China’s labour framework and the underlying HR complications impact foreign investments in the local economy. Hiring employees in China is a delicate and complex process, especially for foreign SMEs that rarely look at putting in place a legal or HR in-house team of counsels, especially in the start-up phase.
Foreign entities located overseas are not allowed to directly hire employees in China, so UK companies indeed need to establish a representative office or a subsidiary in China. The most popular option for foreign companies is a wholly foreign-owned enterprise (WFOE). It’s worth noting that whenever entity incorporation seems like a step too far for an initial presence in China, UK companies can engage a so-called “employer of records,” i.e., a licensed provider that will hire employees under its name in exchange for a fee calculated on their salary’s total company cost.
Global headhunters have a strong presence in the Chinese market but are usually only engaged for middle to senior and high-level management positions given their databases and the fees involved (usually 20% of the candidate’s yearly gross). Companies usually dedicate in-house recruiters to managing online HR platforms (Job.cn, Zhaopin.com, 51job, etc.), where candidates and job-seekers directly upload their CVs and apply for job postings. Recently, social media channels and apps (especially WeChat official accounts) have created a direct link between employers and candidates, especially for companies in the consumer, luxury and fashion industries, or those that are well known in their sector.
Firstly, companies should note that written employment contracts must be in China’s official language: Mandarin. According to the provisions of Article 19 of China’s Labor Law, these are the terms to be included in employment contracts:
China’s wages are coupled with compulsory provident funds (five main categories), a government-run housing fund for rent and mortgage benefits, and individual income tax declaration liabilities, representing an additional burden on the employer’s monthly declarations. Social contributions for work-related injuries, pensions, maternity leave, unemployment, and medical insurance provided by the state are also capped depending on the previous year’s average salary published every summer by each municipality.
Training and induction programmes are usually expected by candidates, especially the youngest generation, who have more detailed expectations for their work commitments. Employers wishing to implement non-compete clauses should budget for the related remuneration that becomes a must when these are put into use. The minimum wage connected to non-competes is usually 30% of the employee’s monthly salary but candidates are free to negotiate that amount up to their liking and can’t be forced into similar obligations.
Since the appearance of unicorn tech companies and internet giants, China has been noted for a culture of unpaid overtime that clashes with official regulations; under official Chinese law, employees can work a maximum 44-hour workweek and any work beyond that requires extra pay for overtime. There is a high turnover rate in the job market; candidates that change jobs after 3-5 years of work experience are seen as having a relatively reasonable job hopping rate but it can be much more frequent. It is worth noting that GenZers and young talents are more likely to frequently switch roles, but employers can combat this by providing a positive working culture and good advancement opportunities.
The majority of Chinese labour contracts are usually based on 12 months arrays with a clause for discretionary bonuses typically set in the months in the proximity of Lunar New Year festivities (January-February). Multinationals keep 13 months’ wages with performance bonuses and commission schemes on top even though local regulations don’t prescribe fixed arrangements on this matter. The main difference is that 13th-month bonuses and the like are considered part of the employee’s salary and represent a fixed commitment from employers, whereas bonuses and commissions are discretionary.
Foreign-invested enterprises should have two systems in place for recruitment: 1) background checks, including prior records of labour arbitration cases with other employers, and 2) mental health check-ups due to the fast pace of life and work in China’s major cities. Close attention should also be paid to candidates’ interpersonal relationships while handling tasks under pressure and their ability to integrate with existing teams as some companies may encounter highly educated Chinese returnees who are fluent in English but tend to feel easily disappointed with their careers versus their investment in studies abroad. As a general principle, the potential negative impact on the overall staff by candidates who have not been thoroughly committed and engaged outweighs issues arising from employees not skilled or trained for the set of tasks they’ll need to look after.
In addition to the differences in the social insurance provident funds mentioned above, welfare policies such as sick leave, maternity leave and marriage leave differ from city to city. The overall process and regulations for terminating labour relations with employees also follow different precautionary measures and practices according to China’s local courts and arbitration committees, and companies should pay attention to these divides. Finally, foreign enterprises should implement internal SOPs for non-resident workers to apply for household registration and residence permit points in the municipality where they operate, as these create additional requirements for the payment of social security and the issuance of corresponding documents during the application process.
The process of labour relationship terminations should be based on performance appraisals and individual business cases. HR teams will need to prepare different supporting documents for different cases, but severance pay should be put forward based on China’s Labor Law and its clauses on unilateral and mutually agreed termination. The usual set of causes ranges from dissatisfactory performance during probation, irregular or false attendance records, objective major changes in the company’s business outlook, and major disciplinary violations. National laws and regulations do provide for special labour protection and treatment for female employees during pregnancy and workers who have experienced labour-related injuries. In most cases, companies can avoid lawsuits and arbitration through severance and compensation packages, helping them to convey an employee exit without any repercussions on their main operation and enterprise credit.
This article is part of a series on exporting to China. See all the articles in the series below.
Part 1: How to conduct market research
Part 2: Protecting your trade mark
Part 3: How to choose the correct route to enter the China market
Part 4: The dos and don’ts of choosing a distributor
Part 5: How to find and hire staff in China
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