They may receive some basic free medical treatment but this is provided outside of the standard social insurance framework. Many rural workers are employed at factories within urban areas these days. This group of people is known as the floating working population of China. One of the reasons that employers at factories are keen to recruit such workers is that they can pay them a lower wage as well as make lower contributions for social security compared with workers possessing urban hukous.
Recently, the government has been introducing schemes to allow such workers to enjoy limited social insurance. It is likely that the programs will continue to expand over the coming years. In contrast, holders of urban hukous do fall within the organized Chinese social security system. However, the contributions they should make, and the benefits they are entitled to receive from the system depend on which city they are affiliated to. We explained the situation relating to social security in the section above, but there are also some other reasons why the location of the hukou is important for Chinese people.
In the same way as holding a US or a UK passport, to hold a hukou in one of these cities can be quite valuable. There are a couple of ways to obtain such a hukou: 1. Marry someone holding a hukou from that city, and live there for a predetermined length of time 2. Graduate from university in a specialist subject and work in a related industry for a period of time 3. Purchase a property of above a certain value in the city; usually this will be a rather expensive property 5. Join a company that has negotiated with the government for some of its employees to obtain hukous; some foreign enterprises, particularly high-technology companies, obtain such commitments from local governments because they know they will have to hire resources from other parts of China In recent years there has been discussion among the various departments of the central government about whether to abolish this hukou framework.
It is likely that reforms will be implemented; however it is doubtful whether China is in a position to abolish the system entirely in the near future. Of course the biggest difference is that they must receive special permission to work in China a visa. Here we describe the considerations that affect the take-home salary of the foreign worker. As of the end of , Chinese nationals are allowed to deduct RMB2, from their income. The remainder minus their personal social security contributions is taxable.
In contrast, foreign nationals are allowed to deduct RMB4, from their income. Naturally, they are not covered by the system either. We have heard of a few exceptions to this rule. Yingkou city in Liaoning Province is one example. Companies in the area have opposed the collection of these contributions, however it appears that the government does have a legal right to make the claim.
It will be interesting to see if local tax bureaus in other parts of the province follow the example of Yingkou to collect company contributions for foreign as well as Chinese staff in the future. There are two prerequisites that need to be taken care of: 1. In the employment contract and sometimes also in a board resolution depending on the location of the company there should be a clear reference to the amount being paid to the employee under the title of each specific allowance 2. Most of the fapiaos submitted should be issued by restaurants, although for some portion of the allowance fapiaos issued by supermarkets may also be accepted.
Foreign employees that really do require a fapiao should negotiate this with the landlord before signing the rental contract. The issuance of a fapiao should be clearly mentioned in the agreement. Foreign employees living in a serviced residence will not have this problem—the residence will be managed by a company that can issue a fapiao.
Note that the education must be received here in China and, as with the other allowances above, a fapiao must be received. Cost of hotels and other expenses are also not accepted as this is considered a home visit allowance, not a vacation allowance.
There is always the possibility that the tax office will challenge the company on this issue, so we recommend that the proportion of allowance should be set at or below this level. As a result, the company will have a harder time dismissing such an employee and it will also put itself in a weaker position during any negotiations that need to be held with that employee. As a guideline, we would normally suggest any company with more than ten employees to consider creating a company rulebook.
What should be included in the rulebook? This really depends on the industry in which the company is involved. Companies in the manufacturing industry will generally be more concerned about issues relating to promptness, length of breaks, safety of employees, etc. Those in the food industry will pay most attention to hygiene. We will not discuss these issues at length here, but instead point out some things that employers may want to bear in mind. Is the Rulebook Reasonable? Bear in mind that if a dispute with an employee or ex-employee reaches the court, the judge may consider the size and complexity of the rulebook when deciding how much responsibility the employee should take for a particular infraction.
If the judge considers that the company has set arbitrary rules in order to find reasons to dismiss employees then the employee is more likely to receive a sympathetic judgment. The employer should be prepared to explain exactly why each of the regulations should be included in the rulebook.
A rulebook should differentiate between a serious breach and a minor breach when determining how many warnings a company must give an employee before dismissing that person. Serious breaches can constitute immediate dismissal. Minor breaches are generally dealt with by issuing an official warning letter to the employee. The rulebook may stipulate that after a specified number of official warnings the employee is deemed to have committed a serious breach of the rulebook.
In this way the company may gain the right to dismiss the employee without compensation, although we would like to stress that ultimately the decision on whether or not the infringements warrant dismissal could be challenged by the employee in a court. This is an obvious point, but often overlooked. We have seen many cases of companies amending the English version of the rulebook, but not updating the Chinese version or not informing employees of the change.
