As China begins preparations to celebrate the passage on January 31 from the Year of the Horse to the Year of the Monkey, we are reminded of how different the business culture in China can appear to western companies. Indeed, the traditions associated with the Chinese New Year are just some of the myriad (and often unfamiliar) workforce-related issues unique to China that can be confusing to companies doing business in the country—especially those just beginning their operations there. Understanding and planning for these issues is critical to avoiding missteps that could result in financial or legal challenges down the road and disrupt a company’s operations.
Chinese New Year, also referred to as Spring Festival or Lunar New Year, is the most important and celebrated holiday in China, as the workforce takes an extended break to spend time with family. The official public holiday is from January 31 to February 6; however, some businesses and factories will shut down for a full two weeks. Like Thanksgiving in the U.S., the Chinese New Year is the busiest travel season for China. More than 230 million people will venture home by road, rail, air and sea to be with their loved ones to celebrate, and many others will journey abroad to spend their extra month’s pay and year-end bonuses at vacation destinations worldwide.
Yet while the holiday period is a time of celebrations and respite for workers, the weeks following Lunar New Year can pose a challenge for factories, which often must hire and train new workers to replace those who have decided to remain in their hometowns. At the end of 2012, there were more than 260 million migrant workers in China— most of them single young men and women who left their rural hometowns to work in manufacturing hubs in South China and along the eastern coastline. Each year, many of those young workers will return home during the New Year to either start small businesses, seek employment locally, marry and settle down, or tend to aging parents and family members. With a 13th month salary and year-end bonus in the bank, white collar professionals, as well, often find the period a good time to seek or consider new career opportunities.
A company operating in China must understand the significance of Chinese New Year to its employees and plan its operations accordingly—just as it must account for other practices unique to China that can have a significant impact on the company’s ability to do business effectively there.
For instance, any U.S. company planning to hire its first full-time employee in China first must register a company to establish a legal entity in the country. This can be in the form of a Wholly Owned Foreign Enterprise (WFOE) or a Representative Office (RO). Once that entity is established, it is required by Chinese law to pay a portion of its full-time employees’ social welfare benefits—what is commonly known as the five mandatory “insurances” and the housing provident fund. The five insurances covered by the welfare system refer to pension, unemployment, medical, worker’s injury, and maternity insurances. The housing fund, introduced by the Chinese government in 1995, is a tool designed to help middle- and low-income groups purchase their own homes.
Social welfare obligations are not insignificant. Employers are required to contribute 7% to 13% of an employee’s salary to the housing fund, and the employee usually matches this with an equal contribution of his or her own. The five mandatory insurances are calculated as a percentage of salary with a capped amount, each of which vary from city to city and are revised every year. In total, these benefits can add up to 70% of an employee’s salary depending on location and income.
To illustrate the point: An employee in Shanghai making a base salary of RMB 10,000 per month would cost an employer RMB 6,910 in social welfare insurance contributions—about 69% of the monthly salary. An executive making RMB 62,500 per month would cost an employer RMB 9,877 in benefits, about 16% of salary. Starting in 2013, the capped salary amount for determining contributions in Shanghai is RMB 14,407. So although the executive makes RMB 62,500 per month, his benefits are calculated using RMB 14,407, whereas the full amount of RMB 10,000 is used to calculate the worker’s benefits.
Given the significant costs social benefits typically represent, a company may not want the obligation of paying an employee’s social benefits. In that case, the company could decide not to create a legal registered company and, instead, make an employee a self-employed contractor who, in turn, would be responsible for paying all his or her own mandatory social welfare benefits and contributions. However, while the company would save the cost of paying for these benefits, it would risk not having the contractor’s full attention and dedication because he or she is legally free to offer services to other companies (including the company’s competitors). Thus, a company needs to carefully weigh the tradeoffs.
A final note on the aforementioned 13th month salary: It’s very common for employers in China, both local and foreign, to give employees two months’ pay in December each year. Although the practice is not mandatory, many companies offer a 13th month salary as part of their employee benefits program. Traditionally, it has been used to reward employees at the end of the year for their hard work and to allow them to use the extra money to return home for Chinese New Year celebrations.
Navigating the myriad workforce-related regulations and customs in China can be difficult for companies, especially those with little experience in hiring and managing employees in the country. But doing so effectively is critical to capitalizing on the substantial opportunities presented by Chinese market.
