Human Resources in China, 3rd Edition

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China Briefing The Practical Application of China Business

For further volumes: http://www.springer.com/series/8839 http://www.asiabriefingmedia.com

Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with nineteen offices in four jurisdictions, employing over 170 business advisory and tax professionals. We also provide useful business information through our media and publishing house, Asia Briefing.

Chris Devonshire-Ellis Andy Scott Sam Woollard •

•

Editors

Human Resources in China Third Edition

123

Editors Chris Devonshire-Ellis Andy Scott Sam Woollard Dezan Shira & Associates Asia Briefing Ltd. Unit 1618, 16/F., Miramar Tower 132 Nathan Road, Tsim Sha Tsui, Kowloon Hong Kong e-mail: [email protected]

ISSN 2191-0634

e-ISSN 2191-0642

ISBN 978-3-642-18208-2

e-ISBN 978-3-642-18209-9

DOI 10.1007/978-3-642-18209-9 Springer Heidelberg Dordrecht London New York Published by Springer-Verlag Berlin Heidelberg 2011 Ó Asia Briefing Ltd. 2011 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: eStudio Calamar, Berlin/Figueres Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

About China Briefing’s China Business Guides

Thank you for buying this book. China Briefing’s publications are designed to fill a niche in the provision of information about business laws and taxes in China. Produced by the foreign direct investment practice Dezan Shira and Associates, we started this series of guides several years ago with the knowledge that much of such intelligence regarding China was expensive, or contradictory. Much also did not adequately address the real on the ground issues faced by multinational businessmen—the practical knowledge that must be part of the armory of any business operating in emerging markets. This guide is designed to deal with this gap and is aimed at providing both the regulatory background as well as detailed information concerning China business with a firm eye on the practicalities of turning a profit and remaining in compliance on the mainland. Accordingly, we have made this guide informative, easy to read and inexpensive. To do so we relied on the experience and practical knowledge of Dezan Shira and Associates, China’s largest independent business and tax consultancy with offices in Beijing, Dalian, Guangzhou, Hangzhou, Ningbo, Qingdao, Shanghai, Shenzhen, Zhongshan and Hong Kong. The articles and materials within this guide have been researched and written by professionals familiar with the issues that face foreign investors in China. The first chapter of this guide was kindly provided by Direct HR, a boutique recruitment firm specializing in the China market with a presence in Shanghai, Beijing, Shenzhen, Ningbo and Macau. We thank them for their assistance with this work. This book was written by Adam Livermore for Dezan Shira and Associates. Michael Maeder of Direct HR contributed Chapter One. The cover and contents of the book were designed and laid out by Chris Wei and the book was edited by Andy Scott. At China Briefing, our motto is ‘‘The practical application of China business,’’ we hope that you feel we have accomplished this within these pages.

Asia Briefing Publications Hong Kong v

Introduction

China’s labor market is the largest on earth. As the country continues to transition from a centrally planned economy to a market based economy, one of the biggest challenges it faces is protecting the interests of workers while allowing companies the flexibility to control their workforce. For a company, adequately comprehending the HR environment, hiring appropriate people and managing them effectively is critical to maintaining a successful operation on the mainland. Unfortunately, mainly due to lack of reliable information in English (and the proliferation of unreliable information) as well as the rapidly changing nature of both the labor market and the laws that regulate it, it is very difficult for foreign investors and managers to understand the overall situation in enough detail. 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. The guide can be a useful reference for local HR managers when they need to explain a complex point to foreign colleagues. It should be read in its entirety by investors considering establishing a presence in China. All line managers in China should at least adequately understand the procedures necessary for terminating staff explained in Chapter Five. 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. Therefore 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. I would like to thank several colleagues at Dezan Shira & Associates for their valuable input to this guide; in particular, Lina Wang and Helen Kong in the Dalian office, Sarah Wei in the Beijing office, Carol Zhao in the Shanghai office, vii

viii

Introduction

and Eunice Zhou in the Shenzhen office. I am also very grateful to Michael Maeder, Chun Liew and Derrick Wong at Direct HR for their contributions. Adam Livermore Dezan Shira & Associates Dalian

Contents

Recruiting Professionals in China . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Issues to Consider When Initially Hiring Staff . . . . . . . . . . . . . . . . . .

29

Managing the Monthly Payroll Process . . . . . . . . . . . . . . . . . . . . . . .

63

Managing the Employment Relationship . . . . . . . . . . . . . . . . . . . . . .

91

Terminating the Employment Relationship. . . . . . . . . . . . . . . . . . . . .

103

Organizing Visas for Foreign Staff in China and Chinese Staff Going Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119

ix

Recruiting 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. Recruitment is defined as the profiling, attraction, search, selection and on-boarding of candidates for open positions. Taking a generic global understanding of recruitment as a basis, this chapter will provide China-specific insights into the different stages of the recruitment process (see figure China Recruitment Process). The chapter focuses on recruiting white collar and skilled senior technical professionals. 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. The following sections will provide assistance on how these challenges can be dealt with in the various stages of the recruitment process.

China recruitment challenges 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 who possess the following skill set: multiple language ability, in-depth technical and industry know-how, international exposure, and familiarity with global best practices. In particular, the strong desire of professionals to move into commercial roles, such as sales and purchasing, has created a shortage of technical professionals. High personnel turn-over and recruitment uncertainty: Professionals move quickly between jobs, particularly in first-tier cities such as Shanghai, Beijing and Guangzhou. Due to this common job-hopping trend coupled with high drop-out rates during the on-boarding process, continuous recruitment planning is 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.

C. Devonshire-Ellis et al. (eds.), Human Resources in China, China Briefing, DOI: 10.1007/978-3-642-18209-9_1, © Asia Briefing Ltd. 2011

1

2


Therefore, location is a particularly important factor to take into consideration when choosing to establish a branch location and attracting potential employees. 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 to rapidly gain experience and 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. Lacking calibration of title and salary: Job titles have a different prestige status than in other cultures. Particularly being a “Manager” or to work in a commercial function are linked to social status. Furthermore, finding the right salary level linked to a job and its title is a challenge. This problem is amplified by the lack of detailed market data and unrealistic expectations colored by candidates’ perception of foreign salary levels. Companies tend to over-emphasize the starting salary, however a clear growth perspective with respect to salary development is often more important to candidates than the starting salary per se.

1 Profiling The 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, as 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

1 Profiling

3

communication ensures that assumptions for the position are aligned and complications throughout the recruitment process are minimized.

Analyze Company Needs In 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. Clusters of job content 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

4


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 Content Job 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 Title Defining the right job title will have a significant impact on how well a company will be able to attract qualified candidates. For instance a multi-national company in China might be restrained by their internal policies to design a job title as a “team leader” or “senior engineer” which would otherwise be designated as a “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 in 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. In China, a lower level of standardization exists 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 Profile It 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 (see table Types of Employees in China).

+++

+++

++

+

–

+++

++

++

+

–

Local Chinese (no overseas experience) Chinese returnees (with international exposure) Overseas Chinese in Asia (e.g. Singapore, Taiwan, Hong Kong) Overseas Chinese outside Asia (e.g. America, Europe) Foreigners (non-Chinese)

Chinese language ability

China cultural fit

Candidate type

Types of employees in China

+++

+++

+++

++

+

English language ability

+++

++

++

+

+++

+++

++

++

+

–

+++

+++

++

++

+

Know-how of Academic industry best strength practices

Other language ability

+++

+++

++

++

–

International exposure

++

++

++

++

+

Employment stability

++

++

++

+

+++

+++

+++

++

++

+

Market Salary availability expectations

1 Profiling 5

6


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 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 additional 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. On the following table Candidate Profile: Senior Quality Engineer you will see an example of a candidate profile in which the two above mentioned candidate qualifying questions have been integrated.

Candidate profile: senior quality engineer Candidate details Educational background

Professional experience

KO Weight REQ Bachelor degree or higher, major in casting or mechanical 10 engineering PRE Alternatively a professional college education with focus on casting KO 20 REQ Above four years hands-on supplier development and production experience in casting Above three years of quality control and assurance experience in casting and machining In-depth understanding of common quality control and assurance processes (continued)

Research Compensation Details

7

(continued) Candidate profile: senior quality engineer Candidate details

Technical skills

Soft skills

Language skills

Personality requirements Motivational requirements Desired age Other requirements

KO Weight PRE Knowledge of EU and international regulations and standards for casting components in controls, fittings and instruments KO 20 REQ In-depth and solid knowledge of metallurgy In-depth know-how of casting techniques, particularly precision and sand casting PRE Familiarity with ISO9000 and PED system REQ Strong work spirit and ethic 20 Good coordination and communication skills Good organizing and planning skills PRE Good coaching skills REQ Fluent in spoken and written English (TEM 8) KO 10 Fluent in spoken and written Chinese PRE Knowledge of spoken German is a plus REQ Meticulous/pays attention to detail 10 Punctual and precise PRE A strong self-initiator REQ Willing to travel extensively within China 5 PRE Willing to live and work in Nanjing PRE [28 3 REQ In good physical and mental health 2 PRE Driving license for passenger cars

REQ required, PRE preferred but not necessary, KO kick-out criteria (max. 3), Weight category importance (tot. = 100)

Research Compensation Details Conducting 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 regionand industry-specific data as well as differing assumptions on language requirements, international exposure, know-how of industry best practices and job content amongst companies.

Quality

+++

++

+

++

Channels

Consultancies

Job boards

Web sites

Government statistics

Large sample source Customized report Detailed data collation process Suitable for middle-executive level position Large sample source Less customized report Suitable for entry-middle level positions Large sample source Based on anonymous data Suitable for quick and rough benchmarking Large sample source Reliable data Suitable to observe market trends

[1,500

Free

Free

[500

Comments

Price per report (RMB)

National Bureau of Statistics of China

Pay Scale

51Job ChinaHR Zhaopin

Hewitt Watson Wyatt Mercer Hudson

Sources in China

www.stats.gov.cn18

www.payscale.com

www.51job.com www.chinahr.com www.zhaopin.com

www.hewittassociates.com www.watsonwyatt.com www.mercer.com www.hudson.com

Web site

8 Recruiting Professionals in China

2 Candidate Identification

9

2 Candidate Identification There are various channels to identify and reach different candidates. In general, there are three types of candidates that can be identified during the recruitment process: Candidate type

Definition

Active candidate— applying

Candidates who Large pool send their Interested resume to candidates apply for an Easy to obtain online and/or candidate offline job profile advertisement

Pros

Cons

Comments

Low hit rate Fraud sensitive

Most suitable for junior positions and mass recruitment

Marketing intensive Time consuming screening Large pool Costly Most suitable for generic midCandidate Low candidate level profiles interest positions available Detailed search Time consuming specifications search possibilities

Passive candidate— Candidates who database have published their profiles in databases and who are not actively applying to a job advertisement Passive candidate— Candidates who Qualified pool of Difficult to Most suitable for direct contacting have not candidates identify and executivepublished contact target level High hit rate their profiles candidates positions and in databases Lower fraud specialists Only able to and who are sensitivity assess not actively candidate applying to a suitability job after having advertisement obtained the candidate’s profile Low candidate interest Resource consuming Small pool

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

10


market value compared with finding jobs via the generic strategies (actively applying, publishing profile in databases). The map on pages 18 and 19 provides a breakdown of professional clusters 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 to concentrate on allocating resources in this region to find qualified professionals.

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 Q3 2009 was valued at RMB288 million, with the biggest online platforms being 51job (28.6%), ChinaHR (16.8%) and Zhaopin (15.8%).

All China

ENGHR.com

Beijing, Shanghai, Hong Kong

NewChinaCareer .com

First-tier cities in China

North China

Zhaopin.com

YXX.com.cn

First-tier cities in China

ChinaHR.com

Industry specific (examples)

East China, Shenzhen, Beijing

51Job.com

Generic (examples)

Regional strength

Sample

Online channelsa

Engineer

PlasticInjection

General

General

Professionals in the plasticinjection industry Engineers

Generic

Generic

Generic

Generic

General

General

Target group

Industry strength

Dedicated online platform for engineers Complementary access to resume database www.ENGHR.com

Large market share in China About 10 to 25 active applicants per day www.51job.com Large market share in China About 10–25 active applicants per day www.chinahr.com Large market share in China About 10–25 active applicants per day www.zhaopin.com Solely English jobsite in China Targets bilingual Chinese mid- to senior level management from China, Hong Kong and the Asia Pacific region www.newchinacareer.com Dedicated plastic-injection website for industry information, recruitment, advertisement and other related businesses www.yxx.com.cn

Comments

[600

Free

350

15

15

15

Price per ad (RMB)

(continued)

2 Candidate Identification 11

German speaking professionals

General

Beijing, Shanghai, Guangzhou, Hong Kong Beijing, Tianjin, Wuhan

German Chamber of Commerce Website (AHK)

The American Chamber of Commerce (AmCham)

a

General

English speaking professionals

American professionals www.amchamchina.org

One of the government websites in China that focus on recruitment www.zrjc.com Large job portal which spans across different cities in Asia and USA www.jobsdb.com Chinese-German speaking professionals German native professionals www.china.ahk.de Chinese-English speaking professionals

Comments

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

Language specific (examples)

Generic

General

Hong Kong

Generic

JobsDB.com

General

Zhejiang

Target group

ZJRC.com

Industry strength

Region specific (examples)

Regional strength

Sample

Online channelsa

(continued)

Only for members (three free postings per month)

2,000

180

15

Price per ad (RMB)


Regional strength

Industry strength

Target group

Jiefeng Daily Group Shanghai General Region Newspaper specific (examples) theBeijinger Beijing General People living in Beijing Managers Students

Job seekers

China Trade All China General Job seekers Newspaper (51job) Industry “oaotu” Magazine All China AutoManagement specific 《产业经济报 motive (examples) 道》 Caijing 《财经》 North, Finance Management academics East, South

Generic (example)

Printed media Sample

[500

Analysis of the overall auto industry trends, country’s policies and regulations

Tracks the most important aspects of [75,000 China’s economic reforms, developments and policy changes, as well as major events in the capital markets. It also offers a broad international perspective through first-hand reporting on international political and economic issues Include updates on current HR news [1,000 and articles with dedicated job section English language magazine about the city [4,800 and lifestyle for locals and expatriates

[450

Price per ad (RMB)

Strongly focused on the recruitment of talents in China

Comments

2 Candidate Identification 13

NBRCW

(examples)

Shenzhen

Ningbo

Beijing

General

General

General

General

Automotive

strength

strength

Shanghai

Industry

Regional

CEIBS Meet and Match Shanghai

Job Fair

High-end specific Shenzhen Top Talent

(examples)

Region specific

BJRC

Orient Express

Industry specific

(example)

Sample

Events

graduates

http://ceibs.directhr.cn

short pre-scheduled interviews

potential candidates from the CEIBS in

company representatives to meet high

An event that serves as a platform for

www.dazhonghr.com

specialists MBA students and

70–80 participating companies

Over 3,000 participating candidates

www.nbrcw.com

Over 30 participating companies

Over 100 participating candidates

www.bjrc.com



www.01h.com



Comments

and technical

Senior management

Job seekers

Job seekers

professionals

Automotive

Target group

Price for participation

by invitation only

Complimentary,

[4,000

[500

[380

[600

(RMB)



15

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 internationalfocused).

