In China’s labor market, foreign companies based in the mainland naturally encounter difficulties when implementing their human resources strategy. Especially so when it comes to defining their remuneration practices. While being compliant with the Chinese labor law can be a challenge, various problems such as balancing the salaries of foreign and local personnel, defining benefits and allowances, or integrating cultural differences into constructive management become obvious.
Gross Salary and Bonus
While a fixed gross salary must be indicated in the labor contract and should be carefully considered when negotiating with a new hire, it may depend greatly upon factors such as the previous package of the employee, the position offered, the industry, whether the employee is a Chinese national or a foreigner, the work location and the employee’s working experience.
The variable part of the remuneration is usually given based upon the employee’s achievements and/or work attitude being satisfactory. Employers can decide to acknowledge their employees with monthly, quarterly or annual bonuses; these must also be stated in the labor contract.
Obviously, the structure of a compensation package must be specific to each role and employee. For example, some employees should be partially remunerated according to their work performance while others require a fixed salary. Employers should strongly take into consideration the amount of income tax that will be deducted from the gross salary and also be aware of how the addition of a bonus structure will impact taxes for the employer and the employee.
Generally, if the employee is a foreigner, the salary must be high enough to provide the employee with a standard of living similar to the one he would have in his home country. Whereas, if the employee is a Chinese national, it is recommended to offer a comprehensive package including a base salary slightly higher than average in order to maximize employee retention. Employers also have the possibility to offer a 13th-month salary which is common practice in China as well as “red packet” money or gift cards around Chinese New Year.
Allowances & Benefits
Nowadays, allowances are a simple yet crucial way of making job offers more attractive. Employers are only required to include an exhaustive breakdown of the allowance system in the employment contract, while the responsibility to prove (through “fapiaos”, an official governmental invoice certificate) that the allowances were used for their actual purpose falls to the employee. Allowances can be used to partially or entirely cover the charge of housing, daily meals, tuition fees, relocation costs and/or an annual round-trip flight.
Nevertheless, there are limitations to their usage. According to the Chinese labor law, no explicit amount is specified, it only mentions that the allowance scheme should be “reasonable” compared to the gross salary. In practice, most companies have adopted a maximum percentage of 30% of the employee’s gross salary. Exceeding this percentage may present a serious risk of facing the Chinese tax authorities.
Please keep in mind that all Chinese workers benefit from Social Security (as detailed below). Foreign expatriates may prefer to enroll in private medical insurance to compliment Social Security, Chinese nationals may also request additional medical coverage. In both cases the company will be expected to cover these costs.
Additional medical coverage for Chinese workers
In order to understand the Chinese statutory benefits, here is a quick summary of the differences between Chinese Social Security and PICC commercial insurance.
- Chinese Social Security entails five categories of insurance, which are: basic old-age insurance, basic medical insurance, work injury insurance, unemployment insurance and maternity insurance.
- As for medical insurance, Chinese Social Security doesn’t cover an employee’s family members. If an employee is ill and needs to go to the hospital, the employee should use their Social Security card and go to certain approved hospitals (which allows the use of the Social Security card). The savings from your previous social security payments (under the medical category) will be deducted, if there’s not enough balance, then you have to pay the bill first then apply for reimbursements later.
- Here’s where the commercial insurance becomes helpful: you can be reimbursed for up to 90% of clinical payments (up to a daily maximum amount of 550RMB), which rate is higher than most conditions under China’s Social Security policy, which renders between 65% and 90% reimbursement rate (differentiated by age and work status in the working location).
Individual Income Tax and Employer Contributions
Being compliant with Chinese regulations is a critical element in setting up a long-term local presence. Consequently, foreign employers need to be aware of the tax system surrounding the employment of foreign or Chinese staff.
The following Chinese Social Security contributions are made by both the employee and the employer:
- Social Insurance: Regulated by the Ministry of Human Resources and Social Security (MOHRSS). It entails five categories which are: basic old-age insurance, basic medical insurance, work injury insurance, unemployment insurance and maternity insurance.
- Housing Fund: This is a type of social insurance that allows Chinese workers to save money in order to buy their own house.
Throughout most of China, Income tax and Chinese Social Security are deducted monthly from the employee’s remuneration package (gross salary + allowances). In Shanghai however, foreign employees and their employers do not have to contribute to the Chinese Social Security.
How these contributions are calculated is influenced by two main variables:
- Where is the company registered?
- Within that area, what is the maximum base salary provided by the local Chinese authority for social insurance and housing fund contributions?
If you would like to hire an employee in China, INS Global helps foreign companies to meet the Chinese labor law standards via its HR solutions. Outsourcing specific HR activities such as recruitment, employment of an employee under a local contract or payroll and tax compliance in China; has become a common practice between foreign companies that prefer to focus on their core activity, rather than resolving administrative tasks of this kind.
Contact us here and one of our professional consultants will personally reply to your questions regarding your business in China.