Foreign companies doing business in China must onboard their employee hires correctly. Unfortunately, there are many myths that make doing this less likely. This post briefly explains four common and potentially dangerous China hiring myths.
1. Hiring Without a Chinese Legal Entity (WFOE or Joint Venture) is Fine if You Bring on Only Independent Contractors.
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 go wrong with hiring employees without a WFOE or JV, check out Doing Business in China Without a WFOE: Will the Defendant Please Rise.
2. Even if You Botch the Initial Hiring, You Can Discipline/Terminate The Employee Once They Become Legal
Suppose you convert your “employee” to a legal status as soon as your 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 opened your company up to all sorts of lasting 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 give them a big severance payment. Our advice is usually to pay and hope that doing so works.
3. Using Independent Contractors is Okay in China.
China does not generally allow for independent contractors. Plain and simple.
4. Retirees Are Not Covered by China’s Employment Laws and Can Be Independent Contractors
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 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, you must provide a sanitary and safe work environment, pay at least minimum wage, and abide by China’s working hour laws. 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 in the United States. However, unlike under an independent contractor relationship in the United States, the China employer must withhold income taxes and it usually must also make certain employee benefit contributions. Many Chinese jurisdictions also require the employer pay the employee’s work-related injury insurance even though the employee is already collecting a pension. In these sort of post-retirement hiring situations, you should enter into a formal written Chinese language agreement covering all labor-related issues. It is critical that agreement comply with China national and local laws and with local practices.