Online candidate database Region

Database

Users

Ability to specify search

Quantity of Number of Price per candidate candidates having profile (RMB) profiles know-how of industry best practices

Average- [25.5 high Million ChinaHR.com Chinese Average- [25 high Million Zhaopin.com Chinese Low [26.8 Million NewChinaCareer. Chinese Average- [40,000 com high unique visitors each month Renren.com Chinese Low [40 Million International- LinkedIn.com American/ High [50 focused European Million

Low-average

RMB20–50

Low-average

RMB20–50

Low

RMB20–50

Average-high

RMB530/ month, unlimited profiles

Low

Free

Average-high

RMB170/ month, unlimited profiles RMB 60/ month, unlimited profiles RMB68/ month, unlimited profiles RMB17

Chinafocused

51Job.com

Chinese

Xing.com

German

High

[8 Million

Average-high

Viadeo

European (French)

High

[25 Million

Average-high

Monster.com

Global

High

[150 Million

Average-high

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

Research Target Companies Establish 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.

16


Legal note No 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 Candidates When 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 Firms Companies 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 this pool of talents in the market who are generally passive candidates who 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 as an annoyance.


17

Involving recruitment firms in the search process PROS

CONS

Increase speed Reduced talent pool for large search firms Recruiters are more aggressive in the search Search firms often have agreements not to process than corporate teams to find the recruit from their existing clients and this right candidate might be a downside for large recruitment firms that have a big list of clientele in a particular industry Increase candidate reach Increased cost Recruiters will be able to find and introduce The cost of filling a vacancy may often be candidates in a myriad of channels and higher via a recruitment firm compared to networks that might not be accessible to an an in-house search organization Increase confidentiality Need for knowledge transfer Search firms can be hired to operate in Hiring firms will have to invest time in the secrecy when companies do not want to relationship with recruitment firms to have disclose their search for strategic or the recruitment firms fully understand the competitive reasons company, its culture, the position and what the company believes the ideal candidate should look like Increase assistance in negotiation process Recruiters are more in-tune with the current market trends, and can therefore offer advice on compensation and benefits Replacement guarantees Recruitment firms often provide candidate replacement guarantees, meaning that the recruitment firm will replace a selected candidate who leaves the client within a certain pre-defined time-frame, without any further service charges

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.

18



19

20


Contingency search

Retained search

Transaction-oriented No cure, no pay—only when candidate is hired Results within four to eight weeks Each candidate is presented in many firms Suitable for low- to mid-level positions Nor necessarily exclusive with one search firm Client communicates moderate commitment to filling the vacancy, resulting in moderate commitment of resources from recruitment firms Moderate level of confidentiality More commonly used in certain industries, e.g. IT, and first-tier regions

Consulting oriented Progressive payment on a predetermined amount Results within eight to twelve weeks Refined searches to find a few suitable candidates Suitable for mid to high-level positions Exclusive with one search firm Client communicates high commitment to filling the vacancy, resulting in high commitment of resources from recruitment firm High level of confidentiality, therefore more suitable for sensitive issues such as replacement positions

Both type of searches can charge anywhere from 20 to 33% of the prospective employee’s firstyear gross annual compensation

3 Selection Selection in the recruitment process is 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 CVs CV 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

3 Selection

21

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. The following guidelines can be used for more effective interviews: (i) Abolish the general perception of foreign managers Chinese candidates often have the impression that foreign managers are very direct and impatient, have little experience in dealing with business in China and do not take the private circumstances of candidates into account. Therefore, foreign managers will have to be mindful of how to approach and interact with Chinese candidates in an interview in order to facilitate a more effective assessment. (ii) Understanding different behavior and expectations of candidates across regions in China Due to regional and local cultural differences, distinct behavior and expectations of candidates can be stereotyped. Four different regions can be distinguished: South, East, North and West-Central. For instance the East China candidates often behave more directly and can therefore be more treated in a straight-forward matter compared with candidates from West-Central China. Moreover, the English level of candidates from the South is on average better than candidates from the other regions.

Region specific behavioral characteristics and expectations of Chinese candidates Characteristics/expectations Politeness Pro-activeness Uncertainty avoidance Tendency to being humble Willingness to make compromises Work-life balance expectation English language skills

Regions South

East

North

West-Central

+ + + + + + +

+ + + + + + +

+ + + + + + +

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

++ + ++ ++ ++

+ +

+ + +

+ ++ + +

+ low, + + moderate, + + + high

(iii) Apply a China-specific interview structure An advisable interview structure is presented in the following table:

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Typical interview structure in China Interview stages

Warming-up (5–8 min)—of greater importance in China Longer with Chinese than with Western candidates due to Chinese culture specific behavior Offer tea Introductory questions create a more relaxed interview atmosphere for the candidate Introduction (2–4 min) All interviewers should be introduced by name and function Company presentation (5–10 min) Presenting materials should include bilingual company flyer, company’s strategy in Chinese, economic performance, HR development strategy, etc. Candidate questions and answers (30–40 min)—most important/longest part of the interview Includes career development, former employment, project work, achievements, responsibilities Ending (3–5 min) Candidate should leave with a positive impression Provide clear indications on how you will follow up in terms of timeline and activity

Legal note No 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 but interviewees have the right to not disclose such information.

Manage Candidate Expectations Many Chinese candidates are observed to have high expectations, as many see their peers quickly move up the corporate ladder and expect that the same should happen to them. The biggest concerns of candidates are salary, benefits and career development. Companies which are not able to meet candidate expectations experience high employee turnover rate. Clarifying salary, benefits and career development during the recruitment process will improve employee retention and will have a positive impact on candidate attraction.

3 Selection

23

Salary and Benefits 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% when changing jobs. As a comparison, the average salary increase expectation in Europe is between 10 and 20%.

Career Development Well planned career development structures will benefit companies in retaining employees and attracting candidates during the recruitment process. It is advisable that hiring managers are involved in the process of managing candidate expectations together with the HR representative as the latter might not be able to answer all relevant questions related to the job content.

Conduct Assessment Centers Conducting assessment centers provides a means to enable 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. The following table Assessment Tests in China provides a list of assessment tests available in China.

Conduct Reference Checks Reference 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

Motivation

MBTI Personality Test

Personality

HRO MQ

Identity—the self-perception questionnaire

FiT In™ Personality Test

Tests available in China

Category

Assessment tests in China Method

Intrinsic and extrinsic motivational factors

Leadership styles Team role preference Jung/MBTI type Learning styles Emotional intelligence

Motivational questionnaire In-basket exercise

Online tool

Rational functions 2 h workshop Thinking/feeling Irrational functions Sensing/intuition Leadership Online tool competencies/potential Managerial competencies Intercultural competencies

Skills tested/trained Cross Culture Limited

✓Available in traditional Chinese/English × Only available in Hong Kong ✓Developed in Shanghai/China ✓26 specific Scales grouped in 5 broad dimensions ✓Each scale group is independently defined for a person ✓Directly assesses 36 personality ✓Traits ✓Available in Chinese/English ✓Specific in-house norm groups possible ✓Based on 15 motivational factors ✓Motivational profile can be used for appraisal, feedback, employee dialog HRO Consulting

PsyAsia International

HRO Consulting

Provider

Remarks

(continued)

www.hrobjective.com

www.psyasia.com

www.hrobjective.com

www.ticomplete.com

Source


Chinese for non-native speaker

Skills tested/trained

Technical training and certification

Quality management, management techniques, CCC, CQC, etc. Dye penetrant examination, metal material testing information security mgmt. FAMI-QS certification, etc.

TOEFL, IELTS, etc. English for non-native speaker

Tests available in China Chinese Proficiency Test (HSK)

Technical Technical training skills and certification (examples)

Language

Category

Assessment tests in China

(continued)

Workshops Seminars Trainings Tests

Workshops Written tests Practical tests

Testing of: listening, reading, writing and speaking Testing of: listening, reading, writing and speaking

Method

Tests available at locations worldwide

✓Differentiation between general and academic level ✓Certificate ✓Global recognition ✓Global recognition ✓Certificate æ Mostly in Chinese ✓Certificate ✓Seminars/training for different branches available

Tests available at locations worldwide

✓Certificate ✓Global recognition

www.ets.org

www.hsk.org.cn

Source

SGS in China

www.cn.sgs.com/home_ cn_v2

TUEV SUED www.tuvps.com.cn/home. Greater China html

Provider

Remarks

3 Selection 25

26


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 note No 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 check 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.

4 On-Boarding In 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 Intent The 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.

4 On-Boarding

27

Letter of intent

Check-list: next steps

Formal title Main duties

Health checks Signing employment contract

Reporting line

Check-list: registration materials

ID card Copies of academic certificates Registration with HR department on Reference letters the starting date Employment handbook Labor handbook

Remuneration details including bonus structure Social welfare standard Training period Length of contract and probation period Commencement date

Residence certificate Housing fund account number Passport pictures

Consider Candidates’ Notice Period The 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 the risk and to 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 Feedback As 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-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.

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Consider Impact of Hukou and Location A “hukou” refers to the system of residency permits which dates back to ancient China (see Chapter ‘‘Issues to Consider When Initially Hiring Staff’’, Sect. 5 for more information). This system is still enforced and requires citizens to register their households with the local city or district authorities. A household registration record officially identifies a person as a resident of an area and includes personal information such the name of the person, date of birth, the names of parents, and name of spouse, if married. Traditionally the birth place is identified as an individual’s hukou. For university students, the hukou temporarily shifts to the study location. In order to permanently change a hukou, a Chinese citizen has to formally apply with the aspired hukou region’s authorities. Approval of such an application depends on the applicant’s educational background, occupation and employment history, and the process might take up to several years to be completed. An employer can facilitate such approval for its employees by formally endorsing the employee’s application. This can become a critical point of attraction for high potential candidates. Unlike in earlier days of the People’s Republic the hukou no longer formally restricts Chinese citizens from seeking employment outside their hukou region. However, the hukou determines a citizen’s entitlement to social welfare and benefits, such as the housing fund and education. Therefore, somebody who works outside his hukou region will generally not be able to participate in the social benefits of the employment region. However, there are means to bridge this discrepancy by formally employing staff in their hukou area either through a branch office or through an employment agency but having them work in a another location. Furthermore, the employer can financially compensate for the financial disadvantage of not being able to optimally participate in the social benefits. This can further trigger the decision of candidates with hukous from other regions to join a company despite the given disadvantages.

Issues to Consider When Initially Hiring Staff

Hiring staff is one of the first key decisions a company will come across, and as it grows more and more people will be added to the payroll. 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 security system as they relate to employers and covers some other critical points that should be addressed.

1 Options for Hiring Staff: Direct Hire Versus Secondment from Agent One 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. 2. 3. 4. 5.

The nature of the job Is the position likely to be a permanent one? What kind of responsibilities will the employee have within the organization? The effect on the motivation and sense of belonging of the employee 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 C. Devonshire-Ellis et al. (eds.), Human Resources in China, China Briefing, DOI: 10.1007/978-3-642-18209-9_2, © Asia Briefing Ltd. 2011

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in China. The key point for the company will be how to accommodate the employment relationship within the Chinese labor contract law. The fifth point is addressed in the box on the following page. Hiring Employees in China 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. Most employees would like to enjoy the protection of their country’s labor law. Therefore, the most practical way to employ staff in China is to establish a Chinese corporate entity. The process for incorporating such an entity is explained in detail in the China Briefing Technical Guide—Setting Up Wholly Foreign Owned Enterprises in China. Alternatively, the foreign investor could take over the existing operations of a company already incorporated in China (see the China Briefing Technical Guide—Mergers and Acquisitions in China). A company incorporated in China will be issued with a business license by the government. This is the key document that will allow it to employ staff directly, and such employment relationships will be regulated by relevant Chinese laws. 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, who 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. Based on the factors introduced above, the management should decide which type of contracts to enter into for each specific role within the company. There are several choices. In China there are four types of permissible employment relationship that can be entered into between a private company and an individual:

1

1. Article 2 of the Labor Law of the People’s Republic of China implemented on January 1 1995;《中华人民共和国劳动法》第2条,自1995年1月1日起施行.

1 Options for Hiring Staff: Direct Hire Versus Secondment

(i) (ii) (iii) (iv)

31

Job contract Part-time contract Fixed-term labor contract Open-term labor contract

In addition to these four types of contract, which are all entered into directly between the employee and the employer, the following options are also available: (v) Dispatch of staff (‘‘paiqian’’) (vi) Outsourcing Let us discuss these options in turn.

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.2 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 to adequately define the completion of a project? What to do if the project is not completed for some reason? How to compensate the employee 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.3 These considerations, combined with the difficulty of defining an appropriate contract scope, deter most employers from entering into job contracts with employees.

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

2 Article 22 of the Implementation Rules for the Labor Contract Law implemented on September 18 2008;《中华人民共和国劳动合同法实施条例》第22条,自2008年9月18日起施行. 3 Article 19 of the Labor Contract Law implemented on January 1 2008;《中华人民共和国劳动合同法》第19条,自2008年1月1日起施行.

32 ● ● ● ●


The employee may not work for more than 4 h a day The employee may not work for more than 24 h/week No probation period allowed Payment must be made to the employee at least every 15 days4

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 for the work they do.

Fixed-Term Contract The vast majority of employees hired in the private sector in China are given fixedterm 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 to each staff member. A fixed-term contract can be of any length.5 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 contract (see definition below)6 The length of the fixed-term contract will determine the maximum length of the probation period that the company can offer to the employee7 One month: if fixed-contract term is less than 1 year and more than 3 months Two months: if fixed-contract term is more than 1 year and less than 3 years Six months: if fixed-contract term is more than 3 years

4 Articles 68, 70 and 72 of the Labor Contract Law implemented on January 1 2008;《中华人民共和国劳动合同法》第68、70及72条,自2008年1月1日起施行. 5 Article 13 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中人民共和国劳动合同法》第13条,自2008年1月1日起施行. 6 Article 14 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第14条,自2008年1月1日起施行. 7 Article 19 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第19条,自2008年1月1日起施行.


33

When will a Fixed-Term Contract Become an Open-Term Contract? Two employees were hired just 3 days apart. The first (Employee A) was hired on December 30, 2006 and the second (Employee B) on January 2, 2007. Both contracts had a term of 1 year. The labor contract law, which came into force on January 1, 2008, stipulates that an open-term contract shall be offered to employees upon the conclusion of the second renewal of their fixed-term contract.8 Contracts still in effect on this date that were concluded prior to enactment of this law, although covered by the law, are not considered when calculating the point at which a fixed-term contract will become an open-term contract. On January 2, 2008 Employee B’s contract was renewed. For the purposes of calculation of commencement of the open-term contract, this date becomes the starting point. The contract was renewed for the first time on January 2, 2009 and for the second (crucial) time on January 2, 2010. Under the new rules, Employee B was effectively given an open-term contract on January 2, 2010. In contrast, Employee A’s contract did not renew until 30th December 2008. Based on our analysis above we can conclude that this date will be the starting date for calculation of commencement of the open-term contract. Employee A will need to wait until December 30th 2010 before he will be able to claim an open-term contract, despite actually being hired earlier than Employee B. Note that although these employees will be deemed to hold an open-term contract from the dates mentioned above, the company still has the responsibility to conclude an open-term contract with those employees. If the company does not do this, 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.9 During the period of a fixed-term contract an employer cannot dismiss an employee without paying compensation unless the statutory requirements for termination under such circumstances are met. We introduce these requirements in Chapter ‘‘Terminating the Employment Relationship’’, Sect. 3. Even at the end of the fixed-term contract there is some compensation to be paid to the employee. This is explained in more detail in Chapter ‘‘Terminating the Employment Relationship’’, Sect. 4. Please note that at the time of writing of this book there is some argument over whether the employer has an opportunity to dismiss the employee at the end of the second fixed-term contract, or only at the end of the first fixed-term contract, as the law is rather vague. Different verdicts have been issued in different courts around 8 Article 14 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第14条,自2008年1月1日起施行. 9 Article 82 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第82条,自2008年1月1日起施行.

