How Does an Employer of Record Simplify Hiring in China?

Introduction

China has the same basics as other APAC markets: statutory leave, payroll obligations, notice periods. But China layers in several requirements that don’t exist in the same form anywhere else in the region.

The social insurance system runs at city-level rates, not national ones. Employment contracts must be in place within 30 days of the start date or double-wage penalties apply. Termination without a legally recognised ground is a labour law violation, not just a dispute risk. Severance applies even when a fixed-term contract expires and isn’t renewed.

A China employer of record takes on these obligations as the registered legal employer.

Why Employment Contracts in China Work Differently

China’s Labour Contract Law requires employers to issue a written employment contract within 30 days of an employee’s start date. An employer that misses that deadline owes double wages for every month without a compliant contract, up to 12 months.

Beyond the document itself, employers register employment contracts with the local Labour Bureau in the city where the employee works. Requirements vary by city, but the principle is consistent: the employment relationship is anchored locally, not nationally.

The contract must also specify certain terms by law: work location, job description, salary, working hours, employment duration, and the applicable probation period, if any. A contract that omits required terms or includes terms that contradict the Labour Contract Law is treated as if the illegal terms don’t exist; the law’s provisions override them.

The employment contract in China is a compliance instrument as much as an employment agreement. Missing it, or getting the required terms wrong, triggers statutory penalties rather than just a contractual dispute.

For a foreign company without a Chinese entity, none of this is directly manageable. The provider holds the registered employment relationship and issues contracts meeting these requirements from the outset.

How Social Insurance and the Housing Fund Work in China

Every employee in China belongs to the country’s mandatory benefit system: five social insurance schemes (pension, medical, unemployment, work-related injury, and maternity insurance) plus a mandatory Housing Provident Fund (HPF). Each city sets its own contribution rates and salary bases. The employer’s total contribution for social insurance (excluding the housing fund) typically lands between 22% and 28% of the contributory wage base depending on the city. The housing fund adds a further 5% to 12% employer contribution on top of that.

A company hiring across three Chinese cities runs three separate social insurance registrations under three different rate schedules. The employer of record handles each city-level registration as part of onboarding.

How IIT Withholding Works for Employers in China

China uses a progressive Individual Income Tax (IIT) system, with rates ranging from 3% to 45% on employment income. Employers are responsible for withholding IIT monthly from each employee’s salary and remitting it to the local tax authority.

The calculation runs on an annual cumulative method. Each month, the employer calculates year-to-date withholding based on cumulative income and applicable deductions, then adjusts the current month accordingly. Effective monthly withholding shifts throughout the year as cumulative income rises.

Standard deductions include a basic monthly deduction of RMB 5,000 per employee, plus additional deductions for housing loan interest, children’s education expenses, and other qualifying items the employee declares. The employer applies these deductions against the cumulative method each month.

Unlike a fixed monthly deduction, IIT in China runs on a year-to-date cumulative basis: each month’s withholding is recalculated against total income earned so far, and the employer files and remits the result monthly.

Termination Under China’s Labour Contract Law

China’s Labour Contract Law does not permit at-will termination for standard employment contracts. An employer can only unilaterally terminate an employee under specific circumstances listed in the law, and the consequences of getting it wrong are significant.

The grounds for immediate termination without severance are limited: serious violation of company rules, gross negligence causing significant harm, dual employment that prejudices the employer, criminal liability, or fraud during hiring. Outside these grounds, termination requires a legally recognised reason, 30 days’ written notice (or one month’s salary in lieu), and statutory severance.

Severance under the Labour Contract Law is calculated at one month’s average salary per year of service. Severance also applies when a fixed-term contract expires, and the employer chooses not to renew, unless the employer offers renewal on equal or better terms and the employee declines.

China’s labour arbitration system is also employee-favoured and actively used. In other markets, similar disputes settle informally. In China, they routinely go to arbitration, and non-compliant terminations typically draw reinstatement orders or additional compensation of two months’ salary per year of service.

Probation Period Rules Under China’s Labour Contract Law

China ties the maximum probation period directly to the contract length:

Each employee gets one probation period only, regardless of any changes in role or contract type. An employer that imposes a second probation period, or extends a probation period beyond the statutory maximum, is liable to pay compensation equal to the wages for the excess period.

During probation, an employer can terminate for demonstrated failure to meet the role’s requirements, but documented justification is still required. Dismissing a probationary employee without evidence of underperformance exposes the employer to a dispute.

What Does an Employer of Record Handle in China?

Each of these obligations sits with the legal employer, which means a foreign company without a Chinese entity can’t hire compliantly on its own. The employer of record fills that role. In practice, this covers:

• Employment contracts in Mandarin, compliant with local Labour Bureau requirements in the employee’s city
• Social insurance and housing fund registration at the city level, with contributions calculated at the correct local rate each month
• IIT withholding using the cumulative method, filed and remitted monthly to the local tax authority
• Probation documentation to keep periods within statutory limits
• Termination management: correct severance calculation, statutory notice, and documentation that holds up if a dispute goes to arbitration

Frequently Asked Questions

1. What makes hiring employees in China more complex than other APAC markets?

China’s Labour Contract Law requires written contracts within 30 days (with double-wage penalties for late compliance), social insurance is registered at the city level with municipality-specific rates, termination requires a legally recognised ground with statutory severance in most cases, and IIT withholding recalculates month by month. Each of these sits with the legal employer, and that’s the role a China employer of record fills.

2. What happens if a written contract isn’t issued within 30 days in China?

Under the Labour Contract Law, an employer that fails to issue a written employment contract within 30 days of the start date owes double wages for each month without a compliant contract, up to a maximum of 12 months. After 12 months without a written contract, the employment is deemed to have converted to an open-ended contract automatically.

3. How does social insurance work differently across Chinese cities?

Social insurance in China is administered locally, not nationally. Each city sets its own contribution rates for pension, medical, unemployment, work injury, and maternity insurance, as well as its own salary floor and ceiling for calculating contributions. The total employer social insurance burden typically ranges from 22% to 28% of the contributory wage base depending on the city, plus a separate housing fund contribution of 5% to 12%.

4. Can a company in China terminate an employee without severance?

Only in specific circumstances: serious misconduct, gross negligence causing significant harm, fraud during the hiring process, dual employment that prejudices the employer, or criminal conviction. In most other termination scenarios (including economic redundancy and fixed-term contract non-renewal), severance is required at one month’s average salary per year of service.

5. Why is IIT withholding in China more complex than a flat monthly deduction?

China’s IIT uses an accumulative withholding method that runs year-to-date, not a fixed monthly rate. Each month, the year-to-date cumulative income determines the applicable bracket and deductions, so the amount withheld adjusts throughout the year as income rises. In January, withholding is calculated on one month’s income. By December, it’s calculated against the full year. An employee in a higher bracket may see their monthly withholding change significantly as the year progresses. That’s why payroll in China requires month-by-month recalculation rather than a set-and-forget rate.

China’s employment framework creates obligations that don’t exist in the same form elsewhere in APAC: city-level social insurance, restrictive termination rules, mandatory contracts with statutory penalties, and an IIT calculation that recalibrates every payroll cycle. Talk to the Galaxy APAC team about setting up a China employer of record arrangement for your team.