain an international business behemoth for years to come.
Unfortunately, though, China’s complex payroll considerations, tax requirements, and cultural norms will not be getting any simpler! To help your organization achieve ongoing success and compliant outcomes with your China payroll, consider outsourcing your payroll operations to a trusted, global managed services provider.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.