34


the country. As a general rule it appears that southern cities are adopting the ‘‘two opportunities’’ interpretation, while northern cities are using the ‘‘one opportunity’’ interpretation. However, even within cities different judges may come to different rulings on this matter. Such confusion will continue until the lawmakers formally clarify this point.

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.10 This effectively means that their job is secure until retirement age, unless some exceptional circumstances affect the company or the individual. As you can imagine, it can be quite difficult to terminate an employee who possesses an open-term contract. We discuss the issue at greater length in Chapter ‘‘Terminating the Employment Relationship’’, Sect. 5.

Dispatch Contract (‘‘paiqian’’) This form of contract is made with another company, which in turn becomes the official employer. In other words, the employee is dispatched to work at a company that is not their official employer. In China the market for staff dispatch services is a very large and lucrative one. There are many companies supplying blue-collar workers to factories. There are also some companies that provide office staff to foreign invested enterprises. Some of the major ones will be familiar to most people doing business in China. One is called CIIC, another is called STAR. There are a whole plethora of companies claiming the title of FESCO, although in actual fact this organization is not one ‘‘company’’ at all (see the box entitled ‘‘Will the Real FESCO Please Stand Up?’’). Some companies try to limit their obligations to employees by hiring a large proportion of their staff (in some cases all of their staff) through a labor agency. The legal position in China at the moment states that, under normal circumstances, such dispatch contracts should be used for ‘‘temporary, auxiliary or substitute’’ job positions.11 However, no implementation rules have so far been 10

Article 14 of Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第14条,自2008年1月1日起施行. 11 Article 66 of the Labor Contract Law of the People’s Republic of China implemented on January 1 2008, 《中华人民共和国劳动合同法》第66条,自2008年1月1日起施行.


35

issued to clarify the definition of these terms. We can say that companies which hire a large proportion of their staff through agencies are operating in a gray area of the law. The situation is unclear relating to issues of compliance and potential punishment.

Will the Real FESCO Please Stand Up? Almost all foreigners doing business in China will have heard of FESCO. The acronym stands for Foreign Enterprise Service Company, and most people assume it is one organization. Many foreign companies will actually have a contract in place with a FESCO for certain services. These may include dispatching of staff, organizing payment of mandatory benefits for directly-employed staff, managing payroll or even hiring of staff and headhunting. In actual fact, FESCO is not a company at all. It is a generic term used by dozens of local HR companies around the country. Because of the widely held misconception that FESCO is one company, the ‘‘brand’’ is a powerful marketing tool for companies using the moniker. Below we provide an introduction to the ‘‘FESCO world’’ and comment on issues that foreign enterprises contracting with a FESCO should bear in mind.

Who is Claiming to be a FESCO? The answer to this question is complex. There are multiple competing organizations in each city. Some of them have invested in subsidiaries or affiliates in several cities across the country. Some of them used to be stateowned, some of them still are partially state-owned, while others are 100% privately owned. As an example, let us focus on the situation in one large city (Shanghai), and one smaller regional city (Dalian):

Who is FESCO in Shanghai? There are two main FESCOs in Shanghai, namely: 1. Shanghai Foreign Service Co. Ltd (Shanghai FESCO) 2. Beijing Foreign Enterprise Human Resources Service Shanghai Co. Ltd (FESCO Shanghai) Let us look at each of these companies in turn:

36


1. Shanghai FESCO This FESCO is owned by the Shanghai World Expo Group. The Chinese name of this organization is 世博集团上海市对外服务有限公司. It has ten offices across Shanghai. It also has eight subsidiaries and affiliates and four branches in other cities around the country. This group also owns another smaller company providing similar services called FESC, based in Pudong. 2. FESCO Shanghai The Chinese name of this organization is 北京外企人力资源服务上海有限公司. The parent company is a FESCO in Beijing. This parent company has subsidiaries and affiliates in 10 cities across China. Most of these cities are the same ones in which Shanghai FESCO has established subsidiaries or affiliates.

Who is FESCO in Dalian? In Dalian there are at least three competing FESCOs: 1. Dalian FESCO This FESCO is affiliated to Shanghai FESCO. As of August 2009, it was 50% owned by Shanghai FESCO and 50% owned by four individuals. Its official Chinese name is 大连菲斯克外企服务有限公. Established in 2003, it has a registered capital of RMB2 million. 2. FESCO Dalian As of August 2009, Beijing FESCO owned 76% of this company, whose Chinese name is 大连华夏外企服务有限公司. It was established in 2002 and has a registered capital of RMB10 million. 3. Dalian Development Zone FESCO This is a good example of an individually operating FESCO not affiliated to any particular network. Its Chinese name is 大连开发区外中企业服务有限公司. As of August 2009 it had a registered capital of RMB1 million and was owned by two individual investors.

How is this Possible? For those who have studied Chinese corporate law the answer is simple. The English term ‘‘FESCO’’ is a generic one, indicating nothing more than the type of service provided by the company. From a legal perspective the only true names of these companies are the Chinese names we have shown you above. All of them include some variation of the term ‘‘外企服务有限公司,’’ or ‘‘foreign enterprise service company’’, within their full title.


As a result we have a situation where dozens of independent companies all over the country are all claiming to be ‘‘FESCO.’’ It is not surprising. With most foreign companies paying ‘‘FESCO’’ a couple of hundred RMB each month per employee to be the official employer of their staff or to manage social security payments for their workforce nationwide, it is a big market. Whatever else it may be, FESCO is undoubtedly a powerful brand.

How About CIIC and STAR? As if the situation was not confusing enough already, there are a couple of other large players in this market providing similar services 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 stateowned organization based in Beijing and has 13 subsidiaries, affiliates or branches around the country. In this sense it has a larger network than any of the various FESCOs. Unfortunately even CIIC appears to have a similar identity crisis to the various FESCOs. To continue with the above Shanghai–Dalian analysis, the Shanghai FESCO site claims CIIC Dalian to be part of their national network (the Shanghai FESCO site links directly to the Dalian CIIC site). This is despite the fact that CIIC Dalian competes directly with Dalian FESCO— which is partially invested by a subsidiary of Shanghai FESCO. To muddy the waters further, CIIC Dalian uses the web site address http://www.dlfesco.com as one of its home pages. Effectively, at the same time as creating their own corporate identity under the CIIC brand the company also makes an attempt to appear to be a ‘‘FESCO.’’ According to government records as of August 2009, 40% of CIIC Dalian was owned by CIIC, with the remaining 60% being owned by a collection of 31 other individual and corporate investors. 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. While its network may be smaller than the competing organizations, at least its identity is fairly clear.

How Should Foreign Enterprises Deal with these Various Companies? Given this confusing situation, we can assume that many managers at foreign enterprises do not understand the true nature of the ‘‘FESCO’’ organization they are dealing with. We suggest you bear in mind the following points when dealing with such organizations:

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38


1. If your employees are scattered across several cities, restrict to a minimum the information provided by your HR department to the FESCO you work with. This is because the information you provide will be shared with various organizations (both affiliates and non-affiliates) across the country. For employees earning more than three times the average social salary in these various cities, just ask FESCO to make the maximum contributions on their behalf—there is no need to release precise salary information. 2. All FESCOs are limited liability companies. Some of them have capitalizations of just RMB1 million. If you are sending your entire payroll funds to a FESCO each month for subsequent distribution to your staff you may want to consider paying your employees directly from your corporate bank account instead. This is easy to achieve and can be managed via online banking systems. 3. Some of these FESCOs carry out executive search work (headhunting) on behalf of their clients. This creates a conflict of interest internally between payroll clients (who supply confidential personal and salary information) and headhunting clients (for whom the knowledge of such confidential data is valuable).

What Useful Functions Do These Organizations Play Today? FESCOs provide some useful services. Some examples are as follows: 1. Hiring of employees working at your representative office in China Under current laws, ROs are unable to hire employees directly. Using a FESCO, CIIC, STAR or independent HR agency cannot be avoided. 2. Managing social security and housing fund payments on behalf of staff For employees located in cities where companies have not established a formal operation (e.g. an invested entity or a branch), payment of social security and housing fund contributions cannot be facilitated without the assistance of an organization such as a FESCO. A foreign invested company may contract with one of its local FESCOs for management of this service. The local FESCO will coordinate with partners in other parts of the country to manage the payment of these contributions, charging the foreign invested company a lump sum every month. Some companies also choose to use a FESCO to provide this service in the city where they are based. This can be a convenient option, especially for smaller companies. 3. Hiring of temporary, substitute or auxiliary staff There are certain positions within most companies for which it is not desirable or necessary for an employer to enter into a direct labor contract


with the ‘‘employee.’’ These positions are normally defined as ‘‘temporary, substitute or auxiliary,’’ and the current labor contract law defines such positions as appropriate for using agencies such as FESCO as the official employer. Employees working in such positions will generally not have a strategic role within the company and will not have access to corporate secrets, so a direct contractual labor relationship is often not considered necessary. It can make sense to employ people occupying such positions through an agent. Finally, remember when negotiating terms with these agents that you do have a choice. The largest benefit that companies using the ‘‘FESCO’’ brand receive is the general perception that they are part of one enormous organization. In actual fact, if you are operating in a large Chinese city you will likely have a choice between multiple FESCOs, CIIC, possibly STAR, and a whole range of local agents. Putting them into competition should reduce your cost and improve the quality of service provided to you. Using such agencies can give a company more flexibility when hiring staff for certain non-key positions. If a company feels that a particular role may not be permanent, or it is a position that requires some general skills but little or no training, it may be worthwhile to use a dispatch contract. Companies using this format should be aware of the following considerations: ● ●

●

●

●

The company should be able to return the employee to the agency before the end of the contract although there are normally penalties attached According to legislation available as of December 2010, 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 Both the company and the agent shall be jointly and severally liable for any damages arising from the violation of the provisions of the labor contract law of the People’s Republic of China The employment agency will not usually take any responsibility for the behavior of the employee; to the outside world this employee will appear to be the company’s employee, and the company will be judged on that basis The employee concerned will be aware of the lack of job security under such a secondment contract—this can affect an individual’s motivation, working attitude and sense of affiliation to the company—therefore the company should look at each position carefully to judge whether or not the role warrants a directly hired employee or a seconded employee; simple process-based jobs with low levels of responsibility are generally more suited to secondment contracts.

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2 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 implemented wrongly. 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.

3 Designing a Labor Contract Once 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. We will not cover them here. However, 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 1 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

3 Designing a Labor Contract

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worked without a written labor contract after the first month.12 If the situation persists for a period of more than 1 year, the company is deemed to have provided the employee with an open-term contract .13 For specific information on what providing an employee with an open-term contract means for the company, please refer to the sections on ‘‘Issues to consider when initially hiring staff’’ in this chapter and ‘‘Terminating an employee holding an open-term contract’’ in Chapter ‘‘Terminating the Employment Relationship’’. 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. The reason we would advise using a person with specific training in the field of Chinese law for this task is because 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. Every local labor bureau has a template for a standard labor contract. 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 to 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. What information should be included in any labor contract? The following is mandatory14: 1. The name of the company, address and the name of the legal representative or a senior manager 2. The name of the employee together with a valid address and identification number 3. Commencement date and duration of the contract 4. A description of the job and the location where it is to be implemented 5. The working hours, amount of vacation provided and length and frequency of break times 6. Salary details

Article 82 of the Labor Contract Law implemented on January 1 2008, 《中华人民共和国劳动合同法》第82条,自2008年1月1日起施行. 13 Article 14 of the Labor Contract Law implemented on January 1 2008, 《中华人民共和国劳动合同法》第14条,自2008年1月1日起施行. 14 Article 17 of the Labor Contract Law implemented on January 1 2008, 《中华人民共和国劳动合同法》第17条,自2008年1月1日起施行. 12

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7. An indication that the employer will contribute social security on behalf of the employee 8. Labor protection, labor conditions and protection from occupational hazards 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 will discuss further details about some of these issues later on in this chapter. 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.

4 Structuring the Salary Package Structure of the salary package payable for each position in a company should be given careful consideration. Certain employees need to be incentivized, while for other roles a more fixed form of salary is appropriate. Tax considerations should also be taken into account. Salary packages have several components. We will look at them in turn below. The 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. This contract may also designate some allowances to be paid to employees. This is most relevant for foreign employees, as for these individuals allowances are only allowed to be deducted before calculating their individual income tax (IIT) burden in China if they are clearly included in the labor contract. It is also possible to include some one-off payments—many companies make a 13th month or a 14th month salary payment around Chinese New Year time.

4 Structuring the Salary Package

43

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. See the box on the following page for an example of how the tax burden can change based on the timing of the bonus payments. We explain the details of calculation of IIT in Chapter ‘‘Managing the Monthly Payroll Process’’. The next portion of the salary package is social security, often referred to in China as mandatory benefit. Contributions are made by both the employee and employer, although at the time of writing non-Chinese employees are not required to join the mandatory benefit system. 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. We introduce the various components of social security in the next section. 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.15 Payment of annual bonus versus quarterly bonus Example

Mr. Brown was transferred from the US HQ to a China subsidiary. In 2010, he stayed in China for 365 days Monthly salary = RMB110,000 Quarterly bonus = RMB50,000 per quarter Tax paid by the individual IIT payable RMB50,000 9 45% 9 3 months ? (RMB50,000 9 15% – RMB125) =RMB74,875 (this is because for three of the four quarters the bonus must be treated as additional salary of Mr. Brown) IIT for annual If the quarterly bonuses are structured as an annual bonus, i.e. bonuses Monthly salary = RMB110,000 Annual bonus = RMB200,000 IIT for Bonuses = (RMB200,000 9 20% – RMB375) = RMB39,625 Annual tax saving (RMB74,875 – RMB39,625) = RMB 35,250

15

Article 25 of the Implementation Rules for the Individual Income Tax Law implemented on March 1 2008; 《中华人民共和国个人所得税法实施条例》第25条,自2008年3月1日起施行.

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Finally, when structuring salary packages 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. Normally ‘‘net’’ is defined to mean the amount employees receive into their pocket each month after payment of IIT and the employee’s portion of social security. It is more commonly offered to blue-collar workers that may not understand the details of the Chinese social security 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. We have included an example for your reference on the next page. The total of the base salary, allowances, bonuses, non-mandatory pension plans, and the employer’s portion of social security contribution are added together to form the total compensation and benefits (C&B) amount. If the company has promised its employees a net salary then the employee’s portion of social security contribution and IIT liability must also be included in this figure. The C&B total represents the actual direct outlay the company makes every month for employment of its workforce. Net salary in China Example: A Chinese employee John Zhang signed a contract with company M indicating that his monthly salary is RMB10,000. The employee and the company take their own responsibilities in terms of the IIT and MB payments. We assume that the employee’s social insurance contribution is 21% of his total salary, while the company portion is 39% Gross salary for the employee RMB10,000 9 (1–21%) = RMB7,900 IIT for the employee (RMB7,900–RMB 2,000) 9 20% – RMB375 = RMB 805 Net salary for the employee RMB10,000–RMB2,100 – RMB805 = RMB7,095 Total expenses for the employer RMB10,000 ? (RMB10,000 9 39%) = RMB13,900 Example 2: A Chinese employee John Zhang signed a contract with company M indicating that his monthly salary is RMB10,000. Company M agrees to pay full social contributions for John, John pays his IIT only. We assume that the employee’s social insurance contribution is 21% of his total salary, while the company portion is 39% Gross salary for the employee RMB10,000 IIT for the employee (RMB10,000 – RMB2,000) 9 20% – RMB375 = RMB1,225 Net salary for the employee RMB10,000 – RMB1,225 = RMB8,775 Total expenses for the employer RMB10,000 ? (RMB10,000 9 (39% +21%)) = RMB16,000

5 The Social Security System in China

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5 The Social Security System in China 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 Chinese employees can make claims. Monthly contributions to the social security system are determined from a base figure. In most cities it is calculated as follows: Social security base = previous year’s total income/1216 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% of the social average salary for the location in which the employee pays social security.17 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). We show you an example in the box on the following page. The maximum base figures will generally be updated once per year for all employees. This often 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.18 China’s Social Security System is made up of five different kinds of insurance, plus one mandatory housing fund. The insurances are as follows:

Pension Pensions 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

16

Article 12 of the Beijing Social Pension Regulations implemented on January 1 2007;《北京市基本养老保险规定》第12条,自2007年1月1日起施行. 17 Ibid. 18 Ibid.