There are also many instances of poor translations. From a legal standpoint, the Chinese version is considered valid. Strictly speaking, a company in China shall generally have a trade union to which every member is affiliated, and the terms included in the rulebook shall be agreed with the union itself.
In practice, many companies do not have a union in place. Under such circumstances we suggest that you have each employee sign a document confirming that they have received a copy of, read, and understood the rulebook. If you amend the rulebook in the future, have the employees confirm once more.
This not only improves the position of the company legally in the event of a dispute, but will ensure that employees read the rulebook more carefully. Finally, the labor contract template should include a clear reference to the rulebook. Under the labor contract law put into force in , the maximum length of a probation period is directly related to the length of the fixed-term contract that you offer to the employee. Before implementation of this law it was relatively simple for the employer to dismiss an employee during this period.
However, the law now stipulates that an employer should produce evidence that the employee has not satisfied the requirements included in the original recruitment documentation. As a result of this new law companies are now investing more heavily in strengthening their recruitment procedures. Some companies now design online examinations for each candidate to complete, to be followed by another test in the presence of members of the HR department. All this happens before candidates are offered an interview—the consequences of hiring unsuitable employees can now be too high for many employers to ignore.
In contrast, an employee still within their probation period can resign from the company after giving just three days notice. It is not advisable to give a large amount of responsibility to an employee who is able to resign at such short notice. Written Labor Contracts According to the labor contract law, an employer must ensure that it has completed a written labor contract with every staff member within 1 month of the employee commencing work.
Therefore if the company does not fulfill this obligation with an employee until the end of the third month of their employment it shall be liable to pay 2 months of additional salary to that employee. If the company neglects to complete such a contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous 11 months, they can also claim an open-term contract from the employer. Note here that the employment relationship is deemed to have started from the first day the employee works at the company, not from the date of signature of the contract.
So as long as the employee can prove that they have physically been working for the company for over a month prior to signing an employment contract this will be sufficient to make a successful claim against the company. Of course, the simplest piece of evidence proving this will be the receipt of salary. The labor contract law also requires the company to sign an open-term labor contract with each employee by the time the employee completes either 10 years of service with the company or renews their fixed-term contract for the second time. Therefore employers should not expect their employees to chase them for signing written labor contracts or open-term contracts—it could potentially be in their interests not to sign, especially in the event of a future dispute with the company.
A system should be put in place so that there is no possibility for any employee to be overlooked. One effective safety mechanism would be to only release salary to employees once written labor contracts are put in place. As salary is generally paid once per month, this would incentivize the employee to sign while ensuring the employer remains in compliance.
Similar attention should be paid to safeguarding of labor contracts. Not only do such contracts contain confidential information, it could also be costly for the company if the contracts were lost or stolen. Minimum Wage China has a policy on minimum wage, however since there is such a huge disparity between regions in terms of economic development, the minimum wage levels are set locally. In the chart below we list the minimum wage levels in seven cities around China as of Annual Leave The required minimum amount of annual leave in China in addition to at least one rest day per week and the public holidays is five days.
In practice, the vast majority of foreign invested companies realize that their employees are more productive when allowed periodic breaks. Although annual leave periods are generally shorter than in the west, most employees working at foreign invested companies receive 15 to 25 days of annual leave per year. Managing the Monthly Payroll Process This chapter deals with the logistical process of managing the monthly payroll.
Paying employees the correct amount of money by the required date may seem like a simple exercise, however as payroll structures become more complex processing becomes more time consuming and more errors are made. Fundamental mistakes like continuing to pay salary or mandatory benefit to workers that have already left the company are surprisingly common.
Such mistakes are financially damaging, but the consequences to the company can be even worse when it fails to pay the full amount owed to a valued staff member. In the first sections of this chapter we take a look at each of the various aspects of the monthly payroll. At the end of the chapter we focus on a growing trend all over the world and particularly among foreign invested enterprises in China— outsourcing of payroll to improve the efficiency, accuracy, confidentiality and transparency of the process. In China, employees are grouped into three categories working under different systems—the standard work hour system, the comprehensive work hour system and the non-fixed work hour system.
Each employee should be guaranteed at least one rest day. Instead it takes a set period usually a month, but not necessarily as the base to calculate the number of working hours. Although the distribution of hours worked during this period may be quite irregular, the average number of working hours per day and per week should roughly correspond to the levels set out in the standard work hour system.
