What Employment Contracts Are Permissible in China?

In China, there are four types of permissible employment contracts that can be established directly between a private company and an individual:

• Job Contract
• Part-Time Contract
• Fixed-Term Labor Contract
• Open-Term Labor Contract

Beyond these four types of direct contracts, companies can also consider the following options:

• Dispatch of Staff (Secondment)
• EOR Services

When Can an Employee Be Hired Directly in China?

In theory, any company worldwide can employ a Chinese individual to work physically in China. However, unless the employment contract is facilitated through an Local Invested entity on the Chinese mainland, the employment relationship will not fall under relevant Chinese labor laws. This means the company cannot make mandatory benefit contributions or deduct individual income tax before paying the employee’s salary.

Foreign companies operating through a Representative Office (RO) in China face additional restrictions. ROs are not permitted to hire staff directly. Instead, they must employ Chinese staff through an authorized agency (Employer of Records) that acts as the official employer.

What Are the Different Contract Types in China?

(i) Job contract

A job contract in China allows companies to hire individuals for the completion of specific projects. Once the project concludes, the employment relationship automatically ends.

At this point, the company is required to compensate the employee in line with the guidelines established in the Labor Contract Law.

This type of contract is often suitable for seasonal jobs or projects where the scope of work can be defined with precision. However, in practice, several challenges may arise:

• Defining Project Completion: How can the company clearly establish when the project is complete?
• Unfinished Projects: What happens if the project is delayed or remains incomplete?
• Employee Compensation: How should compensation be handled in these scenarios?

Unlike a service agreement with another company, a job contract forms a direct employer–employee relationship. As a result, in cases of disputes, courts typically favor the employee’s interests over the employer’s. Furthermore, job contracts do not allow for probation periods, which adds to the complexity.

Due to these challenges and the difficulty in creating clearly defined terms, most employers in China are reluctant to use job contracts for their workforce.

(ii) Part-Time Contracts in China

Part-time contracts in China are governed by strict regulations, making their application quite limited.

 Below are the main conditions that define this type of employment arrangement:

• Daily Hours: The employee is restricted to working no more than 4 hours a day.
• Weekly Hours: The total working hours per week must not exceed 24 hours.
• No Probation Period: Employers are not permitted to include a probation period in part-time contracts.
• Payment Frequency: Employees must be paid at least once every 15 days.

Due to these restrictions, part-time contracts are typically used in specific scenarios where the workload can be completed in a short timeframe. For example, roles like office cleaners or similar positions are well-suited for this type of arrangement.

(iii) Fixed-Term Contracts in China

The vast majority of employees hired in the private sector in China are given fixed-term contracts. These contracts are typically used for full-time positions but can also apply to part-time roles.

A critical consideration for employers is deciding the appropriate length of the contract for each employee.

Key Characteristics of Fixed-Term Contracts:

• Flexible Duration: Fixed-term contracts can be of any length, providing employers with the flexibility to tailor agreements to their needs.
• Renewal Limitations: Fixed-term contracts can only be renewed once. After the second renewal, the contract automatically becomes an open-term contract, significantly impacting the employer–employee relationship.
• Probation Period Limitations: The length of the fixed-term contract determines the maximum probation period that employers can offer.

 Maximum Probation Periods by Contract Period

What Are the Benefits and Risks of a Probation Period in a Fixed Employment Contract in China?

The probation period in a fixed-term employment contract offers both advantages and challenges for employers:

Benefits:

• Cost Savings: During the probation period, employers can legally pay employees 80% of the full salary stipulated in the contract, provided it is no lower than the minimum wage benchmark.
• Simplified Termination: Employers can terminate employees more easily during the probation period compared to the terms applicable after the probation ends.

Risks:

• Short Notice Resignation: Employees within their probation period can resign with just 3 days’ notice.
• Responsibility Assignment: Offering significant responsibilities to an employee during their probation period is risky, as they can leave the company abruptly.

(iv) Open-Term Contracts in China

An open-term contract effectively guarantees an employee job security until retirement age unless exceptional circumstances impact the company or the individual. Terminating an employee under an open-term contract can be challenging for employers.

When is an Employer Required to Offer an Open-Term Contract in China?

1. Long Tenure or Renewed Fixed-Term Contracts:
   An employee is deemed to hold an open-term contract if they have:
   • Worked continuously for the same employer for 10 years, or
   • Had their fixed-term employment contract renewed twice.
2. Lack of Written Contract After One Year:
   An employee who has worked continuously for the same employer for a full year without a written labor contract is also considered to hold an open-term contract.

Consequences of Non-Compliance:

If an employer fails to conclude an open-term contract in the above scenarios, they are required to pay the employee double their original labor remuneration on a monthly basis, starting from the date the open-term contract should have been concluded.

(v) Employer of Record (EOR) Services in China

Beyond the traditional employment contract types, Employer of Record (EOR) services offer an innovative and compliant solution for foreign companies looking to hire employees in China without establishing a legal entity. EOR services enable businesses to streamline operations while adhering to Chinese labor laws.

What Are EOR Services?

An Employer of Record acts as the official employer on behalf of the hiring company. The EOR handles all employment formalities, including drafting compliant employment contracts, payroll processing, and mandatory benefit contributions, while the hiring company retains full control over the employee’s day-to-day work responsibilities.

Why Are EOR Services Beneficial in China?

1. Compliance with Local Laws:
   Navigating China’s complex labor regulations, including mandatory benefit contributions and tax compliance, can be daunting. China EOR services ensure that employment practices align with the Chinese Labor Contract Law, minimizing legal risks.
2. Eliminates the Need for a Legal Entity:
   For companies without a Chinese subsidiary, EOR services provide a practical solution to hire employees without the costly and time-intensive process of setting up a local entity.
3. Simplified Onboarding:
   EOR providers handle employment contracts, benefits administration, and employee registrations, allowing businesses to onboard talent quickly and efficiently.
4. Flexibility for Representative Offices (ROs):
   Since ROs in China cannot legally hire staff directly, EOR services are essential for such entities, ensuring full compliance while enabling talent acquisition.

How Globaine PEO Can Help

Globaine PEO specializes in providing EOR services in China, making it seamless for businesses to hire and manage employees while remaining compliant with all labor laws. Here’s how Globaine can support your business:

• HR Compliance: Globaine ensures employment contracts adhere to Chinese regulations, including mandatory social insurance and housing fund contributions.
• Payroll Management: We handle payroll processing, tax deductions, and benefit distributions accurately and efficiently.
• Employee Benefits: From statutory benefits to additional perks, Globaine manages the entire benefits portfolio.
• Fast and Compliant Hiring: With Globaine, you can onboard employees quickly while maintaining full legal compliance.
• Local Expertise: Our team has extensive experience in navigating China’s labor landscape, helping you mitigate risks and focus on growing your business