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employer’s contribution is usually between 10 and 22% of monthly salary. The employee will usually contribute around 8%. Different salary–same mandatory benefit Example: John’s monthly salary is RMB12,111. Tom receives RMB20,000 monthly. Both individuals live and work in Beijing: In Beijing, the employer’s social security contribution amounts to 44.3% of the employee’s base salary; while the employee’s contribution is 22.2% of base salary. The cap for the social security payment base is RMB12,111 in Beijing. Accordingly, John’s mandatory benefit paid each month will be: Employer pays RMB12,111 9 44.3% = RMB5,365 Employee pays RMB12,111 9 22.2% = RMB2,689 Tom’s mandatory benefit paid each month will be: Employer pays RMB12,111 9 44.3% = RMB5,365 Employee pays RMB12,111 9 22.2% = RMB2,689 Conclusion: From the above we can calculate that Tom pays 13.45% of his salary as social security contribution, but John pays 22.2%. The employer pays 44.3% on top of John’s base salary, but only 26.8% on top of Tom’s. This is a direct result of the cap imposed on contributions.

Pension contributions made by the employees go directly into their ‘‘personal’’ pension accounts. The contributions made by the company go into a ‘‘social’’ account.19 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% 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.20 It is not possible for individuals in China to draw a pension unless they have made contributions for a minimum of 15 consecutive years.21 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 50.22 19

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;《国务院关于建立统一的企业职工基本养老保险制度的决定》第4条,自1997年7月16日;起施行. 20 Ibid. 21 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;《国务院关于建立统一的企业职工基本养老保险制度的决定》第5条,自1997年7月16日起施行. 22 Reply of Ministry of Labor on the Definition of Statutory Retirement Age for Employees working in Enterprises implemented on May 11 2001;《劳动和社会保障办公厅关于企业职工 ‘‘法定退休年龄’’含义;的;复函》,自2001年5月11日起施行.


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Unemployment Insurance In 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% 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 1-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.23 Individuals may claim unemployment benefits for a maximum period of 24 months.24

Medical Insurance Both employer and employee contribute to this fund. Proportions vary considerably between cities, but generally the company will be expected to contribute between 5 and 12% of the employee’s monthly salary, while the employee will contribute around 2%. 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. 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. 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 Insurance Contributions to this fund are made by the employer. Usually the premium is between 0.5 and 2% of the monthly salary of the employee, depending on what kind of work is being carried out by the employee.

23

Article 19 of Beijing Unemployment Insurance Regulations (No. 38 Order issued by Beijing Municipal Government) implemented on November 1 1999, 《北京市失业保险规定》(北京市人民政府第38号)第19条,自1999年11月1日起施行. 24 Article 17 of Beijing Unemployment Insurance Regulations (No. 38 Order issued by Beijing Municipal Government) implemented on November 1 1999, 《北京市失业保险规定》(北京市人民政府第38号)第17条,自1999年11月1日起施行.

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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.25 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 security bureau and contributions are made promptly.

Maternity Insurance Usually only the employer makes a contribution of 0.5 to 1%. Under this system a female employee generally takes around 4 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.26 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. A fixed amount towards the cost of the childbirth will also be paid out.27 As an associated point, the company may not terminate the contract of the employee from point of pregnancy until the baby reaches 1 year of age.28 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 Fund Housing 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). 25

Article 31 of Beijing Occupational Injury Insurance Clauses implemented on January 1 2004; 《北京工伤保险条例》第31条,自2004年1月1日起施行. 26 Article 14 of Beijing Enterprise Employee Maternity Insurance Regulations implemented on July 1 2005;《北京市企业职工生育保险规定》第14条,自2005年7月1日起施行. 27 Ibid. 28 Article 42 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第42条,自2008年1月1日起施行.


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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 and 13% of the employee’s salary. In many 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% of the local social average salary to employee. The limit is generally 500%, although some cities do not set a limit at all. The portion over 300% 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% 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.29

Summary Contributions 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. We give some examples on the following page. 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. To take an 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

29

Article 24 of the Regulation on the Administration of Housing Funds implemented on April 3, 1994 (and revised on March 24 2002);《住房公积金管理条例》第24条,自1994年4月3日起施行(于2002年3月24日修订).

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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 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. For some examples see the chart on the following page. Two city salary Comparison The employee John receives his monthly salary in the sum of RMB10,000. If John lives and works in Beijing, he will pay a quite different amount to the case in which he lives and works in Zhongshan. Consequently, he will receive a different net salary payment. At the same time, the burden for the employer will also vary quite considerably. In Beijing: The employer’s social security contribution is 44.3% of the employee’s base salary while the employee’s contribution is 22.2%. The social security payment base cap is RMB12,111. Accordingly, John’s mandatory benefit paid each month will be: Employer pays RMB10,000 9 44.3% = RMB4,430 Employee pays RMB10,000 9 22.2% = RMB2,223 Net salary paid to John = 10,000–2,223–780 (IIT) = RMB6,997 Total employer’s burden = 10,000 ? 4,430 = RMB14,430 In Zhongshan (Guangdong Province): The employer-paid social security contribution is 17.6% of the employee’s base salary, plus 2% of RMB1,240 as medical insurance. The employee’s contribution is 8% of pension, 0.5% of RMB1,240 as medical insurance and 5% of housing fund. The cap for the social security payment base is RMB8,277. Accordingly, John’s mandatory benefit paid each month will be: Employer pays 8,277 9 17.6% ? 24.8 = RMB1,482 Employee pays 8,277 9 13% ? 6.2 = RMB1,082 Net salary paid to John = 10,000–1,082–1,009 (IIT) = RMB7,909 Total employer’s burden = 10,000 ? 1,482 = RMB11,482 Comparison: Net salary Total employer’s burden

6,997 (Beijing)–7,909 (Zhongshan) = -912 14,430 (Beijing)–11,482 (Zhongshan) = 2,948

Minimum wage 900 960 1,100 1,100

20 10 11

8 8 8

Pension C (%) I (%) 19 8 20 8 22 8 14 8

Injury C (%) 0.5–2 0.5 0.5 0.4– 1.6 0.4 0.8 0.25 0 0 0

I (%) 0 0 0 0 0.85 N/A 0.5

0 N/A 0

Maternity C (%) I (%) 0.5 0 0.8 0 0.5 0 0.8 0 0.2 0.8 0.4

0.1 0.00 0.00

Unemployment C (%) I (%) 1.5 1 1 0.2 2 1 2 1 I 2.00% 2.00% +3 2.00% 2% ? 4RMB

7% ? RMB9.83 2% 2% 0.5% 4.5% 2%

Medical C 7.00% 10.00% 12% 11.5% 5–20 5–20 13

Housing fund C (%) 10, 12, 15 or 25 12 7 12

5–20 5–20 0

I (%) 10, 12 or 15 12 7 12

Notes to chart 1. Shenzhen pension contribution by company to non-Shenzhen hukou holders is 10%, not 11% 2. Zhongshan base for medical insurance is a flat rate of RMB1,240—not related to income 3. Hangzhou also has reduced rates for housing fund as low as 8%, but only companies in financial difficulties are allowed to apply for these reduced rates 4. Caps for pension contributions in cities in Guangdong Province are set at a provincial level not at a city level, with the exception of Shenzhen. Therefore, the caps for Guangzhou, Dongguan and Zhongshan are equal despite the variation in average salary

Guangzhou 1,100 Zhongshan 920.00 Shenzhen 1,100.00

Dalian Beijing Shanghai Hangzhou

City

C = Company I = Individual Mandatory welfare payments (%)

Simplified Mandatory Welfare Payments Reference (Year 2010 August)

5 The Social Security System in China 51

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6 Two Peculiarities of Employment in China: the Dangan and the Hukou Every one of your Chinese employees will possess a ‘‘hukou’’ and those born in urban areas will also have a ‘‘dangan.’’ These concepts should be understood by an employer as they can add a layer of bureaucracy into the hiring of staff and, especially in the case of the hukou, have a tangible effect on the total cost of employment and the benefits that employees are able to receive from the local government.

The Dangan A dangan (pronounced dang-an) is a personal file that is maintained for each Chinese individual. A person’s dangan will usually contain the following information30: 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 transfer 4. Name of employer and period of employment 5. Any periods when the individual was not employed 6. Evidence of criminal record All of this information is of a fairly general nature. Nevertheless, the existence of the dangan is still relevant to employees. In particular, 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. So, what does this have to do with the employer? First of all, it is the employer who is responsible for ‘‘holding’’ this dangan. 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. The Chinese government does not allow foreign-invested enterprises (or smaller domestic enterprises) to hold these dangan themselves. This restriction creates a lucrative market for the HR agents in China, who charge a fee of around RMB25 per person per month to store the dangans of employees working at foreign invested enterprises. With millions of Chinese employees working at such companies around the country, it is quite a good business. 30

Article 9 of the Management Rules on the Files of the Employees in Enterprises promulgated by the Labor Bureau and implemented on June 9 1992;《企业职工档案管理工作规定》第9条, 自1992年6月9日起施行.

6 Two Peculiarities of Employment in China: the Dangan and the Hukou

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Secondly, 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. It requires a physical trip to the dangan bureau to make the amendment.

The Hukou A hukou (pronounced hoo-kou) can be considered as a kind of domestic passport. Each individual has a specific location (a city or a county) designated as their home. In principle, the local government of this region will be responsible for handling administration relating to the individual. An individual’s hukou location will follow that of their parents. If an individual has parents with differing hukou locations, they may choose which one to adopt. We will first describe the distinction between a rural hukou and an urban hukou. People possessing a rural hukou (referred to as ‘‘nongmin’’ and making up about 64% of the entire population of China, or around 800 million people) are either provided with or lease a piece of land which they can use to generate income for themselves. They do not pay social security contributions and do not receive any such benefits in terms of insurances, pensions or housing fund. They may receive some basic free medical treatment but this is provided outside of the standard social insurance framework. Many rural workers are employed at factories within urban areas these days. This group of people is known as the floating working population of China. One of the reasons that employers at factories are keen to recruit such workers is that they can pay them a lower wage as well as make lower contributions for social security compared with workers possessing urban hukous. Recently, the government has been introducing schemes to allow such workers to enjoy limited social insurance. It is likely that the programs will continue to expand over the coming years. In contrast, holders of urban hukous do fall within the organized Chinese social security system. However, the contributions they should make, and the benefits they are entitled to receive from the system depend on which city they are affiliated to. We explained the situation relating to social security in the section above, but there are also some other reasons why the location of the hukou is important for Chinese people. ●

● ● ●

Chinese that reside in a city different from the one written on their hukou may have to pay more for their children’s education (assuming the children reside in the same city as their parents) Such Chinese will have to return to their hometown to take certain exams, such as the university entrance exam or certain professional certificates A larger deposit may be necessary when purchasing a house for Chinese living in a city in which they do not have their hukou The bureaucratic procedures for travelling abroad can be simplified for holders of certain hukous, like those from Beijing or Shanghai

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Because of these factors certain hukou locations in China are viewed as being highly desirable (not surprisingly, Beijing and Shanghai). In the same way as holding a US or a UK passport, to hold a hukou in one of these cities can be quite valuable. There are a couple of ways to obtain such a hukou: 1. Marry someone holding a hukou from that city, and live there for a predetermined length of time 2. Graduate from university in a specialist subject and work in a related industry for a period of time 3. Leave China and work abroad for a while, in the process becoming a ‘‘foreign specialist’’ 4. Purchase a property of above a certain value in the city; usually this will be a rather expensive property 5. Join a company that has negotiated with the government for some of its employees to obtain hukous; some foreign enterprises, particularly high-technology companies, obtain such commitments from local governments because they know they will have to hire resources from other parts of China In recent years there has been discussion among the various departments of the central government about whether to abolish this hukou framework. It is likely that reforms will be implemented; however it is doubtful whether China is in a position to abolish the system entirely in the near future.

7 Special Considerations for Non-Chinese Employees Foreign employees in China (including those from Hong Kong, Macau and Taiwan) are treated differently from Chinese employees. Of course the biggest difference is that they must receive special permission to work in China (a visa). This will be addressed in Chapter ‘‘Organizing Visas for Foreign Staff in China and Chinese Staff Going Abroad’’. Here we describe the considerations that affect the take-home salary of the foreign worker. The first fundamental difference between foreign employees and Chinese employees is the amount of basic deduction they are allowed to make from their taxable income before calculation of individual income tax (we explain how to make the calculation in Chapter ‘‘Managing the Monthly Payroll Process’’). As of the end of 2010, Chinese nationals are allowed to deduct RMB2,000 from their income. The remainder (minus their personal social security contributions) is taxable. In contrast, foreign nationals are allowed to deduct RMB4,800 from their income.31 This deduction is permitted for all foreign employees, and no approvals are required to enjoy it.

31

Article 18 and 29 of the Decision of State Council on Amending Implementation Rules of Individual Income Tax Law of People’s Republic Of China implemented on March 1 2008;《国务院\关于修改中华人民共和国个人所得税法实施条例[的决定》第18条和第29条,自2008 年3月1日起施行.

7 Special Considerations for Non-Chinese Employees

55

Secondly, at the time of writing of this book non-Chinese employees in China are not required to make contributions into the country’s social security scheme. Naturally, they are not covered by the system either. We have heard of a few exceptions to this rule. Yingkou city in Liaoning Province is one example. The local tax bureau has been attempting to collect pension contributions at a rate of 20% from companies employing foreign staff based on a provincial regulation enacted in 2008. Companies in the area have opposed the collection of these contributions, however it appears that the government does have a legal right to make the claim. It will be interesting to see if local tax bureaus in other parts of the province follow the example of Yingkou to collect company contributions for foreign as well as Chinese staff in the future. Thirdly, the Chinese tax bureau allows foreign staff to deduct certain ‘‘allowances’’ before calculating the tax burden on their monthly salary.32 They cannot do this indiscriminately though. There are two prerequisites that need to be taken care of: 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 (note that in some cities the name of the company must be clearly written on the fapiao for it to be permitted as a deduction) Let us look at the deductions that are allowable one-by-one: a) Meal allowance Foreign 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 allowance The 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, they must pay approximately 17% of the rental amount received to the tax bureau. If a fapiao is requested the landlord

32

Clarifications from the State Tax Bureau on Several Issues on Foreign Individual Income Tax implemented on April 9 1997;《国税总;局明确外籍个人所得税有关问题》,自1997年4月9日起施行.

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will likely charge a large premium on top of the originally negotiated rental amount. Foreign employees that really do require a fapiao should negotiate this with the landlord before signing the rental contract. The issuance of a fapiao 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 allowance This is fairly self-explanatory—an allowance for the dry cleaning of clothes, etc. d) Children’s education allowance Some 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 allowance Each 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. 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.’’33 In practice, many companies adopt a proportion of 30% 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.