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Under the non-fixed work-hour system employees do not generally receive overtime payments because measurement of the time spent working is considered to be impractical. A company implementing this system for some of their employees should receive prior approval from the local labor bureau. Adding this maximum 36 h period of overtime means that for an average-length month an employer cannot legally require an employee to work for more than h during that month.
Although the percentages of social security and housing fund contributions can differ depending on the city in which the employee works, the fundamental structure of the system remains similar across the country. There are also some localized mandatory payments that employers based in certain regions must pay to their employees. We will refer to them as regional allowances.
Although these funds are not specifically part of payroll, they effectively constitute an extra cost of employing workers, so we mention them here. We will just provide two examples of supplemental payments that companies based in certain locations need to make to their employees. Heating is supplied to all apartments during the winter, however there is a cost associated with this.
The cost differs per city, but each household can expect to have to pay a fixed fee of around RMB2, to RMB4, for constant heating through the winter months. This fee can represent a few months of salary for some workers—not an inconsequential amount. In an attempt to ensure that all households will have enough money to pay for their heating bill, the various local governments in the region require companies to provide a certain amount of money each month to each employee as a heating allowance.
To take Dalian as an example, the amount payable is RMB The Guangdong government has instituted a policy that requires companies to compensate their employees for working during the hot months. Companies that do not follow these rules can be fined. Such regional allowances should be considered when processing the monthly payroll.
Other Hidden Payroll Costs We only give one example here, although there are likely to be many more in various regions of the country. Disabled Workers Employment Assistance Fund In certain cities employers are required to either employ a certain proportion of disabled workers or to pay a certain amount into a fund to assist disabled people find work.
Beijing and Shanghai both have policies in place governing payment into these funds, however the burden for the employer is quite different. We compare them below: Beijing12 1. At least 1. If this proportion is not met, a specified amount should be paid into a Disabled workers employment assistance fund.
Companies that do employ some disabled workers but do not meet the 1. Shanghai13 1. If this proportion is not met, a specified amount should be paid into a disabled workers employment assistance fund. In practice, the collection of this fund is being implemented using a rather different calculation to the legal basis. The maximum social insurance base in Shanghai in is RMB10, Therefore, the contributions the company makes for employees earning more that this amount is limited.
As a result we can say that due to this practice the total cost to the employer is lower than the amount calculated in accordance with the relevant regulations. Nevertheless, the contribution to the disabled workers employment assistance fund in Shanghai for foreign invested companies that usually pay higher salaries than domestic companies should still be higher than the amount paid by an identical company in Beijing. In this section we explain the mechanics of how the contributions are calculated and how the payments are facilitated. Although both employee and employer make contributions towards the social insurance funds in China, it is generally the case that the employer is responsible each month for withholding the contribution of the employee from gross salary, and making their contribution together with that of the employer.
This is acceptable in many areas of China, however the portion that is above the mandatory amount is taxable for individual income tax purposes, and this amount of tax should be deducted by the employer before payment of net salary to the employee. We will first explain the steps that should be followed to register at the social insurance bureau before turning to the housing fund bureau. As the process is slightly different across different cities in China, we use the situation in Beijing as an example. Procedure for Registration at the Social Insurance Bureau 1. A social security number for the company should be obtained.
After receiving the company social security number, details relating to the employees should be inputted into software provided by the social insurance bureau. One key piece of information will be the salary details for each employee as this will determine the base on which monthly contributions shall be made. Information inputted into the software should be saved onto a USB flash drive and physically taken to the social insurance bureau.
This completes registration for medical insurance one component of the five mandatory insurances. After receiving confirmation that medical insurance registration has been completed, various forms can be filled out to register each employee for the other four mandatory insurances. They need to be submitted to the social insurance bureau between the 6th and 25th of the month. Note that the first payment of social security contribution must be made via a check issued from the company—it cannot be automatically debited until the second month.
Only bank accounts opened at specific banks can be used to make these automatic contributions. A visit to the bureau will be necessary every month if the company has any new hires or people leaving the company, as registration and deregistration cannot be handled online in Beijing at the time of publication of this book.
Fines can be imposed by the social security bureau for late payment of contributions by an employer, although these are rarely imposed. More of a concern for employers is the fact that if one of their staff has an accident at work and the necessary contributions have not been made, then there is a possibility that the company will be liable for the costs and expenses incurred. All of the contributions made to this fund accrue to the individual, with none of the funds going to a social pool. For this reason it is treated separately and governed by a different bureau.
The steps to complete the procedure are explained below: 1. A company account must be opened with the housing fund bureau. Approval can generally be received immediately, and the company receives a special account number for payment of housing fund. Note that the first payment of housing fund contribution must be made via a check issued from the company—it cannot be automatically debited until the second month.
