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.
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 such factors 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, is it 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 some pocket money or gift cards around Chinese New Year.
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.
In order to understand the Chinese statutory benefits, here is a quick summary of the differences between Chinese Social Security and PICC commercial insurance.
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:
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:
If you would like to hire an employee in China, INS 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 your questions regarding your business in China.