If you have ever planned on hiring an independent contractor while in China, there are numerous factors you must consider. This article will provide a comprehensive overview on independent contractors in China, the distinctions and challenges associated with hiring contractual workers as well as the necessary requirements and procedures should you decide to hire one.
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What is an Independent Contractor?
An independent contractor is any entity or person hired to work or provide services to another entity but not as an employee of the client. It means the contractor is not entitled to any benefits from the client, including social security, healthcare insurance, retirement contributions, and other advantages that regular employees enjoy. Another term for an independent contractor is a freelancer.
What is a China Independent Contractor?
An independent contractor in China provides temporary services to an organization or company under the locally implemented regulations, although independent contractors are rather uncommon. Any company planning to hire independent contractors should outsource the personnel from a third-party agency that is registered for that service, such as a PEO service or dispatching agent.
Differences Between Independent Contractors and Full-Time Employees in China
Employer Relationship
Full-time Employees (FTEs) are treated as employees under the registered company; thus, they receive benefits and other advantages, which an entity is required to provide. On the other hand, independent contractors have a business relationship and agreement with a company, thus it creates more of a transactional interaction between the parties.
Duration of Employment
FTEs are usually given employment contracts for periods ranging from 1 to 3 years or more, with long-term employment in mind. Independent contractors are given short-term, often one-time-only, contracts.
Labor Protection
FTEs enjoy the protection of various labor laws, whereas freelancers are not entitled to this benefit. The termination of an independent contractor is based on the conditions set forth in the contract of service, allowing for a relatively more flexible process. A termination at will, without cause can be agreed upon by both parties and only if losses suffered are in breach of the contract or law, are independent contractors able to claim compensation.
Working Hours
Full-time employees in China generally need to follow the regular 8-hour workday, unless otherwise agreed in the labor contract. Whereas independent contractors can freely work on their preferred schedule or according to the schedule determined by the short-term agreement with a company.
Compensation
Employees in China are required to be paid monthly, while freelancers are typically paid upon completion of the project or otherwise agreed terms of the contract.
Leave Days
FTEs are entitled to take annual leave days and enjoy public holidays. Independent contractors often do not have this benefit because they generally work according to their own schedule and are paid by project completion. However, a contractor is able to choose if they want to take on a particular project at a particular time.
Social Security
It is mandatory for employers to contribute and ensure their employees contribute to China’s social security system. Independent contractors, on the other hand, have to file and make contributions by themselves without any assistance from the partners or entities they work with.
Tax Declaration
Employers file and declare their employees’ income tax on a monthly basis. However, as independent contractors do not have employers per se, they are required to declare their income tax on a yearly basis.
Termination of Services
Depending on the circumstances under which an employment relationship comes to an end, severance payment is usually given to employees if the employment relationship is abruptly terminated on the part of the employer. Independent contractors do not receive this kind of security from the entities they work with, and their relationship can be terminated by either party, at any time, unless otherwise agreed.
Intellectual Property Rights
Companies that hire FTEs own the product and intellectual property created by their employees. On the other hand, independent contractors own the rights to their work, unless stated on their contract.
Chinese Labor Laws Involving Independent Contractors
There are no limitations on hiring independent contractors in China. But employers should not use independent contractors to avoid their responsibilities under the PRC labor laws. Doing so will result in the employee-employer connection being identified as an employment relationship, thus the employer will be liable to fulfil the duties as per the labor regulations.
How to Hire an Independent Contractor in China
There is a lot of paperwork involved in hiring an independent contractor.
When hiring independent contractors in China, it is highly important that companies avoid misclassification. This can happen when the employer manages outsourced freelancers like full-time employees. To avoid this, only the following items should be included in the contract:
- Project scope
- Tasks to be completed
- Start and end date of the project
- Amount and payment method of compensation
- Rights to any intellectual property (IP)
- Liabilities and responsibilities on tasks and resources
- Non-disclosure statements (NDAs) or non-compete clauses, if needed
- Guidelines for terminating the contract
Employers are required to sign a formal employment agreement if they have worked with the same independent contractor for 10 years or more. This also applies if the partnership continued with at least two fixed-term agreements.
FAQ’s when Hiring a Freelancer in China
Below are two other things you need to know when planning to hire independent contractors in China.
Do You Need to Sign a Contract With Independent Contractors?
Yes, a contract is needed to clarify the duties and responsibilities of both parties, to set out the project scope and avoid potential disputes.
Employers should avoid specifying the working hours or how the work should be done in the contract. This could lead to the relationship with the independent contractor being considered full-time employment.
