When considering expansion, many companies turn to independent contractors because they provide specialist skills or services and don’t require long-term employment. The gig economy in China is increasingly rapidly, with some expecting there to be 400 million freelancers in China by 2036. However, due to the legal confusion and grey-market nature of freelancers, it can be a risky move to hire and pay contractors in China.
In this article, we’ll take you through the definitions and complications of independent contractors, as well as how to safely find, manage, and pay contractors in China.
What are the Differences Between Independent Contractors and Employees in China?
As in other countries, independent contractors in China are individuals who provide specific services to companies, typically on a project-by-project basis, while not being part of a company’s management structure.
Employment in China requires a serious commitment from both the employee and employer. Independent contractors do not require the same commitment from their client company. In turn, companies aren’t responsible for the usual employer functions such as tax and social security management.
Contractors, or freelancers, in China are not subject to the management or direction of a client company, they pay their own taxes and social security and they do not have the same benefits as an employee. They are free to work with multiple clients, and they set their own work schedule.
Contrary to popular belief, freelancing is not illegal in China. However, the paperwork and processes required to pay contractors in China will often put people off the idea and encourage illegal contracting.
In general, it’s more important to check the legal status of a contractor before you begin a working relationship. It’s best to make sure that when you pay contractors in China, you make the payments through the correct channels. Compliance errors here can negatively effect both the contractor and your company.
All of this is essential when working out whether you need an employee or it’s better to find and pay contractors in China.
Which Employment Laws or Benefits Relate to Contractors in China?
As the relationship formed between a company and a contractor is one of a service provider and client, contractors are not eligible for any of the protections or benefits owed to employees.
China doesn’t officially recognize Independent contractor relationships, so in effect the relationship formed when hiring a freelancer is a business-to-business agreement. This means that an independent company has to be careful to declare all payments during monthly payroll and tax compliance processes.
Chinese labor laws are severe in the protections they provide to employees. The law will severely punish a company if it is hiring contractors simply in order to escape paying the requisite employer costs.
How Do Payroll Costs Affect the Way You Can Hire and Pay Contractors in China?
Because contractors in China are not employees, companies do not have to take any costs into consideration beyond the compensation agreed upon in the independent contractor work agreement.
An an employer, it’s best to take steps to avoid any kind of payroll management of individual income tax, social security contributions (or employer contributions to social security), and employee benefits like paid leave.
Errors at this stage could be used later as evidence in an employee misclassification investigation.
How to Hire Contractors in China
In general, you can seek the support of a third-party provider who can connect you with reliable and experienced professionals while also helping you to pay contractors in China compliantly. This is especially true if you are an overseas employer, as you’ll need a local presence to work with and pay contractors in China.
Contractors should be hired through a contractor work agreement. This is not an employment contract and should clearly set out the expected services the contractor will provide, the dates or expected duration of the work period, as well as the compensation amounts expected from the client.
The clearer these agreements can be about the limitations of the company-client relationship, the better.
Companies must not offer any kind of benefits, allowances, or insurance to contractors as they would do to employees when hiring contractors. When a company pays contractors in China, they should make a simple payment, without any deductions for tax or social security.
Companies in China are generally not able to create long-term relationships with workers that rely on temporary agreements or fixed-term contracts. Should a company work with a contractor for too long, or rely too heavily on them, they may be at risk of misclassification penalties or have to to hire the contractor on an indefinite employment contract.
4 Different Ways to Pay Independent Contractors in China Safely
You can pay contractors in China once or repeatedly using direct deposits based on the requirements of your work agreement. There are no legal limitations on paying contractors like this, but in all cases it’s important that the contractor can provide legal fapiao as a request for payment.
We have provided a guide to mastering the fapiao system here.
Be careful to pay contractors in China using distinct payments apart from others made to regular employees. Also, keep in mind that you shouldn’t deduct money from clients the same way you would from employees.
While they do still exist in China, checks are almost unheard of as a form of payment method. Many people see checks as less reliable due to their increasing scarcity and bounce risk. In general, only the biggest banks are likely to accept them.
In general, they take longer to process than electronic payments and are more prone to loss.
PayPal or Other Online Payment Systems Like WeChat Pay/Alipay
Digital payment systems are everywhere in China. Most people in the country will use at least 1 of the most popular to make small transactions on a daily basis. For small payments, simply sharing a QR code is enough, but professionals should still be able to provide digital fapiao. While you can use these methods to pay contractors in China, the contractors will have to keep detailed records of any business payments to avoid tax trouble.
Local systems such as WeChat Pay and Alipay also require user to provide detailed personal information before setting up an account, and place restrictions on some overseas transactions, which may make the process harder for foreign users.
Guaranteed Third-Party Payroll Services
Payroll partners and third-party services can pay independent contractors, other self-employed individuals, and freelancers on time and in compliance with the law. These could be a PEO (Professional Employer Organization) in China which manages payroll through HR outsourcing services or an umbrella company that administers payroll.
Because you need a local company to pay contractors in China, a third-party provider can be the perfect way to work with these specialists without going through the hassle of opening a company in China. These service providers will also help you to maintain absolute legal compliance thanks to specialist knowledge and tools.
Whichever way you pay contractors in China, you should always ensure that payments follow expected invoicing procedures, with independent contractors being able to provide the required fapiao, or invoice.
What You Can Do If You Want to Convert an Independent Contractor into an Employee in China
There are many advantages to hiring a contractor over an employee, including saving on insurance, health benefits, fringe benefits packages, workspace costs, and tools. However, to establish a long-term working relationship, you may be looking to transition a worker from an independent contractor to a full-time employee.
As contracting is particularly complex in China, it may be relatively simple to persuade a freelancer to take an employment contract and benefit from employment protections and advantages. At the same time, because you already being familiar with the contractor, there’s no need for lengthy interviews or background checks.
In this case, to avoid any potential for misclassification errors, take the time to be clear about the way your relationship changes from client to employer.
The employment contract should also explicitly spell out any required changes in the way the contractor works as an employee. This means more structured working hours, benefits plans, and organizing withholding taxes during payroll.
Once a contractor is ready to become an employee, it’s then essential to add them carefully and compliantly to your payroll system.
Get Worldwide Expertise to Pay Independent Contractors in China Securely with INS Global
Knowing how to safely hire and pay contractors in China compliantly may be challenging if you are unfamiliar with Chinese legal requirements. As a result, INS Global can provide you with the resources and information necessary to guarantee that you can reliably and securely pay contractors in China as agreed.
We also offer 24/7 China EOR (Employer of Record) and PEO services and legal advice to help you plan your international development strategy and guarantee complete HR compliance.
INS Global can offer market-leading payroll outsourcing and compliance assurance in over 100 countries worldwide. With the correct HR support, you can easily convert contractors into long-term employees with improved employee benefits or locate the best contractors in your target market with speed and confidence.
To discover more about your employment relationships worldwide, get in touch with our global growth experts today.