If you are familiar with global payroll than you know that China is a country that is a bit of a muddle when it comes to determining what can be done by foreign businesses and how it can be accomplished. It took me some time, but I believe I have started to bring some clarity to this muddle. The key is to understand to role that Human Resource Outsourcing plays in China. HR Outsourcing is one of the most common services used by foreign enterprises, as foreign firms without independent legal entities need to hire a local workforce through Chinese HRO providers, as per government regulation. China has sought to force foreign companies seeking to hire in China to form a company in China; those who do not must go through an HRO.

The Government requires transparency regarding the HR functions and thus HROs meet these requirements.

HR outsourcing provider firms specialize in employment and dismissal, payroll and benefits administration, personal income tax, personnel file management, and labor dispute resolution.

As of 2008, there has been tremendous growth in HROs; partly a result of the enactment of the new Labour Contract Law (LCL) from 1st January 2008. LCL provides a much tighter framework of employment relationship than previous labor regulations, including job security and the provision of social insurance benefits. It also gives employees more power to seek justice through legal channels when employers violate labor laws.

HR Outsourcing Service includes:

  • Employee Relation Service Local staff outsourcing, employment & dismissal, certificate, contract, personnel file, legal consulting concerning labor affairs
  • Benefit Service Social insurance and housing fund, commercial insurance, corporate health insurance and annuity programs, supplemental benefits
  • Recruitment Service Headhunting service, talent recommendation, recruitment process outsourcing, background checking, campus recruitment, talent evaluation
  • Finance & Tax Service payroll, accounts payable, finance and accounting, tax outsourcing, and consulting services
  • Business Service
  • IT System Service
  • Staff Training Service

Who are the HRO Providers: CIIC, FESCO, China Star, China Key…etc. (CIIC and FESCO are the biggest players as they are Government Sponsored)What are some of the Options?

Multinationals operating in China generally have four possibilities in setting up employees and payroll in China: WFOE, FICE, and REP OFFICE as well as a PEO arrangement. The majority outsource to HROs. Those that operate through a WFOE or FICE do not have to operate through an HRO. Those that have a REP office or PEO must operate through an HRO.

Those clients that have no legal entity or presence in China and low headcount can set up a strictly PEO arrangement with an HRO.

Who is responsible for what?

If the company has a REP office or a PEO they must “dispatch” their employees to the HRO. Thus, the HRO becomes the employer of record. The HRO then signs contracts with each of the client’s employees. All filings and payments are done under the name of the HRO as well as any disputes/queries/issues are dealt through the HRO. This takes a lot of liability off the hands of the client.

Those that have WFOEs and FICEs have a choice. They can dispatch their employees to an HRO and thus decreasing their liability when it comes to administrating payment of nets and taxes as well as dealing with the employee relations and benefit administration. Additionally, they can outsource the payroll calculations, payments and filings to an HRO. Lastly, they can handle it all themselves.

Of course, there are a lot more complexities than those mentioned in this blog, however it is a start to attaining a bit of a clearer picture.