Note that only bank accounts opened at specific banks can be used to make these monthly contributions. A visit to the bureau will be necessary every month if the company has any new hires or people leaving the company, as registration and deregistration cannot be handled online in Beijing at the time of publication. When employees elect to use their housing fund a trip must also be made to facilitate this. As you can see from the above explanation, even Beijing has not organized itself sufficiently well to cope with online registrations.
In summary, managing the process of social security payments can be a very time-consuming task. Some agents can communicate with the company as part of a more comprehensive payroll service, while the best ones can provide the service entirely in English if necessary. This enables the HR department abroad as well as the foreign managers at a company to clearly understand all the details of their payroll.
As a general rule, a company with less than 1, employees will normally find it worthwhile to outsource this function.
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Some larger companies will also decide to outsource the role to maintain confidentiality. The vast majority of companies handle this via electronic funds transfer EFT. Online banking is now widely available in China for corporations. EFT files can be uploaded through bank web sites by the HR manager and approved online for payment to employees by the finance manager. If the employees have bank accounts with the same bank as the company then the transactions should be processed immediately, otherwise there can be a short delay but normally of no more than one day.
Before the batch is processed the bank will require approval from the finance manager at the company for the total amount of salary to be released. Only the person that uploaded the EFT file will know the contents of that file. This is usually the HR manager at the company. There are several points that companies should consider when they choose a bank to handle these EFT payments: 1.
Do not use a local regional bank. Such banks sometimes lack the resources to develop a fully-functioning, user-friendly online banking system. If you use a larger domestic bank it is likely that their web site will not be fully functional in English. For smaller companies with foreign managers this may be inconvenient as the manager may have to rely on an assistant to complete transactions through the online site.
Also bear in mind that domestic banks will usually not have staff who can explain in English the various procedures and restrictions involved in banking in China. The format of the EFT file currently used by most domestic banks is extremely simple. It can be as basic as just two columns in an Excel sheet—one column with the bank account number of the employee and the second with the amount.
The bank will try to recover money transferred incorrectly in this way, but the ultimate responsibility lies with the company providing the information. At a minimum, such instances will cause a delay in the employee receiving their salary.
In contrast, the EFT files for foreign banks in China can be quite complex. There is no chance of sending money to the wrong account because the system cross-references other information included in the EFT file such as the account holder name and the address of the bank. If the company is processing payroll internally it can take more effort to generate this file, especially if no specialist software is used to prepare it. At the time of writing this book the EFT functionality of certain Chinese banks is still quite limited.
For instance, when using the China Construction Bank system, it is not possible to pay to accounts that are not held with the China Construction Bank. Certain foreign banks new to the Chinese market have not yet developed the infrastructure to handle such batch payments online. Others provide a batch payment service for payroll only to larger clients. Fees for online banking facilities are also likely to be higher than for domestic banks.
In practice this is not always possible. For companies that use an international bank for their main bank account it is not always possible to process a batch EFT file, therefore all the salary details for each individual will appear on the statement. This method is not recommended as it causes an unnecessary delay in the monthly payroll process while the agent verifies that the funds have been received. There is also the risk that the agent fails to make the required payments. The responsibility of the employer is limited to deducting the IIT payable on salary income before paying a net amount to the employee.
Any payments of IIT based on other sources of income are the responsibility of the individual. As in most countries, IIT is a progressive tax—a higher proportion of tax is payable on earnings above a certain level. It is payable monthly. The key point to address is what exactly constitutes taxable income?
Employees should provide official invoices to the company for reimbursement each month based on the actual amount of their expenses. In theory, foreigners are also allowed to deduct social welfare contributions that they are required to make in their home country from taxable income in China. Unfortunately in practice this is quite hard to achieve as documentation must be provided to and approved by the local tax bureau evidencing the mandatory nature of these payments before they can be deducted.
The tax treatment works as follows: 1. Cross-reference taxable rate and quick deduction amount from table in Sect. For the annual bonus calculation there is no fixed tax deductible amount for either Chinese or foreigners unlike for monthly salary, where RMB2, or RMB4, may be deducted One key point is that the annual bonus declaration can only be made on one of the 12 monthly IIT declaration forms during any calendar year. This does not mean that the entire bonus must be received in one payment, or for one specific purpose.