8 Creating a Company Rulebook The logic behind drafting a company rulebook and making sure your employees sign to say that they have read it is simple. Without such a document there are no set rules or guidelines for the employees in your company, therefore it will be much harder for the company to argue at some point in the future that an employee

33

Article 1 of the Clarifications by the State Tax Bureau on Several Issues on Foreign Individual Income Tax implemented on April 9 1997;《国税总;局明确外籍个人所得税有关问题》, 自1997年4月9日起施行.

8 Creating a Company Rulebook

57

has broken some company rule. As a result, the company will have a harder time dismissing such an employee and it will also put itself in a weaker position during any negotiations that need to be held with that employee. As a guideline, we would normally suggest any company with more than ten employees to consider creating a company rulebook. What should be included in the rulebook? This really depends 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 food industry will pay most attention to hygiene. Those in the business process outsourcing (BPO) market will be particularly concerned about the confidentiality of their clients’ information. We will not discuss these issues at length here, but instead point out some things that employers may want to bear in mind.

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. Bear in mind that if a dispute with an employee or ex-employee reaches the court, the judge may consider the size and complexity of the rulebook when deciding how much responsibility the employee should take for a particular infraction. If the 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.

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.

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Is the English Version the Same as the Chinese Version? This is an obvious point, but often overlooked. We have seen many cases of companies amending the English version of the rulebook, but not updating the Chinese version (or not informing employees of the change). There are also many instances of poor translations. From a legal standpoint, the Chinese version is considered valid.

Do you have Evidence that Your Staff have Read and Agreed with the Terms? Strictly speaking, a company in China shall generally have a trade union to which every member is affiliated, and the terms included in the rulebook shall be agreed with the union itself. In practice, many companies do not have a union in place. Under such circumstances we suggest that you have each employee 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. 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. 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.

9 Probation This section discusses three issues—the length of the probation period that you can offer to an employee, the salary that should be paid during the period and the ability of the company to dismiss employees during the probation period. Under the labor contract law put into force in 2008, the maximum length of a probation period is directly related to the length of the fixed-term contract that you offer to the employee.34 ● ●

If the term of the contract is less than 3 months then there shall be no probation period If the term of the contract is for a period of between 3 months and 1 year then the maximum length of probation period shall be 1 month

Article 19 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第19条,自2008年1月1日起施行. 34

9 Probation ● ● ●

59

If the term of the contract is longer than 1 year but shorter than 3 years then the maximum length of the probation period shall be 2 months If the term of the contract is 3 years or more then the maximum length of probation period shall be 6 months If you offer your employees an open-term contract (not recommended initially) the maximum length of probation will also be 6 months

Note that 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. An employee’s salary during the probation period can be reduced to 80% of the full salary as stipulated in the employment contract and it shall not be lower than the minimum wage benchmark as stipulated in the location where the employer is based.36 It is illegal to pay the employee a lower amount than this. One of the key changes to the employment relationship after the introduction of the labor contract law was the tightening up of the employer’s responsibilities during the probation period. Before implementation of this law it was relatively simple for the employer to dismiss an employee during this period. However, the law now stipulates that an employer should produce evidence that the employee has not satisfied the requirements included in the original recruitment documentation.37 We address the issue of terminating employees during their probation period in Chapter ‘‘Terminating the Employment Relationship’’, Sect. 2. As a result of this new law companies are now investing more heavily in strengthening their recruitment procedures. Some companies now design online examinations for each candidate to complete, to be followed by another test in the presence of members of the HR department. All this happens before candidates are offered an interview—the consequences of hiring unsuitable employees can now be too high for many employers to ignore. In contrast, an employee still within their probation period can resign from the company after giving just three days notice.38 Employers may want to consider this point if they offer employees a particularly long probation period (for instance of 6 months). It is not advisable to give a large amount of responsibility to an employee who is able to resign at such short notice.

Article 33 and Article 34 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第34及34条,自2008年1月1日起施行. 36 Article 20 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第20条,自2008年1月1日起施行. 37 Article 39 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第39条,自2008年1月1日起施行. 38 Article 37 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第37条,自2008年1月1日起施行. 35

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10 Other Miscellaneous Points for Consideration In the final section of this chapter we would like to mention a few other issues that should be considered by employers before hiring staff.

Written Labor Contracts According to the labor contract law, an employer must ensure that it has completed a written labor contract with every staff member within 1 month of the employee commencing work.39 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 2 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 11 months, they can also claim an open-term contract from the employer.40 As we explained earlier in the chapter, 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. The labor contract law also requires the company to sign an open-term labor contract with each employee by the time the employee completes either 10 years of service with the company or renews their fixed-term contract for the second time.41 The employee can claim double payment of salary for the period during which the employer fails to provide the open-term contract. 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 Article 10 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第10条,自2008年1月1日起施行. 40 Article 14 and Article 82 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第14及18条,自2008年1月1日起施行. 41 Article 14 of the Labor Contract Law implemented on January 1 2008; 《中华人民共和国劳动合同法》第14条,自2008年1月1日起施行. 39

10

Other Miscellaneous Points for Consideration

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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. 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.

Minimum Wage China has a policy on minimum wage, however since there is such a huge disparity between regions in terms of economic development, the minimum wage levels are set locally. In the chart below we list the minimum wage levels in seven cities around China as of 2010. City

Minimum wage (RMB/month)

Dalian Beijing Shanghai Hangzhou Guangzhou Zhongshan Shenzhen

900 960 1,100 1,100 1,100 920 1,100

Minimum Working Age The minimum working age in China is 16 years old.42 An employer can find out the age of their employees very easily from the identification cards that they are required to submit to enable the payment of mandatory benefit.

Annual Leave 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

42

Article 38 of the Laws of the People’s Republic of China on the Protection of Minors promulgated by the Standing Committee and implemented on June 1 2007; 《中华人民共和国未成年人保护法》第38条,自2007年6月1日起施行.

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commences once the employee has worked for one continuous year.43 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.

43

Article 3 of the Rules on Employees’ Paid Time Off promulgated by the State Council and implemented on January 1 2008; 《职工带薪年休假条例》第3条,自2008年1月1日起施行.

Managing the Monthly Payroll Process

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.

1 Calculation of Overtime Overtime 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 8 h, and that the normal working week not exceed 40 h. 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.

1

Article 38 of the Labor Law of the People’s Republic of China implemented on 1 January 1995;《中华人民共和国劳动法》第38条,自1995年1月1日起施行.


63

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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 Let’s take a look at how overtime is calculated for the two types of workers eligible to receive it:

Overtime Under the Standard Work Hour System Overtime for office workers with set working hours each weekday is calculated as follows5: Extra hours worked on weekdays: Hours worked on weekends: Hours worked on public holidays:

150% of basic hourly salary 200% of basic hourly salary 300% of basic hourly salary

The 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).6

2

Article 5 of Approval Measures for Adopting Non-fixed Working Hours System and Comprehensive Working Hours implemented on 1 January 1995;《企业实行不定时工作制和综合计算工时工作制的审批》第5条,自1995年1月1日起施行. 3 Article 7 of Approval Measures for Adopting Non-fixed Working Hours System and Comprehensive Working Hours implemented on 1 January 1995;《企业实行不定时工作制和综合计算工时工作制的审批》第7条,自1995年1月1日起施行. 4 Ibid. 5 Article 44 of the Labor Law of the People’s Republic of China implemented on 1 January 1995;《中华人民共和国劳动法》第44条,自1995年1月1日起施行. 6 Article 2 of the Notice on the Monthly Working Hours and Salaries of an Employee promulgated by the Labor Ministry and implemented on 3 January 2008;《关于职工全年月平均工作时间和工资折算问题的通知》第2条,自2008年1月3日起施行.

1 Calculation of Overtime

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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.

Overtime Under the Comprehensive Work Hour System Overtime for shift workers is calculated as follows: Extra hours worked outside of normal shift Extra hours worked on public holidays a

150% of basic salary 300% of basic hourly salary7,

a

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

There are also some restrictions on the amount of overtime an employer may ask an employee to do: ● ●

A maximum of 3 h in any one weekday A maximum of 36 h in any one month8

Assuming a company stipulates an 8 h work day, then on average in a month a worker shall work 174 h. Adding this maximum 36 h period of overtime means that (for an average-length month) an employer cannot legally require an employee to work for more than 210 h during that month.

2 Regional Allowances and Other Hidden Payroll Costs In Chapter ‘‘Issues to Consider When Initially Hiring Staff’’ we covered the mandatory social security and housing fund contributions that have to be made by both employer and employee. Although the percentages of social security and housing fund contributions can differ depending on the city in which the employee works, the fundamental structure of the system remains similar across the country. There are also some localized mandatory payments that employers based in certain regions must pay to their employees. We will refer to them as regional allowances. 7

Article 13 of Preliminary Regulations on Salary Payment implemented on 1 January 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 4 August 1995;《工资支付暂行规定》第 13条,自1995年1月1日起施行和关于贯彻执行《中华人民共和国劳动法》若干问题的意见第62条,自1995年8月4日起施行. 8 Article 41 of the Labor Law of the People’s Republic of China implemented on 1 January 1995;《中华人民共和国劳动法》第41条,自1995年1月1日起施行.

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In addition, there are also a couple of funds that employers based in certain cities must contribute to. Although these funds are not specifically part of payroll, they effectively constitute an extra cost of employing workers, so we mention them here.

Regional Allowances China is a huge country—we don’t have the space to detail all the regional allowances here. We will just provide two examples of supplemental payments that companies based in certain locations need to make to their employees.

Allowances for Winter Heating Fee: Northeast China Northeast China is a cold place in the winter, with temperatures falling to below 30 C 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. To take Dalian as an example, the amount payable is RMB99.9 An additional requirement in Dalian is that companies must also contribute another 2% 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.10 This amount is paid together with the monthly social security contribution to the social security bureau.

Summer Heat Allowance Fee: Guangdong Province In 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.

9 Article 3 of Dalian City Employee Heating Allowance Regulations implemented on 30 September 2005;《大连市职工采暖费补贴办法》第3条,自2005年9月30日起施行. 10 Article 6 of Dalian City Council Code No.80 implemented on 15 September 2006;《大连市人民政府令第80号》第6条,自2006年9月15日起施行.

2 Regional Allowances and Other Hidden Payroll Costs

67

During the period June–October, companies should pay an additional RMB100 per month to their employees working indoors, and RMB150 per month to any staff working outdoors.11 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. Companies that do not follow these rules can be fined. Such regional allowances should be considered when processing the monthly payroll.

Other Hidden Payroll Costs We only give one example here, although there are likely to be many more in various regions of the country.

Disabled Workers Employment Assistance Fund In certain cities employers are required to either employ a certain proportion of disabled workers or to pay a certain amount into a fund to assist disabled people find work. Beijing and Shanghai both have policies in place governing payment into these funds, however the burden for the employer is quite different. We compare them below:

Beijing12 1. At least 1.7% of each company’s workforce should be made up of disabled workers. 2. If this proportion is not met, a specified amount should be paid into a Disabled workers employment assistance fund. 3. Companies that do not employ any disabled workers are required to pay into this fund based on the following calculation:

11

Article 1 of Guangdong Province Notification of Standards for High Temperature Allowance implemented on 5 September 2006;《广东省高温津贴标准的通知》第1条,自2006年9月5日起施行. 12 Notification of Implementation Measures Concerning the Management of Payment of Contributions to the Beijing City Disabled Workers Employment Assistance Fund implemented on 17 July 2006;《关于印发北京市残疾人就业保障金征缴管理办法实施细则的通知》,自 2006年7月17日起施行.

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Beijing social average annual salary for previous year 60% number of workers employed 1:7% 4. Companies that do employ some disabled workers but do not meet the 1.7% requirement will pay a reduced amount into this fund based on the difference between the percentage of disabled employees actually employed and the 1.7% threshold.

Shanghai13 1. At least 1.6% of each company’s workforce should be made up of disabled workers. 2. If this proportion is not met, a specified amount should be paid into a disabled workers employment assistance fund. 3. Companies that do not employ any disabled workers are required to pay into this fund based on the following calculation: Actual average annual salary for the company in previous year no: of workers employed 1:6% The regulation mentions a ceiling for the actual average annual salary for the company, however the amount of this ceiling is not specified anywhere. In practice, the collection of this fund is being implemented using a rather different calculation to the legal basis. The social insurance bases of the company’s employees are being used as the reference point for calculation of the fund contribution. This has the following effects: ● ●

Foreign employees do not contribute to social insurance, so their (generally high) salaries are not reflected. The maximum social insurance base in Shanghai in 2010 is RMB10,698. Therefore, the contributions the company makes for employees earning more that this amount is limited.

As a result we can say that due to this practice the total cost to the employer is lower than the amount calculated in accordance with the relevant regulations. Nevertheless, the contribution to the disabled workers employment assistance fund in Shanghai for foreign invested companies (that usually pay higher salaries than domestic companies) should still be higher than the amount paid by an identical company in Beijing. See the following table for an example of the difference 13

Implementation Measures for Methods of Organizing Employment for Disabled Workers in Shanghai City implemented on 22 June 2000;《上海市残疾人分散安排就业办法实施细则》 , 自2000年6月22日起施行.

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between the two cities (for Shanghai we calculate according to the regulation instead of the practice for simplicity).

Disabled workers employment assistance fund comparison Currency RMB Actual Contribution average rate (5) (%) annual salary for the company— assumption (4)

City (1)

No. of employees (2)

Social average annual salary for previous year (3)

Beijing Shanghai

100 100

48,444.00 N/A N/A 120,000.00

Difference

1.70 1.60

Calculation formula (6) (%)

Amount payable (7)

2 9 3 9 5 9 60 49,413 2 9 4 9 5 9 60 115,200.00 65,787

3 Managing the Payment of Social Security Contributions In Chapter ‘‘Issues to Consider When Initially Hiring Staff’’ we introduced the various types of social security contribution that the employee and employer are required to make on a monthly basis. In this section we explain the mechanics of how the contributions are calculated and how the payments are facilitated. 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.14 Please look back to Chapter “Issues to Consider When Initially Hiring Staff”, Sect. 4 for details of the percentage contributions that should be made for each city based on the monthly income of the employee. Note that 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% 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.15

14

Article 12 of the Social Insurance Levy Temporary Clause implemented on 22 January 1999; 《社会保险费征缴暂行条例》第12条,自1999年1月22日起施行. 15 Article 1 of Circular Caishui [2006] No.10 implemented on 27 June 2006;《财政;部、国家税务总局关于基本养老保险费基本医疗保险费失业保险费住房公积金有关个人所得税政策的通知》(财税[2006]10号)第1条,自2006年6月27日起施行.

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Below we will explain how the initial setup and monthly process for payment of contributions operates in practice. We will first explain the steps that should be followed to register at the social insurance bureau before turning to the housing fund bureau. As the process is slightly different across different cities in China, we use the situation in Beijing as an example.

Procedure for Registration at the Social Insurance Bureau 1. A social security number for the company should be obtained. The following documentation must be presented at the social security bureau between the 1st and the 20th of the month (no social security numbers will be issued after the 20th): • • • • •

Company business license (original and copy) Enterprise code certificate (original and copy) Certificate of approval (original and copy) ID of the legal representative or person in charge of the company (copy) Social insurance information collection form (two copies) If a branch of the company is being setup the following documentation is also required:

• Parent company’s business license and enterprise code certificate (copy) • Power of attorney affixed with company chops (original) 2. After receiving the company social security number, details relating to the employees should be inputted into software provided by the social insurance bureau. One key piece of information will be the salary details for each employee as this will determine the base on which monthly contributions shall be made. 3. Information inputted into the software should be saved onto a USB flash drive and physically taken to the social insurance bureau. This completes registration for medical insurance (one component of the five mandatory insurances). 4. After receiving confirmation that medical insurance registration has been completed, various forms can be filled out to register each employee for the other four mandatory insurances. They need to be submitted to the social insurance bureau between the 6th and 25th of the month. 5. A contract should be completed with the company’s bank to ensure that the monthly social security contributions can be directly remitted to the social insurance bureau each month. Note that the first payment of social security contribution must be made via a check issued from the company—it cannot be automatically debited until the second month. Only bank accounts opened at specific banks can be used to make these automatic contributions.