Can You Hire Independent Contractors Through an Entity Based Abroad While in China?
It is illegal to hire anyone, whether they are FTEs or independent contractors, without an established Chinese legal entity. This is one of the most common mistakes foreign companies make when hiring people in China. Overseas entities are unable to declare and deduct the individual income tax, thus risking tax compliance in China.
How Payroll Works for Contractors
Differences in Benefits
Employers are required to contribute to their employees’ social insurance plans, including medical, pension, maternity, unemployment, and housing contributions. FTEs are also entitled to statutory leave days and may receive more, depending on their employer’s offer.
On the other hand, freelancers and independent contractors are not given social insurance, housing contributions, or leave days similar to that which the FTEs enjoy.
Differences in Tax Treatment
Employees are required to make their individual income tax contributions. The tax exemption is RMB 5,000 for foreigners and RMB 5,000 for Chinese employees, on a monthly basis, whereafter a progressive tax rate will be applied, which ranges from 3% to 45%.
Protection from Termination
PRC labor laws strongly favor employees, which is why many statutory provisions have been implemented in order to protect them from termination. Employers are only allowed to unilaterally terminate an employment contract without severance pay under limited circumstances, for example if an employee fails to satisfy employment conditions during the probationary period.
On the other hand, terminating an independent contractor is easier. Hiring companies can simply serve a notification according to the conditions of the contract or the Contract Law of the People’s Republic of China. Severance pay is not required unless stated in the contract agreed upon by both parties.
It is also possible to implement ‘termination without cause’, as long as both parties agree to it being stipulated in the contract. While independent contractors are not protected by the Labor Contract Law, they may still claim compensation for damages if the company terminated them and breached the contract.
Biggest Problems in Hiring an Independent Contractor
1.Legality
While hiring independent contractors is not illegal, there is a lot of paperwork involved to make it legal. This often makes it difficult for foreign companies to enter the market and utilize the local workforce. Without a legal entity in China, foreign businesses cannot directly hire employees or contract workers.
2.Less Control Over Work
Independent contractors are known for working autonomously. They are given the freedom to decide how to best complete the project with their choice of tools and schedule. This kind of autonomy is generally not provided for by employers that want more control over their workers.
3.Frequent Rehiring
Freelancers and independent contractors work for short-term projects, so when they are completed, freelancers can then move on to the next assignment. This means businesses should rehire another contractor and train them again on what needs to be done. Rehiring the same contractor is possible but not all the time since they may have been already hired to work for another company. The uncertainty of availability can be disruptive to businesses that want continuity in their projects.
4.Copyright Ownership
Unless indicated in the agreed contract, the independent contractor has the rights over the work they create. This is why contracts should be carefully written and thoroughly reviewed if the work involves sensitive information.
Consider Alternative Means of Entry
Even if a business wishes to use a freelancer in China, it may be difficult to go through the process without a legal entity in the country. Therefore, it is recommended that companies wishing to do business in China set up an entity according to their needs and goals.
The establishment of a Wholly Owned Foreign Entity (WFOE), Joint Venture (JV) or Representative Office are the most advantageous ways of operating a business in China, especially from a legal perspective. Notable benefits of pursuing common modes of entry such as a WFOE include complete ownership and autonomy over your business scope, as well as the flexibility of employing both foreign and Chinese employees.
Moreover, pursuing a joint venture would provide access to local expertise and resources through partnerships that will help navigate obstacles and barriers. While a Rep Office is limited in its scope, it could be suitable for businesses who are not yet willing to fully enter the Chinese market, but rather take some time and survey the local market.
Given the complexity of the Chinese regulatory environment surrounding administration and compliance requirements, establishing a legal entity is essential for your business needs for the long-term in China. Once you have an entity set up, however, hiring a temporary independent contractor may be more appropriate for short-term projects and commitments.
Final Thoughts
In consideration of the legal requirements and additional complications that may come as a result of employing an independent contractor in China, understand how it works and the regulations surrounding it, is important for any business wishing to hire a freelancer. It is important to understand that independent contractors are placed under a different set of conditions and contractual obligations relative to full time employees and should not be used to shortcut legal responsibilities in accordance with labor laws. The employment of independent contractors should only be considered on the basis of mutual agreement, legal compliance and necessity of the specific project at hand.
Hiring Employees in China can be a complicated and time-consuming process for new business entrants. It is important to ensure compliance at every step of setting up your business. MSA has operated in China for over a decade, supporting enterprises with services in accounting, financial advisory and company set-up.
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