How to Convert Contractors to Employees in China

When expanding business operations in China, it is common to hire contractors or third-party service providers to help with various tasks. However, as a company grows and establishes a more permanent presence, some of these contract workers may need to be transitioned to full-time employees. This process requires navigating Chinese labour laws and regulations, which are complex and subject to frequent revisions.

The following article provides an overview of the steps involved in converting contract workers to regular, full time employees in China, both with and without an established legal entity.

Converting contractors to employees in China with a legal entity: eight steps

If a business has a legal entity established in China and wants to convert their contracted workers to regular employees, here are the steps to follow:

Step 1: Review the legal and regulatory requirements.

To ensure compliance, as with any employment agreement in China, it is critical to review the appropriate laws and regulations. This may involve consulting with local legal experts who are familiar with Chinese labour laws.

Step 2: Negotiate with the contracted workers.

Before beginning the process of converting contractors to employees, it is important to have open and transparent communication with them about the reasons for the change, the benefits and obligations of regular employment, and any changes to compensation or other terms.

Step 3: Draft an employment contract.

Once both parties have agreed to the terms of employment, a new employment contract should be drafted and signed. This contract should specify the terms of employment, including compensation, benefits, working locations, working hours, labour protection, work conditions, and termination clauses.

Step 4: Transition the contractors to employees.

The next step is the transition to regular, full time employment. This can be a complicated process in China, and it is critical to ensure that all employment contracts and benefits are correctly transferred. Training may be required so that the new employees understand the company’s policies and processes.

Step 5: Register with the relevant authorities.

Employers must register with the relevant authorities and obtain any necessary permits and licences. This may include registering with the local labour bureau, the social security office, and the tax authorities.

Step 6: Set up payroll and social security contributions.

As an employer in China, payroll taxes and social security contributions must be withheld from employee wages and remitted to the government. This may involve setting up a payroll system, calculating contributions and individual income tax, and making regular payments to the appropriate authorities.

Step 7: Establish HR policies and procedures.

After the employees have been transitioned, it is critical to establish HR policies and procedures that are tailored to the company’s and employees’ needs. Examples are setting up employee benefit schemes, producing an employee handbook, and announcing relevant policies.

Step 8: Provide employee benefits.

It is essential for employers in China to provide certain employee benefits, such as social insurance, a housing fund, and paid leave, while also ensuring compliance with the Chinese labour laws.

Converting contractors to employees without a legal entity: five steps

Companies operating in China without an established legal entity can convert their contracted workforce to regular employees by partnering with a Professional Employer Organisation (PEO), specifically, one that offers employer of record (EoR) services. In this arrangement, the EoR is the legal employer of the employees, taking responsibility for the payroll, benefits, and compliance functions. Having a PEO acting as the employer of record is a good option for multinational businesses that do not have a legal entity in China and want a more formal employment structure for their workforce.

The following are the general steps to follow to convert contracted workers to employees with a PEO acting as the employer of record:

Step 1: Choose a PEO with the capacity to act as the employer of record.

There are many PEOs to choose from in China, so it is important to research and choose a reputable provider. The chosen PEO must have deep knowledge of China’s labour laws and be fully equipped to manage essential employee requirements, legal obligations, and administrative tasks.

Step 2: Provide information about the employees.

The employees’ information, such as their contract details, payroll information, benefit plans, and other relevant information, must be provided to the PEO. The PEO will be interacting with China’s various labour-relations, social security, and tax authorities, so it is important to always keep this information up to date.

Step 3: Notify the employees.

Before the employees’ status is changed, they must be officially notified. It is essential to explain the reason for the transition, how it will affect their employment, and the advantages, such as better job security, access to social insurance, and other employee benefits.

Step 4: Convert the contractors to employees.

The PEO will then convert the contracted workers to full time, regular employees. This involves terminating the existing service agreement with the contractors and entering into a new employment contract with the PEO. The PEO will take care of all the paperwork and legalities involved in converting the contractors to employees, and, as the employer of record, assume responsibility for labour disputes, restructuring, and other workforce-related risk factors.

Step 5: Monitor progress.

The last step is to monitor the progress of the conversion process and communicate regularly with the PEO to ensure that everything is running smoothly with the administration of the workforce.