3 Managing the Payment of Social Security Contributions

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6. A visit to the bureau will be necessary every month if the company has any new hires or people leaving the company, as registration and deregistration cannot be handled online in Beijing (at the time of publication of this book). Fines can be imposed by the social security bureau for late payment of contributions by an employer, although these are rarely imposed. More of a concern for employers is the fact that if one of their staff has an accident at work and the necessary contributions have not been made, then there is a possibility that the company will be liable for the costs and expenses incurred.16

Procedures for Registering at the Housing Fund Bureau The nature of 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 it is treated separately and governed by a different bureau. The steps to complete the procedure are explained below: 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 the company’s bank to allow automatic contribution of housing fund each month. Note that the first payment of housing fund contribution must be made via a check issued from the company—it cannot be automatically debited until the second month. Note that only bank accounts opened at specific banks can be used to make these monthly contributions. 4. A visit to the bureau will be necessary every month if the company has any new hires or people leaving the company, as registration and deregistration cannot be handled online in Beijing (at the time of publication). When employees elect to use their housing fund a trip must also be made to facilitate this.

16

Article 31 of Beijing City Occupational Injury Insurance Implementation Measures implemented on 1 January 2004;《北京市实施 \工伤保险条例 [ 办法》第31条,自2004年1 月1日起施行.

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It is an unfortunate fact that online systems for registration of employees with the social insurance bureaus are still not available in many parts of China. As you can see from the above explanation, even Beijing has not organized itself sufficiently well to cope with online registrations. 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 to an agent. In summary, managing the process of social security payments can be a very time-consuming task. In every city in China there are agents that can assist with this work, usually charging between US$10 and US$50 per individual per month depending on the total headcount of the company. Some agents can communicate with the company as part of a more comprehensive payroll service, while the best ones can provide the service entirely in English if necessary. This enables the HR department abroad as well as the foreign managers at a company to clearly understand all the details of their payroll. As a general rule, a company with less than 1,000 employees will normally find it worthwhile to outsource this function. Some larger companies will also decide to outsource the role to maintain confidentiality.

4 Payment Via EFT and Bank Accounts Once social security contributions have been deducted and individual income tax calculated the company is ready to pay net salary to its employees. The vast majority of companies handle this via electronic funds transfer (EFT). Online banking is now widely available in China for corporations. 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 but normally of no more than one day. In addition to the time saved in uploading one EFT file which includes details of each employee’s net take home pay, processing salary via such a ‘‘batch’’ transaction 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. This is usually the HR manager at the company. There are several points that companies should consider when they choose a bank to handle these EFT payments: 1. Do not use a local (regional) bank. Such banks sometimes lack the resources to develop a fully-functioning, user-friendly online banking system. Furthermore,

4 Payment Via EFT and Bank Accounts

2.

3.

4.

5.

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transactions are likely to be processed manually using local staff, reducing the level of confidentiality of the payroll. If you use a larger domestic bank it is likely that their web site will not be fully functional in English. For smaller companies with foreign managers this may be inconvenient as the manager may have to rely on an assistant to complete transactions through the online site. Also bear in mind that domestic banks will usually not have staff who can explain in English the various procedures and restrictions involved in banking in China. The format of the EFT file currently used by most domestic banks is extremely simple. It can be as basic as just two columns in an Excel sheet—one column with the bank account number of the employee and the second with the amount. The danger for the company is that the employee or the HR manager supplies an incorrect account number to the bank, and as a result the salary goes to the wrong person’s account. The bank will try to recover money transferred incorrectly in this way, but the ultimate responsibility lies with the company providing the information. At a minimum, such instances will cause a delay in the employee receiving their salary. In contrast, the EFT files for foreign banks in China can be quite complex. There is no chance of sending money to the wrong account because the system cross-references other information included in the EFT file such as the account holder name and the address of the bank. If the company is processing payroll internally it can take more effort to generate this file, especially if no specialist software is used to prepare it. At the time of writing this book the EFT functionality of certain Chinese banks is still quite limited. For instance, when using the China Construction Bank system, it is not possible to pay to accounts that are not held with the China Construction Bank. We recommend that companies research the ability of the bank’s systems when choosing their bank. Certain foreign banks new to the Chinese market have not yet developed the infrastructure to handle such batch payments online. Others provide a batch payment service for payroll only to larger clients. Fees for online banking facilities are also likely to be higher than for domestic banks.

As a final point, salary payments in China are supposed to be handled through the company’s main operating bank account.17 In this way the payments can easily be classified as salary payments. In practice this is not always possible. 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 17

Article 4 of Bank Account Administration Regulations implemented on 1 November 1994; 《银行账户管理办法》第4条,自1994年11月1日起施行.

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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. While there are many HR agents around the country claiming to be large state-owned enterprises with a long track record and solid credit ratings (many use the catch-all term ‘‘FESCO’’ in their title, see Chapter “Issues to Consider When Initially Hiring Staff”, Sect. 1), in reality some of these are just small companies owned by a few individuals. We suggest companies that use such services find out the exact nature of the agent, especially if employees’ salary will be paid to such an organization.

5 How to Calculate Individual Income Tax Payment 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. It is payable monthly. The lowest level of IIT is 5%, levied on the portion of taxable monthly income between RMB1 and RMB500. The highest rate is 45%, payable on the portion of taxable monthly income above RMB100,000.18 Please see the table below for a summary of the rates levied at each income category and the quick deduction figure, which is subtracted from ‘‘taxable income * tax rate’’ to derive the total amount payable. Tax rate for individual income tax calculations Grade Monthly taxable income (RMB) 1 2 3 4 5 6 7 8 9

\ 500 C 500 and \ 2,000 C 2,000 and \ 5,000 C 5,000 and \ 20,000 C 20,000 and \ 40,000 C 40,000 and \ 60,000 C 60,000 and \ 80,000 C 80,000 and \ 100,000 C 100,000

Tax rate (%)

Quick deduction

5 10 15 20 25 30 35 40 45

0 25 125 375 1,375 3,375 6,375 10,375 15,375

Taxable income for Chinese employees = gross salary - mandatory benefit contributions RMB2,000 Taxable income for foreign employees = gross salary - RMB4,800

18

Tax Rate Table Supplement to the Individual Income Tax Law implemented on 1 March 2008;《中华人民共和国个人所得税法-个人所得税税率表一》,自2008年3月1日起施行.

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The actual IIT calculation for monthly salary income is fairly straightforward— on the following table we have included an example of the calculation based on the amount of taxable income declared. 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 – RMB2,000 IIT calculations Gross salary for foreign staff (includes any taxable fringe benefits)

Deduction Taxable income

Tax rate (%)

Quick Payable deduction IIT

5,000.00 6,000.00 11,000.00 25,000.00 50,000.00 80,000.00 100,000.00 150,000.00

4,800.00 4,800.00 4,800.00 4,800.00 4,800.00 4,800.00 4,800.00 4,800.00

5 10 20 25 30 35 40 45

0 25 375 1,375 3,375 6,375 10,375 15,375

200.00 1,200.00 6,200.00 20,200.00 45,200.00 75,200.00 95,200.00 145,200.00

10.00 95.00 865.00 3,675.00 10,185.00 19,945.00 27,705.00 49,965.00

Deduction Taxable Gross salary for Chinese staff income (includes fringe benefits but employee’s social insurance contributions already deducted)

Payable Tax Quick rate deduction IIT (%)

2,200.00 5,000.00 6,000.00 11,000.00 25,000.00 50,000.00 80,000.00 100,000.00 150,000.00

5 15 15 20 25 30 35 40 45

2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00

200.00 3,000.00 4,000.00 9,000.00 23,000.00 48,000.00 78,000.00 98,000.00 148,000.00

0 125 125 375 1,375 3,375 6,375 10,375 15,375

10.00 325.00 475.00 1,425.00 4,375.00 11,025.00 20,925.00 28,825.00 51,225.00

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

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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. Please refer to Chapter “Issues to Consider When Initially Hiring Staff”, Sect. 6 for details of deductible allowances for foreign employees. In theory, foreigners are also allowed to deduct social welfare contributions that they are required to make in their home country from taxable income in China. Unfortunately in practice this is quite hard to achieve as documentation must be provided to and approved by the local tax bureau evidencing the mandatory nature of these payments before they can be deducted.

Individual Income Tax Bonus Treatment All 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. Total amount of bonus/12 2. Cross-reference taxable rate and quick deduction amount from table in Sect. 5 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 follow (please note that the calculations below assume that the employee will receive their current month’s salary and that this is over RMB2,000 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 15% with a quick deduction amount of RMB 125.00 (on the following table we show a comparison of the tax saving that can be made by paying some portion of salary in the form of an annual bonus) 2. Calculate the total IIT for the annual bonus: RMB50,000 9 15% - 125 = RMB7,375

5 How to Calculate Individual Income Tax

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3. For the annual bonus calculation there is no fixed tax deductible amount for either Chinese or foreigners (unlike for monthly salary, where RMB2,000 or RMB4,800 may be deducted) One key point is that the annual bonus declaration can only be made on one of the 12 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 Entities Note 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—based 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. One final IIT treatment relates to severance pay. Chapter ‘‘Terminating the Employment Relationship’’ of this guide is devoted to issues relating to termination of employees, and we have included discussion of calculation of severance pay within that chapter. Net salary in China Example: Mr. Brown was transferred from a U.S. HQ to a China subsidiary. In 2009, he stayed in China for 365 days. His annual salary (after non-taxable deductions) is RMB1,320,000. If the annual salary is separated into twelve equal monthly payments Monthly salary RMB110,000 Tax paid by Mr. Brown [(110,000 – 4800) 9 45% – 15,375] 9 12 = RMB383,580 If the annual salary is separated into a lower monthly salary and one lump sum annual bonus Monthly salary RMB80,000 Annual bonus RMB360,000 Tax payable on salary [(80,000 – 4,800) 9 35% – 6,375] 9 12 = RMB239,340 Tax payable on annual 360,000/12 = 30,000 therefore the tax rate is 25% (refer to table in bonus Sect. 5) Tax payable 360,000 9 25% – 1,375 = RMB88,625 Total IIT 239,340 ? 88,625 = RMB327,965 Annual tax saving 383,580 – 327,965 = RMB55,615

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6 Filing of Individual Income Tax and Automatic Deduction from Bank Account Nowadays 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), but usually they only have to be made quarterly or annually. In this section we will explain the process for making the filings as well as how the tax bureau receives the payment every month.

IIT Online Filing To make online filings of IIT the company will generally require: 1. A special USB Key issued by the local tax bureau 2. A piece of software installed on a computer to facilitate the online filing 3. 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 seven working days of the month.19 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. 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. After the deadline day for submission of IIT the tax bureau will directly deduct the amount of IIT filed from the bank account of the company. A precondition to this occurring is that 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.

19

Article 9 of the Individual Income Tax Law implemented on 1 March 2008;《中华人民共和国个人所得税法》第9条,自2008年3月1日起施行.

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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 Filings Depending on the city, physical filings of IIT are necessary periodically. Assuming online filings have already been made by the company, all that is required for the physical filing is: 1. From the tax bureau software print out the details of the IIT payments for each individual for each of the months required 2. Stamp each document with the company chop 3. Take to the local tax bureau for submission It is also possible for companies to make physical filings every month instead of online filings. 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. A visit to the bank with a form issued and stamped by the tax bureau will be necessary. The bank will receive this form and the payment. This 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.

7 Requirement for Declaration of Annual Income A relatively recent requirement for certain people earning income from China is to make a personal declaration of the total amount of their income during the past financial year. This declaration should be made by the end of March of the following year.20 We have included a copy of the annual IIT declaration form at the

20

Article 15 of the Individual Income Tax Self Declaration Methodology (Trial) implemented on 1 January 2007;《个人所得税自行纳税申报办法(试行)》第15条,自2007年1月1日起施行.

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end of this chapter for your reference. 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. The annual declaration should be made by anyone who has income from specified sources in China in excess of RMB120,000 during the financial year (January 1 to December 31).21 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.22 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

Because 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. What the employer should do at the end of the year is 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.

8 Outsourcing of Payroll As mentioned earlier in this section, more and more companies are turning to third parties to handle their payroll in China. Common reasons for doing this include:

21

Article 6 of the Individual Income Tax Self Declaration Methodology (Trial) implemented on 1 January 2007;《个人所得税自行纳税申报办法(试行)》第6条,自2007年1月1日起施行. 22 Article 4 of the Individual Income Tax Self Declaration Methodology (Trial) implemented on 1 January 2007 and Article 3 of the Implementation Rules for the Individual Income Tax Law implemented on 28 January 1994 and Revised on 18 February 2008;《个人所得税自行纳税申报办法(试行)》第4条,自2007年1月1日起施行和《中华人民共和国个人所得税法实施条例》第3条,自1994年1月28日起施行,2008年2月28日修改.

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Increased efficiency. Providers 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 confidentiality. Obviously, 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 liability. Outsourcing 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 outsourcer by the agreed deadline, any responsibility for under-reporting of tax or penalty for late filing should be the responsibility of the outsourcing company. Decreased cost. While the costs of outsourcing are quite obvious, they should be carefully compared 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.

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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 Procedure There are several distinct steps during a payroll processing operation: Step 1: Submission of payroll input information by company This 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 security 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 security payments. The payroll processor will send this file back to the internal HR manager at the company for approval. Step 3: Approval of payroll data The 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. Assuming everything is in order, the HR director will approve the payroll. Step 4: Generation of all other payroll-related reports The payroll calculations are now approved and the payroll processor can run the other reports from the system. These can include, but are not limited to, the following reports: (a) (b) (c) (d) (e)

Electronic funds transfer (EFT) file Payslips (printed on special security paper) General ledger file for uploading into the financial system Cost center report IIT online filing document


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Step 5: Processing of reports Again, this 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 uploading through a secure online portal and using a password provided by the bank. (b) The payslips are couriered to the various offices, or in some instances to the home addresses of employees. (c) The general ledger file is sent back to the HR department of the company, and then forwarded onto the finance team for consolidation via upload 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 funds The final step is for the company to approve the payment of salary via online banking (finance team only need to see the total amount, not the individual payments) and ensure that there are enough funds in the relevant account to cover the payment of salary, mandatory benefit and individual income tax. As a general rule the processing takes between six and 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. The agent should be able to handle all communications with your local HR team through e-mail and in English, allowing management to monitor what is happening 2. The agent should have a reliable, customizable software system that can meet all the reporting requirements for your organization 3. The agent should not have any direct contact with anyone but the members of the HR team at the company and their supervisors. The agent should not be contacting other employees within your company 4. The agent should process the payroll from a remote location, preferably not in the same city as the client; only one or two people should be involved in the daily processing work 5. The agent 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

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Instructions 1. This return is designed in accordance with The Individual Income Tax Law of the People’s Republic of China, The Implementing Rules of the Individual Income Tax Law of the People’s Republic of China and The Rules Concerning Individual Income Tax Self Declaration (provisional), and is applicable for individuals with an annual income of reach RMB120,000. 2. Taxable individuals are obliged to fill out and submit the return to the local tax authority within 3 months after the end of the tax year, either by themselves or other entrusted prepares. In case of inability to file the return within the

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prescribed time limit, an application should be submitted to the local tax authority within prescribed time limit and upon the tax authority’s approval, the filing deadline may be extended. 3. The return should be filled out in Chinese or in both Chinese and a foreign language. 4. Instructions for filling out various items: (1) Year of income incurred and Date or filling: Year of income incurred: The year in which the taxpayer receives the income.Date or filling: the actual date when the return is filed. (2) ID type: The name of the valid identification certificate of the taxpayer(ID Card, passport, solider certificate, military officer certificate, returning permit, etc.) (3) ID number: The number of the valid identification certificate of the taxpayer. (4) Employer: The taxpayer’s employer. The name of the employer for the reporting shall be filled if there are more than one employer. (5) Employer’s tax ID code: The ID code of the taxpayer’s employer registered at tax authority either as a taxpayer or as a withholder. (6) Industry of employer: The industry a taxpayer’s employer belongs to. It should fall into the general categories of the Categorization of National Economy Industries. (7) Title: The taxpayer’s official rank at his/her employer. (8) Profession: The main profession of the taxpayer. (9) Days of stay in China: The actual days stayed in China by a taxpayer without a permanent residence during the tax due period. (10) Address in China: The address or the effective contacting address of the taxpayer. For a person without a residence who lives in a hotel, it means the room number and hotel name. (11) Taxpayer’s tax ID code and taxpayer’s name: Tax ID code of the business: The number on the tax registration certificate. Name of the business: The name of the taxable self-employed industrial and commercial households, individually-invested enterprises, partnerships, individually-invested or partner-invested private non-enterprises, or enterprises or social service providers partly or wholly funded by state assets under contracted or leased operation.