It is possible to combine the payment of several bonuses or allowances into the filing for one month. Although the employee can treat bonuses and allowances in this way during one month of the year, the standard salary payment for the month will still follow the normal IIT rules explained previously. Foreign Employees Working for Overseas Entities Note that the calculations introduced above for foreign employees assume that they are contracted to and working for the Chinese entity. If they happen to be contracted to an affiliate based abroad then their tax treatment is different—based upon a number of factors including the number of days they have been based in China during the fiscal year.
This treatment is quite complex and we will not explain it here in this guide. One final IIT treatment relates to severance pay. Net salary in China Example: Mr. Brown was transferred from a U. HQ to a China subsidiary. In , he stayed in China for days. His annual salary after non-taxable deductions is RMB1,, Physical filings are still generally required with the exception of Beijing, Shanghai and a few other cities , but usually they only have to be made quarterly or annually.
In this section we will explain the process for making the filings as well as how the tax bureau receives the payment every month. A special USB Key issued by the local tax bureau 2. A piece of software installed on a computer to facilitate the online filing 3. The details of the IIT amounts for each individual, organized into a format that can be uploaded into the above mentioned software At the beginning of the month following the payment of salaries to employees there is a period of around two weeks during which the online IIT filing should be made. The precise deadline can be different depending on the city in which the company is located, although according to the national law filings should be completed within the first seven working days of the month.
The pre-generated IIT file with the details of all the payments to be made by each employee can then be uploaded into this piece of software. The final step is to authorize the software to send the total amount of IIT to be paid by the company to the tax bureau. This software should not be deleted from the computer, because physical tax filings that periodically must be made at the tax bureau are also generated using this software. Physical filings will include details of all the individual contributions made by each employee.
After the deadline day for submission of IIT the tax bureau will directly deduct the amount of IIT filed from the bank account of the company. A precondition to this occurring is that the company must have signed an agreement with the tax bureau and their bank to allow the amount filed to automatically be debited. Most large domestic banks are able to facilitate these transactions, although at the time of writing of this guide foreign banks are still unable to do so.
If the company fails to meet the deadline for some reason it must make a physical filing. A fine will likely be imposed for any late filings. Assuming online filings have already been made by the company, all that is required for the physical filing is: 1. From the tax bureau software print out the details of the IIT payments for each individual for each of the months required 2. Stamp each document with the company chop 3. Take to the local tax bureau for submission It is also possible for companies to make physical filings every month instead of online filings.
This is obviously more time consuming. A visit to the bank with a form issued and stamped by the tax bureau will be necessary. The bank will receive this form and the payment. At the time of writing this guide there are still some cities in which the only option for companies is to make a physical filing every month. It will likely take several more years before all of the urban areas in China are geared up to allow online filings. This declaration should be made by the end of March of the following year. This requirement has been introduced by the government to ensure that individuals earning significant income from China take personal responsibility for the amount of tax they pay.
The annual declaration should be made by anyone who has income from specified sources in China in excess of RMB, during the financial year January 1 to December Foreigners that have stayed in China for less than days during the calendar year are not required to make this declaration, even if the amount of personal income they have received from China in one form or another exceeds this amount. What the employer should do at the end of the year is inform the employee of the total amount of gross income paid by the company and the total amount of tax paid on behalf of the individual over the course of the year.
If gross income, added to any other income earned from other sources during the year, exceeds RMB, the individual should fill out and submit a declaration. As mentioned above, the obligation to submit such a form extends to foreigners working in China. In situations where the salary details of the foreign employee cannot be disclosed to any local staff members, companies will often appoint a third-party agent to assist the foreign employee to make the declaration.
Providers should have their own software that can generate all the necessary reports required by the client, the bank and the tax bureau. This is more efficient and reliable than generating reports internally using relatively manual processes on software like Excel. Increased accuracy. Running payroll through a manual system can often lead to mistakes. This presents a poor image of the company to its employees. It can also cost the company money if employees have been overpaid or are left on the payroll after they have left the company.
Both of these phenomena are remarkably common. Increased transparency. When there is a problem it is necessary to have a clear procedure in place to ensure that the source of the problem can be located and is reported to management. When companies handle payroll internally it will often be the case that such problems are rectified without any reporting to management. By outsourcing the payroll process this possibility can be eliminated. Problems with payroll come from one of two areas—incorrect input information or incorrect processing. As long as the problem is reported to management it can be investigated and dealt with.
In the second instance the problem lies with the setup of the payroll calculation software itself. If the company is outsourcing payroll management the provider should take responsibility for the error and the client should consider switching providers in the future. Increased confidentiality. HR and Payroll Managing personnel in Asia requires a robust approach to local regulations and customs. Contact us for more information.
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