Employee vs. Contractor: How to Classify Workers in China (Quiz included) [2024]
If you plan to hire workers in China, you must classify them correctly, or else you risk fines, penalties, and other issues.
In 2021, there were approximately 200 million freelance workers in China, many of them working in the gig economy as delivery drivers, copywriters, and more. Still, the People’s Republic of China (PRC) is known as being a high-risk country for hiring independent contractors. Chinese labor laws strongly encourage employment, meaning it’s complicated to legally use freelancers. The Chinese government has pursued foreign businesses that use independent contractors, seeking back taxes and other fees.
Misclassification is harmful to workers. Freelancers who take on the duties of a full-time employee miss out on benefits and protections they’re entitled to under Chinese law, including overtime and minimum wage. What’s more, they’re fully responsible for reporting their own taxes. Misclassification has major ramifications for a company’s reputation, too.
Read on to learn more about how to classify your workers correctly—and stay compliant with Chinese labor and employment laws.
Classifying workers in China
China categorizes contractors differently than employees. Learning the differences can make or break your global team and help you avoid fines and penalties. (More on that below.)
What is an employee in China?
Employees are workers with an established employment relationship with an employer. When hiring an employee, you are subject to various federal and local laws. Employees are entitled to:
- A written employment contract in Chinese (possibly with an English translation)
- A probation period of up to six months
- Limited working hours (typically 40 hours per week, per local law)
- Minimum wage
- Employee benefits and social security payments toward medical insurance, retirement, and unemployment insurance
- Contributions to the Housing Reserve Fund
- Paid leave
- Public holidays off
- Severance pay
- Parental leave (maternity leave and paternity leave)
What is a contractor in China?
In China, contractors are defined as individuals who are self-employed and enter into a “contract for service” with employers. They may also be known as freelancers or consultants. These individuals are not owed employee benefits and don’t have the same worker protections as full-time employees.
Worker classification overview: Employees vs contractors in China
Contractors
Employees
Self-employed as an individual in China, not necessarily engaged in work by a registered company in China.
Employed by a registered company in China, which can be a legal entity or an employer of record (EOR).
High level of worker control.
Contractors are generally given more autonomy to determine how to complete the work and when to do it.
More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.
Paid upon completion of work.
Paid a monthly salary.
No entitlement to benefits. Contractors are not entitled to the same benefits and labor protections as full-time employees.
Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, annual leave, and vacation pay.
Responsible for their own taxes. That includes tax payments, social security contributions, and reporting their own taxes annually.
The employer reports taxes and makes contributions. This includes declaring the employee’s individual income tax each month, plus contributing to social security and The Housing Fund on their employee’s behalf.
Can have contract agreement terminated at any time.
Highly protected from termination.
Own their work. Unless agreed upon in a contract, the contractor has the rights over the intellectual property they create.
The employer typically has full ownership over their work.
Time-bound engagement. Contractors are typically engaged for a specific project or short period of time.
Indefinite engagement. Employees are generally hired for an indefinite period of time or long-term engagements.
Tests to classify workers in China
Regulations around classification are very strict in China, as employers aren’t allowed to lean on contractors to skirt employer liabilities and obligations under the country’s labor laws. Chinese labor courts will look to the Circular of the Ministry of Labor and Social Security on the Establishment of Employment Relationship to figure out whether an employment relationship exists between you and your worker. Under this legislation, there are three characteristics of an employee-employer relationship:
- Both the employee and employer are legally qualified to enter into an employment relationship.
- The employer’s rules apply to the employee, who is subject to the employer’s labor management and is paid for their work.
- The employee’s work is part of the employer’s business.
And…that’s it! While local courts may have more specific criteria, if those factors are satisfied, you should likely classify that worker as an employee.
In a dispute, the Chinese government will look at all aspects of the working relationship. Therefore, no single test should be considered conclusive for classifying a worker. They may examine wage payment records, work certificates, recruitment methods, attendance records, and the testimony of co-workers to determine whether a worker has been misclassified.
Local courts may have their own criteria. For example, in one Shanghai decision, it was determined that a worker can be classified as a contractor rather than an employee if they’re not subject to the management of the employer, takes risks with their own skills and facilities, does not follow instructions from the employer, and doesn’t have a subordinate relationship with the employer.
If you’re hoping to classify Chinese workers yourself, here are some additional questions:
Control
Does your contractor have full control over when and where they perform their work? Contractors should be able to complete their work at a time and place of their choosing.
Do you give your worker feedback or coaching? Typically, contractors should be fully independent of the employer as skilled workers tackling one-off projects or short-term assignments.
Can your contractor work for other companies at the same time? They should be able to work for multiple clients. If they only have time to work for you, they should probably be classified as an employee.
Tools
Who owns your worker’s tools? Contractors should have their own laptop, monitor, phone, and other equipment. If your workers receive equipment to perform work-related tasks, they may need to be classified as employees.
Do you reimburse your worker for work-related expenses? Typically, independent contractors assume their own work and travel expenses.
Contract terms
Is your worker paid per project or for a specified period of time? Workers who are paid hourly, weekly, or monthly without a set end date should probably be classified as employees. Contractors are not included in payroll and typically send invoices at the conclusion of projects.
Integration into the workforce
Do you offer your workers employee benefits? Employee benefits are only required for full-time employees and aren’t intended to be given to contractors.
Is your worker integral to your business? If you can’t operate your business without your “contractor,” they are probably a misclassified employee.
Penalties for misclassifying workers in China
Contractors may want to become employees to get worker protections, fair compensation, a contribution for social security, and protection from termination—furthermore, if they have been working as full-time employees, they’re legally entitled to be classified as such. Misclassified contractors may file labor arbitration or bring a lawsuit to confirm their true status as employees. If they have enough evidence, then the contract will be re-characterized.
What happens in this case? Once the worker is correctly classified, the employer must pay them a salary that meets or exceeds minimum wage, plus any applicable overtime payments. The employer may also be on the hook for unpaid social insurance funds and late payment interest.
But it goes beyond simply having to reclassify your worker and treating them like an employee. Businesses found to have misclassified employees as contractors in China face serious financial risk—China is especially quick to enforce these rules against foreign companies. Here are some of the potential risks:
- Fines and penalties.
- Back pay for employee benefits, overtime, taxes, and social insurance contributions. You could also be liable for late payment interests and may have to make up for any underpayment under minimum wage or overtime laws.
- Bans from operating in China.
- Loss of intellectual property should the independent contractor challenge the ownership of the work they created for you.
Of course, companies found misclassifying workers may also suffer from legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