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(12) Annual income: The total amount of the corresponding items of income in the tax year. The annual receipts income is calculated in accordance with The Implementing Rules of the Individual Income Tax Law of the People’s Republic of China and the Law of the People’s Republic of China Concerning Administration of Collection. The calculation shall be in RMB. Those in foreign currencies shall be converted to the RMB on the basis of the foreign exchange rate quoted by the competent state foreign exchange authority. (13) Taxable income: The part of an income which is subject to the individual income tax. (14) Tax pre-paid and withheld: The amount of the tax paid or withheld for the current items of income within China. (15) Tax credit: The amount of individual income tax paid outside China that it to be credited against in accordance with the Individual Income Tax Law. (16) Tax exempted or deducted: The amount of individual income tax which is to be exempted or deducted in accordance with the Individual Income Tax Law. (17) There shall be two original copies of this table in A4 format. One is for the taxpayer and the other is for the tax office for record.

Managing the Employment Relationship

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. This chapter 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.

1 Performing Periodic Appraisals Once 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. As we will explain in Chapter ‘‘Terminating the Employment Relationship’’, 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, considered not 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


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the probation period and then at 6-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 both the manager and the employee. Appraisal records should 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 are 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. We include an example of a probation appraisal form on the following page for your reference.

2 Long-Term Sick or Injured Employees It is inevitable that as your company grows in China a small portion of your workforce will fall ill or suffer some injury on certain occasions. This section describes what the responsibilities are for the employer in such situations. Assuming the employer and employee have been making their contributions under the social insurance system (explained in detail in Chapter ‘‘Issues to Consider When Initially Hiring Staff’’), 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. The period of responsibility for payment of salary and the proportion of salary to be paid each month are decided by the number of years the employee has worked for the company. Some of these regulations are made at a local level, therefore in the below analysis we will make a comparison of the situation in two major Chinese cities—Shanghai and Beijing.

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Shanghai Recuperation Period (during which the employer is responsible for paying salary to the employee): a minimum period of 3 months plus 1 month for every year of service to the company from the second year onward, with a maximum of 24 months.1 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; 《关于本市劳动者在履行劳动合同期间患病或者非因工负伤的医疗期标准的规定》第2条,自2002年5月1日起施行.

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Example: An employee serving for a full 6 years would be eligible to receive salary for 8 months after the commencement of an illness/injury (3 months plus 1 month for every year after completion of the first full year). After this period the employer would in most cases be able to terminate the labor contract with the individual.

Amount of salary payable during sickness or injury leave period The amount will be a proportion of the employee’s actual salary determined in accordance with the chart on the following page. The proportion is higher during the first 6 months of the sickness or injury leave and lower for subsequent months. Note that the base salary is as stipulated in the employment contract, and does not have to include income classified as allowances, bonuses or overtime.2

Example: In the case above the employee would receive 56% (80 of 70% of their total salary) of their normal base salary for the first 6 months of their illness or injury. In the seventh and eighth months they would receive 42% (60 of 70% of their total salary). The following points should also be taken into account: ●

2

If the amount payable to the employee during this period of illness or injury each month is greater than the average monthly social salary in Shanghai for that

Article 1 of the Shanghai Labor Bureau’s Bulletin in Relation to Calculation of the Salary During the Sick Leave Period implemented on November 1 2004;《上海市劳动局关于病假的工资计算的公告》第1条,自2004年11月1日起施行.


●

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●

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year (RMB3,566 in 2010) 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% of the minimum wage (RMB1,100 in 2010)4 The minimum payment that should be made to the employee should not be lower than 40% of the average salary paid to all employees in the company, unless this amount is higher than the social average salary for Shanghai5 A separate Shanghai regulation stipulates that 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), it should make a one-off payment equal to at least 6 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 12 months, including allowances, overtime and bonuses; the regulation does not mention whether or not this shall be limited by 300% of the average social salary for Shanghai)6 The employer shall also pay 1 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 monthly salary exceeded 300% of the average social salary for Shanghai then the calculation should be based on 300% of the average social salary figure)7 If the internal company rules stipulate that sick or injured employees should receive higher compensation than the above regulations indicate, these internal rules must be followed

To summarize this example, the payments that the company should make to our employee introduced above (who worked for the company for 6 full years—we assume at the end of the 8 months sick/injury leave period he was unable to make a recovery), the company should burden the following: ● ●

3

Payment of 64% of base salary for first 6 months of illness or injury, limited by the average social salary in Shanghai for that year Payment of 42% of base salary for the final 2 months of illness or injury, limited by average social salary in Shanghai for that year

Ibid. Ibid. 5 Article 1 of the Shanghai Labor Bureau’s Bulletin in Relation to the Calculation of Illness Holiday Salary 《上海市劳动局关于病假的工资计算的公告》. 6 Article 44 and Article 45 of Shanghai City Labor Contract Implementing Rules, implemented on May 1 2002;《上海市劳动合同条例》第44条及第45条,自2002年5月1日起施行. 7 Article 40 and Article 46 the Employment Contract Law implemented on January 1 2008;《中华人民共和国劳动合同法》第40及46条,自2008年1月1日起施行. 4

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Payment of 6 months of full salary upon termination (medical expense compensation) Payment of 6 months of full salary upon termination (payable to all employees who are released by the company—1 month for every year served). The monthly payment is limited by three times the monthly average social salary in Shanghai for that year.

You can see from the above that 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.

Beijing Recuperation period (during which the employer is responsible for paying salary to the employee).8 ●

Employees with a cumulative number of working years below 10: Cumulative working time at current company\5 years ¼ 3 months Cumulative working time at current company [ 5 years ¼ 6 months

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Employees with a cumulative number of working years above 10: Cumulative working time at current company\5 years ¼ 6 months 5 years\cumulative working time at current company \10 years ¼ 9 months 10 years\cumulative working time at current company\15 years ¼ 12 months 15 years\cumulative working time at current company\20 years ¼ 18 months Cumulative working time at current company [ 20 ¼ 24 months

The same regulation also explains that the recuperation period does not have to be taken all in one period. We will not go into detail here, but instead take the shortest recuperation period of 3 months as an example. The 3 months recuperation period is calculated from the cumulative amount of sick leave taken during a 6 month period Therefore 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 3 months of sick leave is used in any 6 month period

8 Article 3 of the Regulations on the Recuperation Period for Illnesses or Non-work Related Injuries for Workers at Enterprises implemented on January 1 2004;《企业职工患病或非因工负伤医疗期规定》第3条,自2004年1月1日起施行.


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Example: An employee serving for a full 6 years would be eligible to receive salary for 6 months after the commencement of an illness or injury. After this period the employer would in most cases be able to terminate the labor contract with the individual.

Amount of Salary Payable During Sickness or Injury Leave This is much lower than the payments necessary in Shanghai. The employer is only required to pay at least 80% of the minimum salary for the city of Beijing, unless anything in the labor contract specifies that a higher amount should be paid.9 Example: In the above case the employee would receive at least 80% of the Beijing minimum wage (80% of RMB960 in 2010) during their 6 month recuperation period. The following points should also be taken into account: ●

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A separate Beijing regulation stipulates that 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 oneoff payment to the employee as economic compensation; this compensation payment should be equal to 1 month of salary for every year worked at the company10 At the same time, a 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 6 months of salary and should be increased by at least 50% in the case the illness is defined as “serious” and by at least 100% in the case the illness is defined as “terminal” 11 The employer shall also pay 1 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)12

9 Article 21 of Beijing City Salary Payment Regulations implemented on January 22 2004;《北京市工资支付规定》第21条,自2004年1月22日起施行. 10 Article 6 of the Notification of Economic Compensation Methodology for Labor Contracts that are Violated or Terminated implemented on January 1 1995;《关于印发〈违反和解除劳动合同的经济补偿办法〉的通知》第6条,自1995年1月1日起施行. 11 Ibid. 12 Article 40 and Article 46 of the Labor Contract Law implemented on January 1 2008;《中华人民共和国劳动合同法》第40及46条,自2008年1月1日起施行.

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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.

To summarize this second example, the payments that the company should make to our employee introduced above (who worked for the company for six full years and had no previous working experience—we assume at the end of the 6 month sick or injury leave period he was unable to make a recovery), the company should bear the following burden: ● ● ●

●

Payment of 80% of Beijing city minimum wage for 6 months Payment of 6 months of full salary upon termination (economic assistance) Payment of a further 6 months of full salary upon termination (medical expense compensation), possibly rising to nine or 12 months depending on the definition of their condition Payment of 6 months of full salary upon termination (payable to all employees who are released by the company—1 month for every year served); the monthly payment is limited by three times the monthly average social salary in Beijing for that year.

You can see from the above that the total amount payable for such an employee could rise to more than 24 months of the employee’s salary. One major difference 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. 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. Any work-related injuries should be covered by Occupational Accident insurance—one of the components of the Chinese social insurance system. For such work-related illnesses or injuries the employer or the individual will usually pay medical expenses up-front before being reimbursed by the insurance fund.

3 Pregnant Employees While 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 security system. The salary paid to the

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employee will equal the individual’s current month mandatory benefit contribution base divided by 30 and multiplied by the number of maternity leave days.13 The employee will generally be allowed to receive this payment for a period of 90 days.14 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. Upon her return, the employee may work for 1 h less than the normal number of daily working hours until the baby reaches 1 year old.15 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. Please refer to Chapter ‘‘Terminating the Employment Relationship’’ for more information on what we mean by “adequate justification”. The employer also cannot terminate a female employee with a child under 1 year of age or require her to work overtime.16 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 security bureau.17 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.18 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.19 Many women will choose to rejoin the labor force after the maternity period. Therefore, we can conclude that, compared with other countries,

13

Article 15 of the Beijing Enterprise Employee’s Maternity Insurance Regulations implemented on July 1 2005;《北京市企业职工生育保险规定》第15条,自2005年7月1日起施行. 14 Article 14 of the Beijing Enterprise Employee’s Maternity Insurance Regulations implemented on July 1 2005;《北京市企业职工生育保险规定》第14条,自2005年7月1日起施行. 15 Article 9 of the Female Employee Labor Protection Regulations implemented on September 1 1988;《女职工劳动保护规定》第9条,自1988年9月1日起施行. 16 Article 4 and Article 10 of the Female Employee Labor Protection Regulations implemented on September 1 1988;《女职工劳动保护规定》第4及10条,自1988年9月1日起施行. 17 Article 33 of the Shanghai Population and Family Planning Regulations implemented on April 15 2004;《上海市人口与计划生育条例》第33条,自2004年4月15日起施行. 18 Article 18 of the Population and Family Planning Law implemented on September 1 2002; 《中华人民共和国人口与计划生育法》第18条,自2002年9月1日起施行. 19 Article 17 of the Beijing Population and Family Planning Clauses implemented on September 1 2003;《北京市人口与计划生育条例》第17条,自2003年9月1日起施行.

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the direct financial effect on the company due to female employees taking pregnancy leave will be relatively low.

4 Labor Unions As 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, although there is one centralized organization called the All China Federation of Trade Unions (ACFTU) that as of June 2008 boasted approximately 210 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.20 Labor unions not affiliated to the ACFTU are deemed illegal unless formal approval is received from the relevant authorities.21 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 less 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% 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).22 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. 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

“Number of ACFTU affiliated members reaches 210 million”, People’s Daily Online 13th Oct. 2008“全国工会会员总数达两亿一千万”, 人民网,2008年10月13日. 21 Article 35 of the Administration Rules on the Registration of Social Unions issued by the State Council implemented on October 25 1998;《社会团体登记管理条例》第35条,自1998年10月 25日起施行. 22 Article 21 of the Trade Union Law implemented on October 27 2001,《中华人民共和国工会法》第21条,自2001年10月27日起施行. 20

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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% of salary to the union fund, the following are the most important: ●

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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 writing23 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 union24 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 meetings are held to discuss issues that will directly affect the interests of the employees (salary, work safety and hygiene, social security), a representative from the union should be in attendance25 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 union26 A certain amount of time must be allowed during working hours for nondedicated members of the labor union committee (there are very few foreigninvested companies with dedicated labor union representatives) to carry out their responsibilities; this time allowance should not exceed 3 days per month27

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

23

Article 42 of the Trade Union Law implemented on October 27 2001,《中华人民共和国工会法》第42条,自2001年10月27日起施行 24 Article 4 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第4条,自2008年1月1日起施行 25 Article 38 of the Trade Union Law implemented on October 27 2001,《中华人民共和国工会法》第38条,自2001年10月27日起施行 26 Article 18 of the Trade Union Law implemented on October 27 2001,《中华人民共和国工会法》第18条,自2001年10月27日起施行. 27 Article 40 of the Trade Union Law implemented on October 27 2001,《中华人民共和国工会法》第40条,自2001年10月27日起施行.

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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.

Terminating the Employment Relationship

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. For this reason we start this chapter by introducing some of the more important pieces of documentation before moving on to explain the situations under which employees can be terminated.

1 The Importance of Documentation In most countries the legal system will tend to be more sympathetic towards the employee than the employer in cases where employment disputes arise. China is no exception to this rule. The burden of proof will fall primarily on the company. For this reason it is critical that the employer organizes all documentation relating to its employment relationships in a thorough and consistent manner. In this section, we would like to summarize the most important pieces of documentation that should be retained as well as some of their key components.

