How to Hire a Local Employee in China?
To hire a local employee in China is a smart move for the foreign companies who are looking to perform business in China as these candidates are likely to bring a value-add by utilizing their previous experiences in the local market. Hence, many foreign companies prefer to hire local employees in China, rather than bringing the overseas talent on board. This especially holds true for fields like project management, business development, marketing, and branding. Many people are from the point of view that hiring local employees in China brings down the operating costs as their compensation package is low to that of the expats. However, it is necessary to understand that while this condition holds true for a few cases, the taxes in other instances may increase the total cost.
For this reason, it is essential to thoroughly understand the compensation structure before hiring local employees in China, hence this article enlightens the main aspects of this process:
- Details on the components of salary package to understand and improve the negotiation process at the time of hiring.
- The social security system for China’s local employees and the obligations of employers.
Definitions of key payroll components
Before you make a decision to hire a local employee in China, here are some definitions that you must be aware of in order to simplify your hiring process.
1- Individual income tax (IIT)
Also termed as China’s personal income tax rate, it is calculated from employee’s gross salary amount, and the tax rate may vary from 3 to 45 percent depending on the monthly taxable income. The calculation of this tax takes into account the total income along with the salary benefits, including allowances, stock options, bonuses, etc. It is obligatory for the employer to submit tax contributions to the tax bureau specific to the work location.
Each income tax calculation is subject to both the fixed and variable tax reductions. The fixed deduction is 3500 RMB for China’s local employees, while the variable tax deduction is computed by taking the gross salary into consideration.
The individual income tax does not present any benefit for both the employer and the employee and is carried out as a governmental requirement.
2- China’s social security system
China’s social security system governs at a provincial level. Hence each province’s individual legislation defines the social security amount that is to be paid by both the employer and the employee.
The employee’s social security contribution is deducted from his/ her gross salary, while the employer’s deduction is separately calculated and credited to the employee’s gross salary to estimate the total employment cost. Contrary to the individual income tax, the social security contribution is regarded as an indirect benefit to the employee.
When an organization submits its taxes to the tax bureau, the social security contributions are deposited into two separate accounts. The employer’s contribution goes to a public social security account, while the contribution shared by the employee is added to his/her social security account. The social security bureau is responsible for managing both these accounts.
As per the rules defined for China’s social security system, an employee first uses the balance available in his/her individual account to pay out the expenses included in the social security fund. Once the employee’s balance is exhausted, he/she is entitled to use to public social fund account.
Types of China’s social insurance
There are five types of social insurances and one mandatory housing fund, in China’s social security system. The rates of the housing fund are revised in July each year, while the social insurance rates are updated every year in April. All of these funds must be taken care of to hire local employees in China.
The 5 categories of China’s social insurance are:
- Unemployment insurance
- Medical insurance
- Maternity insurance
- Old-age insurance
- Work injury insurance
Let’s take a look at each of these types.
1- Unemployment insurance
Unemployment insurance is meant to provide benefits to those individuals who have lost their job for any reason. However, the individuals who resign from their job with their own free will cannot get benefit from this fund.
As per the rules defined for the unemployment fund, a fixed amount is disbursed to the unemployed individuals for a maximum period of 2 years. The calculation of the unemployment insurance amount does not depend on the individual’s previous contributions to the fund.
2- Medical insurance
China’s local workforce is entitled to medical insurance, and for this purpose, each Chinese worker is provided with a medical insurance card. A small sum of money is added to the card each month, and the cardholders are entitled to use their card amount for getting medical treatments and/or for making purchases from the pharmacies. Governmental authorities define the types of treatments that an individual can seek using the card.
Generally, employers’ contribution to the medical fund lies somewhere between 5 to 12 percent of the monthly salary while the employees pay up to 2 percent. These rates, however, vary in different cities.
3- Maternity insurance
This is one of the major types of China’s social insurance. As a general rule of thumb, an employer starts paying out the maternity insurance once a pregnant employee is registered in the social security bureau. The monthly amount to be paid during the maternity period is established after calculating the average salaries of all the company’s employees.
There are certain cities that differ in their calculation of maternity insurance fund, however. For example, in Shanghai, the company is obliged to pay the difference between the company’s average salary and the pregnant employee’s salary as a maternity fund.
The pension insurance aims to provide some financial relief to the senior citizens who have spent their lives contributing to the company’s progress. As per the standard rate, the employer pays a major contribution to this fund which is normally between 10 to 22 percent, while the employee only pays 8 percent. However, only those Chinese workers are entitled to the old-age fund who have made this contribution for 15 consecutive years. As per the law, the retirement age is 60 for men, 55 for white-collar female workers, and 50 for blue-collar female workers.
Pensioners are entitled to the pension amount based on the total amount in their individual funds. If funds in the personal account exhaust while the pensioner is still alive, he or she is entitled to get benefit from the social insurance account.
It is important for an individual who expects to receive a pension at a later age to keep contributing to the pension fund, even if he loses his/her job. If he/she waits for getting a new job before resuming the fund contribution, the count of 15 consecutive years will start all over again.
5- Injury insurance
As per China’s social insurance rules, the employers pay injury insurance costs for their employees. The general rate of this contribution varies between 0.5 to 3 percent of the employee’s monthly salary.
In the event of an employee’s injury, while he/ she is at work, the employer needs to provide proof of the accident to the insurance company. Once a quick verification is done, the treatment cost of the injured employee is covered by social insurance.
To hire local employees in China, housing fund needs to be contributed by the employer in addition to the above social insurances.
The housing fund aims to empower Chinese citizens to purchase their own houses or pay off their mortgages. Some cities even allow the local workers to use this fund for renewing their homes or getting a house on rent.
Unlike China’s social insurance funds, the housing fund is managed explicitly by the Local Housing Fund Bureau. There is no social pool for the housing funds, and hence all the contributions in this category are directly deposited to the worker’s individual account.
Few more consideration points for hiring local employees in China
An employee’s compensation package breakdown often contains four additional clauses. Let’s take a look at them:
1- Public liability insurance: This insurance provides a cover in events of property damages or personal injuries, while the employee was indirectly on-duty.
For instance, An employee is on a business trip and accidentally breaks the window in the hotel room. The damage amount will be reimbursed to the hotel from the public liability insurance fund.
2- Employer liability insurance: Covers the monthly salary that is to be paid to an employee while he/she is off-duty due to an injury.
For instance, A professional is unable to work for 3 months due to a severe injury. As per China’s labor law, the employer is still obliged to pay the monthly salary, however, this cost is covered by the insurance amount. During this time, the company is also authorized to find a suitable replacement.
3- Supplemental/ commercial health coverage: This fund covers the additional medical care expenses that are not covered by the social security fund.
For instance, An employee is diagnosed with advanced disease, a cure of which cannot be fully covered by the social medical insurance amount.
4- Professional liability insurance: This fund covers the damages imposed by the clients for the inadequate services, advice, or designs that cause the clients to lose money.
For instance, A critical deliverable is not handed over to the client’s company on time, which resulted in the loss of money or business. The damages in this regard will be calculated and reimbursed by the professional liability insurance amount.
The bottom line is that to hire local employees in China, the employer needs to consider four primary factors; the net salary, China’s personal income tax rate (a.k.a individual income tax), and both the employer’s and employee’s contribution to China’s social insurance funds.
China’s social insurance system contributes a great deal in protecting the rights of China’s local workforce. This system is also beneficial to the employers as firstly, it eliminates the need for devising an in-house benefits structure. Secondly, it reduces the extensive salary negotiation at the time of hiring.