HR Outsourcing in China: Avoiding Headaches
- The JLJ Group
The laws and regulations regarding hiring, managing, and terminating employees in China are highly complex and rapidly evolving. The regulatory environment is highly pro-employee, so even inadvertent violations by employers may lead to harsh sanctions. The following article discusses how employers can manage risks and reduce administrative burdens by outsourcing human resource functions in China.
HR Outsourcing is a fast developing trend in China, as complex labor regulations and tedious HR procedures baffle the increasing number of foreign investors lured to this booming economy. Many foreign companies in China have turned to HR outsourcing providers such as The JLJ Group as a solution to minimize legal risks, keep a focus on their core business activities as well as lower costs by avoiding the need to hire and manage an in-house HR team.
The range of human resources outsourcing services available in China is tailored to match its unique set of labor regulations, policies and practices. Unlike other countries, China mandates employers’ obligations to file their staff employment and dismissal with relevant government bureaus, maintain employees’ personnel file (a Chinese document that records employment and academic history of an employee), withhold and pay social benefits as well as individual income tax on behalf of their employees, etc. In particular, China prohibits Representative Offices from directly hiring local employees; instead, it requires them to do so through an authorized service provider (called a “labor dispatch agency”).
Some commonly outsourced HR functions in China include:
Employment Contract Management
All companies are required to sign employment contracts with their Chinese employees and severe penalties apply otherwise. The China labor law has several provisions relevant to the basic contract terms. For example, the probation period must not exceed two months, there is a minimum wage of RMB 960 in Shanghai (other cities may have different minimum wages), severance pay must be provided in most contract termination scenarios, etc. It is useful to seek assistance from the HR professionals when crafting the contract so as to avoid violating the regulations unknowingly.
Generally, it is important to prepare the contract in Chinese (since China’s legal system only acknowledges contracts in Chinese) and include standard terms such as probation period and length of contract, job description and title, working conditions and labor protection, salary, termination conditions, disciplinary rules and breach of contract provisions, non-disclosure and non-compete agreements, etc.
Social Benefits Administrations
This is an important aspect in China’s HR administrations apart from basic payroll that applies only to local Chinese employees. It is mandatory that both employers and employees contribute to social benefits on a monthly basis. It is the employer’s (or the HR service provider’s) responsibility to compute, withhold and pay the contributions (including employee’s portion) to the respective government bureaus. The contribution basis and percentages differs from region to region in China and the table on the right depicts a commonly adopted scheme in Shanghai.
| Social Benefits | By | By |
| Pension insurance | 22% | 8% |
| Unemployment insurance | 2% | 1% |
| Medical insurance | 12% | 2% |
| Workplace insurance | 0.5% | - |
| Maternity insurance | 0.5% | - |
| Public housing fund | 7% | 7% |
| Total | 44% | 18% |
Increasingly common, supplemental benefits are voluntarily provided by employers as part of their retention strategy. It is important to ensure your Human Resources provider in China offers a good range of such additional insurance schemes that fits your organization’s needs.
Individual Income Tax Administrations
Similar to social benefits administrations, employers are required to withhold and submit income taxes on a monthly basis, on behalf of their employees. China’s tax calculation is based on a progressive tax rate ranging from 5% to 45% and allows tax deductions for social benefits contribution and a basic tax threshold of RMB 2,000 (recently increased from RMB 1,600). The role of a professional HR service provider is to help employers keep up-to-date with the constantly evolving tax rules and assist with the administrations and compliance of their employees’ tax contributions.
Employment termination and dismissal
It is generally difficult to terminate employment contracts in China, unless the employee violated some company regulations or failed certain conditions of employment. In most situations, employers are required to provide severance compensation, which is generally equal to one month’s pay per year of service, and must have a clearly defined reason for terminating their employee. Many foreign companies in China chose to seek assistance from HR consultants and HR professionals to manage this complex employment and dismissal process, so as to minimize legal and financial liabilities.
A HR consultant in China will also assist with the maintenance of the employees’ personnel file and all related certifications during the employment period. The document, which records all academic and employment history of an employee, is transferred from one employer to another when the employee changes jobs.
Selecting an HR Consultant in ChinaUnlike in other countries like Europe and North America, where HR Outsourcing is a fairly familiar concept, this industry is only beginning to grow in China. It is critical to find a qualified firm which can provide professional services to satisfaction. In particular, companies should ensure that the HR outsourcing firm they chose:
This article is contributed by The JLJ Group (www.jljgroup.com) – a one stop service-provider for foreign enterprises entering and growing in China. For more information, please email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit www.jljgroup.com/page/en/73/HR-Outsourcing.html.
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