Dangerous China Employee Hiring Myths

Foreign companies doing business in China must onboard their employee hires correctly. Unfortunately, there are many myths that make doing this less likely. In this post, I will briefly explain some common and potentially dangerous China hiring myths.

Myth 1: Hiring without a Chinese legal entity (WFOE or Joint Venture) is fine if you bring on only independent contractors.
Wrong. You cannot legally hire anyone other than through an already established Chinese legal entity, such as a WFOE or a Joint Venture. Improper hirings are one of the most common and most dangerous things we see foreign companies do in China. For what can (and pretty much eventually always does) go wrong with hiring employees without a WFOE or a JV, check out Doing Business in China with Deportation or Worse Hanging Over Your Head.

Myth 2: Even if your initial hiring is done badly, once the employee becomes legal, you can discipline/terminate as you wish pursuant to your employer rules and regulations.
Suppose things are good before you form your WFOE or Joint Venture and you convert your “employee” to a legal status as soon as the WFOE or JV is actually formed. Now suppose you terminate the by-now legal employee pursuant to your employer rules and regulations. When your initial hiring did not comply with Chinese law, you have opened your company up to all sorts of risks, especially if your employee preserved evidence that may be used against your company. Employees in this sort of situation will usually threaten to report you to the Chinese government for your long-ago improper hiring unless you pay them a big severance payment. Our advice is usually to pay and hope that doing so works.

Myth 3: Hiring independent contractors is okay in China.
The PRC generally does not allow what we would call independent contractors in the United States. For individuals, the only permitted form of employment is through a formal, written employment contract pursuant to China’s Employment Contract Law. The primary reasons for this law are to prevent tax evasion and to ensure that the social insurance and other protections of the employment contract system are applied to the individual.

Myth 4: A retired person is not subject to employment law protections and they can be hired as an independent contractor.
In most (but not all) places in China, a Chinese entity can hire a retired person via a labor services agreement not governed by the PRC Employment Contract Law and certain employment laws. Nonetheless, certain basic employment laws must still be observed and the specific rules will depend on  your location. For example, in Shanghai, the company must provide a sanitary and safe work environment, pay at least minimum wage, and follow the laws on working time and hours. In most places, this type of arrangement allows the parties to contractually agree on the grounds for termination and no severance upon termination, similar to an employment at will relationship like in the United States. However, unlike under an independent contractor relationship in the United States, the Chinese employer must withhold the employees income taxes and it also usually must make certain employee benefit contributions. Also, many Chinese jurisdictions also require the employer pay the employee’s work-related injury insurance even though the employee is already collecting a retirement pension. In these sort of post-retirement hiring situations, you should be sure to enter into a formal written English/Chinese agreement covering all labor-related issues that complies with all applicable laws — both national and local — and with local practice.

Bottom line: Bringing on China employees the right way will save you time, trouble and money down the road.