Welcome everyone to another edition of my China Tech Law Newsletter. Following up on a previous post where I discussed some of the things that are keeping us busy these days such as liquidations, employee terminations, litigation, etc. - we’ve also seen companies asking for a more flexible approach to working with staff. This includes using independent contractors.
First, at a high level, I can say that many of the considerations for hiring an independent contractor in China are the same as they are for the US or most other major developed countries. Independent contractors offer more flexibility but certainly have disadvantages, namely:
(1) Intellectual Property – to the extent your contractor is involved in creating valuable IP for the company, you need to be very clear and explicit in your contract with them that the IP he or she creates accrues to the company. Without it, by default, the IP ownership accrues to the contractor.
(2) Social Insurance Benefits - Just as in the US where a self-employed contractor has to pay his or her own social security taxes, an independent contractor will have to pay his own social insurance contributions (retirement funds, medical, housing fund, etc.). The company can still try to cover the costs for those contributions but all things being equal, it tends to limit the ability to hire and retain quality talent.
(3) Taxes - An independent contractor is responsible for paying income taxes themselves. Some individuals may like this, finding creative ways to aggressively deduct business expenses, to minimize taxes. Just be aware that this may happen and avoid being seen as complicit if you suspect that may happen.
(4) Deemed Employee - If you continuously renew an independent contractor’s contract and treat that person like a defacto employee with control over the methods of their work, requiring them to perform core business functions, or requiring them to follow all company (employee) guidelines, you are running the risk that government will view the relationship as an actual labor relationship, and deem the person eligible for employee protections (such as severance).
Hiring independent contractors can save potential severance costs down the road or avoid the cost of setting up a company in the first place. It can avoid having to implement local HR systems, including making social insurance and tax filings. Note however, that there are alternatives such EOR or PEO services available in China. These packaged services can allow the person to be employed by the EOR company but earmarked to service your business as the client (and making the necessary social insurance contributions for them along the way).
*This blog may be considered attorney advertising. It is for informational purposes only and does not constitute legal advice.