Consolidating Regional Employees onto the Payroll of a Single Office

Apr. 19 – An issue that regularly crops up in China concerns the subject of foreign-invested businesses in China expanding their employee base to include staff working in other cities remotely from the main China legal entity. Common questions include:

• How do we handle their HR administration and payroll?
• Do I need to set up a branch, or another office just to handle their employment issues?

The question arises largely because in China, employee social welfare contributions vary from city to city. Accordingly, maintaining an office in say Shanghai, while also possessing staff in Fuzhou or Guangzhou, presents a payroll issue as the social welfare contributions will be different. We have published guidelines to the differing social welfare amounts by city here, here, here and here.

However, it is not necessary to open a new branch office just to cater for one specific, remote employee – what needs to be organized is how to make the social insurance contributions for that employee. The most common method of doing this is to have the employee sign an employment contract with the employing entity (just like any other employee).

Let’s assume that employing entity is in Shanghai. The individual income tax (IIT) for that employee will actually be paid via the company to the Shanghai local tax bureau. However, the social insurance contribution cannot be made directly by the Shanghai company because (in the absence of a branch in the city where the employee is located) it is not possible for the company to setup a social insurance account or a housing fund account in that city to which the employee can be affiliated. The work-around solution here is to find a local agency in that city, affiliate the employee to their corporate accounts, and rely on this company to make the relevant payments.

Each city will have several agents licensed to carry out this kind of work. A common collective name for them is “FESCO,” although in reality they are all local agents and all competing with each other. The company will need to pay the social insurance and housing fund contributions (both employee and employer portion) to this agent, as well as the fee they will charge for the work that they do. It won’t be necessary to have the agent employ the individual, or to pay the individual’s salary through the agent. That can still happen directly. Payroll processing work also does not require the involvement of the agent – their only required function is to make the social insurance and housing fund contributions.

When the number of employees in a specific remote city rises, and especially when the company opens a permanent office in that city, it is advisable to open up a branch office. This will allow the company to cutout the agent and the associated expense. It will also reduce the risk of the local tax bureau challenging the company. Every local government likes to generate tax from the economic activity going on in its region. As we mentioned in the example above, without a branch office, even the IIT income for the work being carried out by the employee working in that location would accrue to Shanghai.

Some companies have employees spread across multiple cities in China. For such companies, it is time-consuming to contract with a separate agent in each city and make separate payments to each of them each month. In these circumstances, we suggest that a single agent is selected in a major city. This agent can accept the payment of contributions for all remotely-based employees, and “sub-contract” with local agents around the country to disperse these funds and make sure the contributions are made. Such an approach can be a more efficient, and sometimes cheaper, way of handling this problem.

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