At the Hiring Stage The documentation trail should start with at the point of hiring an employee. Obviously one key document is the labor contract, and we have covered this in Chapter ‘‘Issues to Consider When Initially Hiring Staff’’. In addition the following documentation should also be organized at or prior to commencement of employment:


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1. Offer letter/letter of intent To be signed by the employee prior to commencement of employment and signing of the official labor contract. It should contain at least the following information: ● ● ● ● ● ● ● ● ● ● ● ●

Date of issuance and deadline for acceptance Position offered and main responsibilities (as specific as possible) Term of the proposed contract and the probation period Work location Details of total compensation Details of annual leave provided Provision of commercial insurance (if any) Terms of payment of any bonuses Disclaimer relating to reference check Disclaimer relating to medical examination Necessity of signing a confidentiality agreement/non-competition agreement Signature of the prospective employee

2. Confidentiality agreement Such an agreement will normally cover corporate secrets. For some positions companies may also want to set terms relating to ownership of patents for inventions created by employees. This should be signed at the same time as the labor contract. 3. Non-competition agreement The purpose of this agreement is to prevent an employee working for a competitor after terminating the labor relationship with the company. It is usually used only for senior positions within the organization. Under current labor laws the maximum period that can be imposed under such a contract is 2 years.1 During that period, the company should pay to the employee an agreed-upon amount specified in the non-competition agreement. If the company fails to do this then the agreement becomes invalid. This agreement should also be signed at the same time as the labor contract. 4. Checklist to ensure completion of all new hire procedures This is an internal document detailing all the steps that should be completed when a new employee joins the company. Each individual step should be signed as completed by both a HR department person and the employee. One person within the HR department should be made responsible for ensuring all new hires complete these procedures within a certain time frame. 5. Employee handbook The employee should clearly sign on the new-hire procedural checklist to confirm receipt of the employee handbook. As mentioned elsewhere in this guide, the employee handbook is a critical piece of documentation explaining the rules of the company and the degree of seriousness of various infringements. For it to be an

1

Article 24 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第24条,自2008年1月1日起施行.

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effective tool for the company it is necessary to prove that it has been safely received by the employees. 6. Employee registration The objective of this form is to make the employee personally responsible for the information that they are providing to the company about their background. It should be filled in and signed by the employee when the company issues the offer letter. Information included should be as follows: ● ● ● ● ● ● ● ● ● ●

Name of the employee (in Chinese as well as English), position applied for and proposed date of commencement Contact details Various personal information (including official ID number) Educational background Other professional certificates Work history Whether or not the employee has been disciplined by a previous employer (and if so, details) 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

At the bottom of this document 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, for instance, 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. 7. Job description This may be added as an attachment to the labor contract in order to serve as a reference.

At the Probation Stage Before conclusion of the probation period the company will need to make an assessment of the employee’s performance. It is recommended that this assessment is as objective and transparent as possible. It should include: 1. A form describing the main tasks carried out by the employee during the probation period and the degree to which they were completed (in the opinion of the supervisor). This should be signed by both the supervisor and the employee

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2. A separate form to be filled out by the employee on probation detailing their opinions relating to job performance. This should also be signed by both the employee and the direct supervisor 3. A probation evaluation form to be filled out by the supervisor. This form should evaluate the employee on several standardized bases. It may use a points system as a reference to objectively judge the employee’s performance. It should also include a recommendation by the supervisor concerning whether the employee should be accepted for the position, transferred to another position or dismissed. The employee should sign on the document to either agree or add comments, and a member of the HR department should also sign (see Chapter ‘‘Managing the Employment Relationship’’, Sect. 1).

At Labor Contract Renewal 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

At Promotion or Transfer 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. In such a 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.

At Resignation or Termination Finally, upon resignation or termination of an employee it is necessary to organize a few pieces of documentation.

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1. The resignation letter from the employee or the letter of termination from the employer. 2. An employment termination checklist form, which will ensure all the necessary steps the company must take are completed before payment of final compensation to the employee. These include: ● ● ●

Returning all items owned by the company Repaying any outstanding amounts owed to the company Closing the e-mail account of the employee and removing access to internal systems

3. A compensation detail list that will show the employee how the company has calculated compensation due to the employee. Sometimes this amount will be based on regulations set out in the labor contract law and other regulations. On other occasions it will be based on negotiations between the two parties. In both cases it is necessary to receive the signature of the employee on this document to acknowledge their agreement concerning the amount of compensation. As you can see, there is a lot of documentation that should be organized for each employee. Naturally there is a cost associated with drafting and maintaining all this information. The costs associated with not preparing well can be much higher. We would recommend any company employing more than a handful of staff to ensure they keep a file on each employee that includes the above information.

2 Terminating an Employee During the Probation Period In Chapter ‘‘Issues to Consider When Initially Hiring Staff’’ we introduced the lengths of probation period that may be provided to employees based upon the length of the fixed-term contract that they signed. We reproduce the information here for your easy reference: ● ● ● ● ●

If the term of the contract is less than 3 months then there shall be no probation period If the term of the contract is longer than 3 months, but shorter that 1 year the maximum length of probation period is 1 month If the term of the contract is between 1 year and 3 years the maximum length of probation period is 2 months If the term of the contract is over 3 years the maximum length of probation period is 6 months If you offer your employees an open-term contract (not recommended initially) the maximum length of probation will also be 6 months

Before 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.’’

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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 We have already introduced the probation period appraisal form in Chapter ‘‘Managing the Employment Relationship’’, Sect. 1. This 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.

3 Terminating an Employee During the Period of a Fixed-Term Contract Upon 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

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if they intend to resign from the position, the employer has a higher hurdle to overcome when terminating an employee. First of all, let us look at the circumstances under which an employer can terminate an employee immediately and with no additional compensation2: 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. As we discussed in Chapter ‘‘Issues to Consider When Initially Hiring Staff’’, Sect. 7, 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 demonstrate the reason for that 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 (see Chapter ‘‘Issues to Consider When Initially Hiring Staff’’, Sect. 5). 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 would suggest employers to insist that prospective employees present originals of graduation

Article 39 of the Labor Contract Law implemented on January 1 2008, 《中华人民共和国劳动合同法》第39条,自2008年1月1日起施行. 2

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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 us 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. See Chapter ‘‘Managing the Employment Relationship’’, Sect. 2). 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, which makes 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. Please see the table below.

3 Terminating an Employee During the Period of a Fixed-Term Contract Service period (X)

Compensation

0\X\6 months (but out of probation period) 6 months B X B 1 year 1 year \ X \ 1.5 years 1.5 years B X B 3 years X [ 3 years

Average monthly wage 9 0.5 Average monthly wage Average monthly wage Average monthly wage Average monthly wage (maximum of 12)

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91 9 1.5 92 9 no. of full years served

Additional points ●

●

●

●

The ‘‘average monthly wage’’ is calculated based on the average salary paid to the employee over the previous 12 months3; it does not include social security contributions made by the employer If this average monthly wage exceeds 300% of the average social salary in the area where the business operates, 300% of the average social salary will be adopted to calculate compensation to the employee (see the table on the following page for average monthly salaries in 12 cities around China)4 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 compensation5 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 misperception that in the event an employer unilaterally terminates an employee’s contract with no valid reason, the liability of the

3

Article 47 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第47条,自2008年1月1日起施行. 4 Ibid. 5 Ibid.

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employer is limited to twice the amount of compensation payable under the conditions that the termination was made in accordance with the law (see the rules on compensation above). 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’’ may the company pay double compensation to the employee. We can therefore see that 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% of average social salary provision) Legally stipulated compensation at the end of the contract term (1 month of compensation for each year of service after January 1, 2008 when the current law came into force) Any court costs incurred

Average monthly social salary in various cities around China—2009 City

Amount (RMB)

City

Amount (RMB)

Beijing Chengdu Dalian Guangzhou Hangzhou Nanjing

4,037 2,273 3,231 4,101 2,290 3,008

Ningbo Qingdao Shanghai Suzhou Xian Zhongshan

2,608 2,116 3,566 2,986 2,836 3,014

Sources various social security bureaus Note written documentation hard to obtain, please use as a general guide only

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 1 year of age.6 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.

Article 42 of the Labor Contract Law implemented on January 1 2008, 《中华人民共和国劳动合同法》第42条,自2008年1月1日起施行. 6

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4 Terminating an Employee at the End of a Fixed-Term Contract The 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 2 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 the time of writing of this guide 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 so vague as to introduce a degree of uncertainty. No clarification of this point has yet been provided by the government. As a result, going through 2011 and onwards it is expected that there will be a lot of disputes relating to this issue. 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 Terminating an Employee Holding an Open-Term Contract After the second renewal of a fixed-term contract, or once the employee has worked for the employer for a consecutive period of 10 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. The reasons for dismissal of an employee described in Sect. 3 of this chapter remain valid, however 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 responsible7 If the company carries out hiring activity within 6 months of terminating employees due to adverse business conditions, it should give preference to rehiring those previously dismissed employees8 The company may not terminate employees who have worked for the company for more than 15 years and have less than 5 years remaining until retirement9

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.

6 Severance Pay and its Tax Treatment In the previous sections we have covered issues relating to the compensation payable to employees when they are terminated. In this section we would like to explain the tax treatment relating to payments made to these employees. Before explaining the tax treatment, it is worth pointing out that some companies will offer to pay their employees more than the mandatory amounts for various reasons. These may include: ●

7

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

Article 41 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第41条,自2008年1月1日起施行. 8 Ibid. 9 Article 42 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第42条,自2008年1月1日起施行.

6 Severance Pay and its Tax Treatment ● ●

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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, termination payments can be quite significant. Individual income tax laws prescribe a special treatment for such payments.10 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, and on the following page we demonstrate it with an example. 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% of the annual social average salary for the region in which the company is based from the total compensation package. Please refer to the table on page 116 listing these amounts for several cities around China in 2009 3. Divide the remaining amount by the number of full years the employee has spent with the company 4. Deduct RMB2,000 (RMB4,800 for non-mainland Chinese) from the amount derived in step 3 above 5. Refer to the IIT percentage and quick deduction amount (see Table on page 74) relating to the income level derived in step 4 above 6. Multiply the amount in step 4 above with the IIT percentage indicated in the table on page 74 7. Deduct the quick deduction amount indicated in the table 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 For most employees there will be no tax to pay on this income. Employees that are receiving 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. 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.

10

Notice in Relation to Levying Individual Income Tax on Employee’s Severance Pay implemented on October 1 2001; 《财政部、国家税务总局关于个人与用人单位解除劳动关系取得的一次性补偿收入征免个人所得税问题的通知》, 自2001年10月1日起施行.

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Severance Payment Example John Chen worked for a Beijing-based company (ABC Company) for 20 years and was recently made redundant. ABC Company agrees to pay John one lump sum severance pay of RMB560,000. The previous year’s average social salary in Beijing is RMB48,444. Accordingly John’s individual income for his severance payment will be: 1. Tax exempt severance payment = 48,444 9 3 = RMB145,332 2. Taxable severance pay = 560,000–145,332 = RMB414,668 3. Although John worked at ABC Company for 20 years, the calculation to determine the percentage payable in tax for his severance payment can only consider the first 12 years; therefore 414,668–12 = RMB34,556: referencing from the table, the tax rate is 25% with a quick deduction amount of RMB1,375 4. John’s IIT = ((34,556–2,000) 9 25% –1,375) 9 12 = RMB81,168

Maximum tax free deductions for severance pay—2010 City

Average monthly social salary amount for 2009 (RMB)

Maximum tax-free deduction from severance pay (RMB)

Beijing Chengdu Dalian Guangzhou Hangzhou Nanjing Ningbo Qingdao Shanghai Suzhou Xian Zhongshan

4,037 2,273 3,231 4,101 2,290 3,008 2,608 2,116 3,566 2,986 2,836 3,014

145,332 81,828 116,316 147,636 82,440 108,288 93,888 76,176 128,376 107,496 102,096 108,504

Sources various social security bureaus Note written documentation hard to obtain—please use as a general guide only

7 Mass Layoffs Under certain circumstances it may become necessary for a company to terminate the contracts of a number of staff at the same time due to adverse business conditions. Such an event is known as a mass layoff.

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117

A 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.11 There are several situations in which a company may implement a mass layoff, namely12: 1. The company undergoes restructuring under the enterprise bankruptcy law 2. The company suffers serious problems with production or other business operations 3. 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 nonperformable 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; compensation should be paid to workers laid off in line with the rules explained in Sect. 3 of this chapter

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.

11

Article 41 of the Labor Contract Law implemented on January 1 2008,《中华人民共和国劳动合同法》第41条,自2008年1月1日起施行. 12 Ibid.

Organizing Visas for Foreign Staff in China and Chinese Staff Going 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. In this chapter we focus on the processes involved in getting working visas for foreign employees in China. At the end of the chapter we also add some notes about applying for a foreign visa for Chinese staff.

1 F Visa or Z Visa? 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. In this section we would like to clarify some of the differences between an F visa and a Z visa so that the company can judge which of their employees require which kind of visa. The F visa is commonly referred to as a business visa. It is used by foreign businesspeople who come to China on business but are not employed at a Chinese entity (either domestic or foreign-invested). It is also misused by a lot of foreigners living semi-permanently in China to work illegally. 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 C. Devonshire-Ellis et al. (eds.), Human Resources in China, China Briefing, DOI: 10.1007/978-3-642-18209-9_6, © Asia Briefing Ltd. 2011

119

120

Organizing Visas for Foreign Staff in China

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. In contrast, 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. It can be seen from the above explanation that 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. We will detail the procedure in the following section. 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. The final 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.

2 The Z Visa Application Process 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.

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121

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 with the F visa, to receive a Z visa it is necessary to submit an official invitation letter issued by one of the organs of the government. 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.

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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.

3 The Alien Employment Work Permit and the Alien Employment Certificate In the previous section we explained that the first step in organizing documentation necessary for Z visa application is to achieve an alien employment work permit. This document is often confused with the alien employment certificate, which should be achieved after the employee arrives in China on a Z visa. Here we will explain the difference between the alien employment work permit and the alien employment certificate, as well as detailing some of the documents that need to be provided before the expatriate can receive the alien employment certificate. The alien employment work permit gives the company permission to employ the foreign person. You can think of the document as a kind of authorization for the company to proceed with the hiring of this individual. Based on this document the invitation letter may be issued by the government, and both of these documents can be used when the foreigner applies for the Z visa. In contrast, the alien employment certificate verifies that the labor relationship between the foreign employee and the Chinese employer has been concluded. It can only be achieved after the employee has arrived in China on a Z visa. Below we will introduce some of the necessary documentation that has to be prepared when applying for an alien employment certificate: ● ● ● ● ● ●

Application form Alien employment work permit Business license (original and copy) Labor contract Passport (with Z visa inside) Two passport size photos

Some of these documents need to be stamped with the company chop. After this certificate has been achieved, there is one final big hoop to jump through for the foreign employee. It is the application for the residence permit and we will introduce it in the next section.

4 The Residence Permit Receipt of this permit into the passport of the employee working at the Chinabased 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

4 The Residence Permit

123

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 the family are living in a hotel) Marriage certificate Certificate evidencing relationship of relatives accompanying applicant 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 h 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.

5 Renewing Visas 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:

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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 around 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 issues of foreign staff internally. This will increase the level of confidentiality concerning expat contracts and reduce the possibility of your foreign staff overstaying their visa or facing other visa related problems. ● ●

6 Applying for Visas for Chinese Staff Working at Foreign Affiliates The final topic we cover in this book relates to the increasing trend of sending Chinese employees overseas to work in affiliates of the China entity. Such employees will face greater difficulties than those faced by foreign workers coming to China because visa restrictions imposed by certain countries are much tighter than the Chinese restrictions. When companies with operations in China would like to send certain staff to operations overseas for a period of time what can they do to smooth the visa application process? Naturally, every country has its own regulations about what documentation needs to be submitted for various visa types. In this guide we just focus on one country (the United States of America) and one visa (H1B working visa). While much of the documentation necessary when applying for such a visa should be provided by either the hosting entity in the United States or by the individual themselves, there is also some supporting documentation that can be organized by the affiliate in China which may speed up the visa process. Examples are:

6 Applying for Visas for Chinese Staff Working ● ● ●

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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. Another useful method for companies who wish to occasionally send staff abroad for work or training programs is to join an organization like The American Chamber of Commerce in the People’s Republic of China. Such organizations can help with coordination and provide specific advice for visa applications.

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