As the export leader and the world's largest manufacturer for many years, China has been the focus of attention for foreign investors and industry professionals. Employing independent contractors for companies operating in China is on the agenda in terms of business trends around the world. 

However, due to Chinese law, social insurance and other legal benefits for employees cause problems. Chinese laws aim to protect the relationship between the worker and the employer in favor of the workers, while the main goal is to protect the working continuity and conditions of the worker. 

On the other hand, working with an independent contractor has significant advantages, especially for short-term and specialized work. Unless the Chinese law's perspective on the use of independent contractors changes, some legal risks remain for employers. As a result of this dilemma, employers and employees need to know the important points as pros and cons under current laws. 

The Biggest Problems With an Independent Contractor 

1. Legal Problems Due To Chinese Laws

Chinese law does not prohibit hiring independent contractors. However, in order not to make this method attractive and to protect the employment contracts of the employees, it is necessary to prepare a large number of documents and bureaucratic procedures. The main purpose here is to direct employers to employ a worker instead of hiring independent contractors, except in cases of necessity. In short, hiring independent contractors is not illegal, but it is sometimes very costly and expensive for employers. 

In China, working for a registered company is treated as an employment relationship; on the other hand, an independent contractor is only a business contractual relationship. And foreign companies cannot hire employees in China without a company in China. 

2. Control Over Employees 

There is a business contract between independent contractors and employers. However, this contract is about the content of the work to be done and how it will be done. Additional items can be added, such as independent contractors' social security, and insurance expenses, but none of them are as secure as employee rights. On the other hand, this type of work arrangement limits the employer's control over the employee. This way of working is risky, especially for companies where information security is important and who want to establish a long-term business relationship with their employees. 

Trying to manage working hours, and establishing a working relationship similar to full-time employment in order to gain more control over independent contractors in China may cause this employment relationship to be perceived as full-time employment and thus cause legal problems for the company. 

3. Business Continuity and Rehiring 

Independent contractors are suitable for short-term projects. For example, establishing such a business relationship with a software specialist that will be needed for a few months would be logical in every respect. But if you're going to need an employee for similar jobs frequently, it's less costly and safer in the long run to have a fixed employee instead of hiring a succession of independent contractors. It will take time for an independent contractor to get to know your company, working methods, employees or suppliers, as well as your current projects. In this case, every independent contractor will be inefficient for a while at the beginning of the work. 

Rehiring the same contractor is another solution. However, there are two risks in this case. First, these people may not be available when you need them. They may have agreed with another company. In such a case, your current job will be suspended. The second risk is that the independent contractor, who is often rehired, may raise some red flags. You may be treated the same as employers who fail to fulfill their employee rights under Chinese law. 

4. Independent Contractors Copyright Ownership

An independent contractor typically retains ownership of their work unless it falls into one of the specific categories that the Copyright Act considers to be made for hire: a component of a film or other audiovisual work or a contribution to a collective work. 

This situation creates various risks for both the independent contractor and the employer. Due to the nature of the work performed, the independent contractor may be deprived of his rights. Or, the employer may experience copyright problems with the independent contractor for the works that he will have his employee do without having a copyright problem under normal conditions. 

5. Taxes 

An independent contractor works in a similar way as a sub-contractor providing a service to the company. In order for the firm to be able to deduct the cost from its costs and other deductions for the purpose of corporate income tax, an independent contractor must get a "laowu" invoice from the tax office and give it to the business as proof that their taxes have been paid. This is an extra burden for the contractor. As a final note, the independent contractor tax rates are higher than that of a company employee. 

6. Social Insurance Benefits 

Whether they are full-time employees or independent contractors, hiring anyone without an established Chinese legal company is prohibited. One of the most frequent errors international businesses make when recruiting individuals in China is this one. There is a tax compliance issue in China due to overseas entities' inability to declare and deduct personal income tax. 

Suppose you are going to hire an independent contractor in China. In that case, you do not need to contribute to the Chinese social insurance and housing fund. The Chinese social security system only covers full-time workers in China. Therefore, independent contractors cannot benefit from social insurance benefits. Many staff often will not accept this type of work to avoid being deprived of these rights. 

Understanding how this works and the rules around it is vital for any business intending to engage a freelancer given the legal requirements and additional issues that might occur as a result of doing so in China. 

Expand into China without setting up a company, by employing or relocating key staff to take a first step in exploring the market. A professional employer organization (PEO) service can act as the official employer of record (EOR) for your staff in China while you expand your business. With the support of our trusted partner network, we can facilitate local hiring and employment without the time and cost of setting up a legal entity in country.

Contact us for more information at inquiries@ChinaLawSolutions.com