Hiring contractors in China can be a smart business decision for companies seeking to expand their operations in the country. While hiring contractors offers flexibility and cost savings in certain areas, it is crucial to understand the legal compliance of hiring contractors in China to avoid the labor relationships constituting an employee employer relationship – undoing all the benefits of hiring contractors as a result.
As opposed to hiring full-time employees, the agreement between a company and a contractor or freelancer is not governed by Labor Law of the PRC or Labor Contract Law of the PRC. This means the company is not bound by the requirements of the Labor Law of the PRC, such as paying social insurance, paying severance, and providing other benefits such as paid leave and sick leave. Instead, the company is permitted to define the terms of the service agreement signed between the Company and the Contractor and is subject to Contract Law of the PRC.
Classification of Freelancers and Contractors in China
Freelancer and Contractor are terms used interchangeably with one another to define the working relationship between the company and the individual. The company is considered to have hired a contractor or freelancer if the company pays the individual in exchange for services and is not deemed to constitute an employee and employer relationship.
The company should be careful that its relationship with a contractor does not trigger an employee-employer relationship, thus fundamentally changing the nature of the engagement.
According to the Labor Law of the PRC, an employee-employer relationship is triggered when:
- The company pays the individual a set salary and provides insurance or other social benefits;
- The contractor is required to follow all of your company’s guidelines and their work is under the control of the company; or
- The contractor is performing an essential functionf the company’s core business operations.
Furthermore, if the company has worked with an independent contractor for 10 consecutive years or more or has signed two consecutive fixed-term contracts with the independent contractor, the company is required to sign a non-fixed term labor contract with the individual.
Standard Contract Terms for Hiring Contractors and Freelancers
The terms of the contract between a Contractor and the company are subject to the mutual agreement of both parties. In order to avoid misclassification of the contractor as an employee and to clearly define the working relationship as they would with a service provider.
Thus it’s important to include the following standard contract terms when hiring contractors in China.
Detailed scope of work and timeline
The scope of work should be clearly defined in the contract to avoid any confusion or misunderstandings. The contract should specify the nature of the work, the expected deliverables for the project to be considered complete, a clear beginning and end date, and the timeline for completion. This helps to ensure that both parties have a clear understanding of the project’s requirements and reduces the risk of disputes.
Compensation and form of remuneration
Payment terms should be clearly outlined in the contract, including the payment schedule, rate of payment, method of payment, and payment structure, if applicable, as they would in a normal service agreement with an outside vendor.
Liability for outcomes and resources used in relation to the scope of work
It’s important to define in the contract who is liable for the cost of resources used in relation to the scope of work being performed. This can be borne by the company or contractor and is subject to negotiation by the two parties. Additionally, the company should define which party is responsible for which outcomes within the scope of work.
Intellectual property and copyright ownership
The contract should specify the ownership of any intellectual property or copyright-protected work produced by the contractor if any. This is very important if the contractor participates in the creation of designs, patents, audio-visual works, or other works which fall under relevant intellectual property laws in China. If the ownership of the work is explicitly provided to the company in the terms of the contract, the creator, i.e. the contractor, will be deemed to be the owner of the intellectual property.
Confidentiality and Non-Disclosure
Confidentiality and non-disclosure clauses should be included in the contract, if applicable, to protect the company’s trade secrets, confidential information, and intellectual property from unauthorized use or dissemination.
Clause for termination of the contract
The contract should include provisions for termination, including the circumstances under which either party can terminate the contract, such as failing to deliver on the agreed upon outcomes, and any notice periods required.
Withholding and Payment of Individual Income Tax for Contractors
According to article 2 of the Individual Income Tax Law of the PRC, enterprises hiring Contractors and Freelancers are required to withhold Individual Income Tax.
When the company withholds IIT on behalf of freelancers or contractors, they do not do so according to the progressive IIT rate in China. Instead, a proportional tax rate of 20% is applicable for monthly prepayment. If the income does not exceed RMB 4000 each time, RMB 800 of expenses shall be deducted; if the amount is more than RMB 4,000, 20% of the expenses shall be deducted, and the remaining balance shall be the taxable income.
However, this isn’t to say that freelancers and contractors are not subject to the progressive IIT rate as normal employees. The taxable income earned by the contractors and freelancers shall be included as part of their comprehensive income and is ultimately subject to the progressive IT rate. Any tax shortage or surplus shall be corrected during the Annual IIT Reconciliation filed by the contractor or freelancer at the end of the year.
Social insurance for contractors and freelancers
Under Social Insurance Law of the PRC, companies are only required to withhold and pay social insurance on behalf of their employees. With regard to contractors, freelancers, and part-time employees, Social Insurance Law of the PRC states that Individual industrial and commercial households without employees, sole proprietors, non-full-time employees, and other flexible employment personnel CAN participate in the social insurance program on their own.
In other words, payment of social insurance by contractors and freelancers is left up to the individual, freelancer, or contractor and not the company. The company should explicitly NOT withhold social insurance on behalf of the employee as this could constitute an employee-employer relationship.
Let us help you ensure compliance when hiring contractors in China
Integra Group has extensive experience assisting clients to hire contractors or freelancers in China and ensuring HR-compliant practices in doing so with our HR support services. Our HR experts assist you in creating contracts that suit your HR management practices and provide practical guidance on how to avoid unknowingly triggering an employee-employer relationship with your contractors and freelancers. When combined with our payroll services, we are your one-stop solution for hiring contractors in China.
Get in touch with us today to talk to one of our HR professionals!
