Hiring in China

In China, companies can hire employees in the following three ways:

• Direct hiring
• Dispatching
• Outsourcing

Direct hiring

Except for representative offices (RO), foreign invested enterprises (FIE) can hire employees directly by themselves. The Chinese labour law requires employers to sign a written contract with their employees. They have a  month to do so, starting from the employee’s first day of work at the company. Failing to do so results in:

• double salary compensation (for each month without a contract)
• a non-fixed term contract by default (after one year without a contract)

One exception to this rule is part-time work, where an oral agreement is considered sufficient.

Generally, China allows three types of employment contracts:

• Fixed-term contract
• Non-fixed term contract
• Job contract

Fixed-term contract

The fixed-term contract creates an employer-employee relationship for a fixed length of time and can be used for part-time or full-time work. A fixed-term contract can be renewed only once, after which it will be necessary to give the employee a non-fixed term contract when renewing for the second time. Certain clauses may be inadmissible according to Chinese law, while others are mandatory. Employers can stipulate a probationary period at the beginning of the contract, during which time it is comparatively easier to dismiss the employee.

Also, the employer can pay the employee 80%of the full salary stated in the employment contract. This amount may not fall below the local minimum wage. The employee may resign after giving three days’ notice. It is therefore inadvisable to stipulate a very long probation period. The length of the fixed-term contract will determine the maximum length of probation the employer can set.

During the probation period, the employer may dismiss the employee if he/she is found to not meet the requirements for the position. The burden is on the employer to prove this.

Note: An employer cannot make an employee take a new probation period, for example, after a promotion or when the company has been merged or acquired by an investor.

For part-time workers:

• The employee may not work for more than four hours per day, or 24 hours per week.
• No probation period is allowed, and either the employer or employee may end the agreement at any time.
• The employee is not entitled to severance compensation.
• The employee must be paid at least every 15 days.
• Part-time employees are not required to have a written contract.

Non-fixed term contract

Based on its unrestricted term and limited grounds for termination, the non-fixed term contract effectively guarantees the employee job security until retirement. Specifically, an employee on a non-fixed term contract can only be terminated based on grounds eligible for immediate dismissal, dismissal with 30 days’ notice, or as part of a mass layoff. During a mass layoff, employees on non-fixed term contracts must be prioritized over other employees.

Job contract

Due to its lack of legal clarity, the job contract is an unpopular choice in China. This type of contract is defined by the specific task or project an employee is to work on—not the length of time. Once the project is completed, the employment relationship comes to an end and the company must pay severance to the employee. No probationary periods are permitted. Job contracts are sometimes used for seasonal jobs where the scope of work can be defined very clearly. However, in most cases, defining the completion of a project can prove to be a challenge. The relevant legal framework offers no guidance on what to do when a project is left uncompleted, or how employees should be compensated in such a case, making job contracts more prone to disputes and even litigation.

Dispatching

Labour dispatch is an alternative option for FIEs looking to hire Chinese staff. While the preparatory work often requires the assistance of Chinese employees, FIEs are not allowed to establish legal contracts with Chinese individuals before they obtain their business license. Additionally, as mentioned previously, an RO cannot hire staff directly, and their employees must be sent from dispatch agencies.
Labour dispatching arrangements are only applicable for the following three types of positions:

• Temporary position: a position with a duration of no more than six months.
• Auxiliary position: a position that provides auxiliary services to the main or core business of the employer.
• Replaceable position: a position that can be performed by a dispatched employee in place of a permanent employee during the period when such an employee is away from work for study, vacation, or other reasons.

The number of total dispatched employees used by an employer should not exceed 10%of its total number of employees, including regular employees and dispatched employees. ROs of foreign enterprises, however, are not subject to this restriction on dispatched employees’ positions.

In addition, there must be a contract between the dispatching company and the dispatched employee, the dispatching company and the FIE, as well as the dispatched employee and the FIE, respectively. The contract between the dispatching company and the dispatched employee should have a fixed term of at least two years.

Outsourcing

Outsourcing is an additional option for FIEs. Generally, the most commonly outsourced tasks are those that require specialist skills, a high degree of confidentiality, or those that have a clear scope but incur major consequences if incorrectly implemented. Good examples in China include accounting, tax filing, HR administration and payroll processing work. Many small and medium-sized companies will choose to completely outsource some or all of these functions, whereas large companies will set up a separate entity to manage such back-office tasks on behalf of their regional subsidiaries.

• Responsibility for the behaviour of the outsourced employee is borne 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.
• Such tasks will often use special software licensed by the company contracted for the outsourcing.

Termination

From a legal perspective, terminating employees in China can be more difficult than expected, especially under the comparatively stringent regulations on terminating employment contracts since 2008.

Employers should follow the steps below to ensure full compliance:

• Step 1 - Determine whether the termination is an early termination or not. If the employer chooses to terminate the employer prior to the expiration of the first fixed-term contract, this is considered “early termination” and certain additional requirements apply.
• Step 2 - In the case of early termination, the employer should attempt to negotiate an agreement with the employee, including the termination date, severance payment, and any other necessary details. This is often the safer option even if there are grounds for unilateral termination.
• Step 3 - If unable to come to a termination agreement, consider whether there are grounds to support immediate termination for cause or 30-day notice termination without cause, keeping in mind the statutory obstacles to such forms of termination.

If none of the above measures can be adopted, then the termination is likely to be considered an unlawful termination and additional severance payment might be required.

Permissible types

Disclaimer:

The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information. 

Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.