Chinese laws and regulations: Is hiring a freelancer legal in China?

Questions & Answers

Q: More and more websites (like oDesk.com, Elance.com Freelancer.com) in English and Chinese are connecting international business people with Chinese freelancers to project work on a part time and sometimes full time basis. What do the Chinese laws and regulations say about this?

A: Technically, this transaction is not governed by Chinese Labor law and there can’t be a legally binding labor contract in place because the “employer” is not a legally registered Chinese entity. However, Chinese tax law does apply.

It’s not forbidden for a Chinese person in China to work for overseas entity as a freelancer, as long as he/she complies with Chinese laws and regulations, especially the tax law. Income tax needs to be paid and is it the responsibility of the individual freelancer to pay it.
The PRC individual income tax laws clarify how much income tax would need to be paid:

For tax on remuneration for labor services (usually for freelance job) a flat tax rate of 20% is applicable.

There is a different structure for the tax on salary (usually for full-time, long term jobs paid by a formal employer). In those cases a progressive tax rate is in place. 3 to 45 percent is applied depending on the income bracket. Income tax is not applied to the salaries below 3,500 RMB/month.

At the moment, it’s not easy for the China tax man to know how much a freelancer is actually making and where the money came from. However, it’s required by the law that any individual whose income is more than 120,000 per year should report their income to government, regardless of the source.

3 legal services foreign companies in China should not overlook!

To date, there are few instances of freelancers getting in trouble for failure to pay full income tax. In the not too distant future, PRC government will start to crack down. But for now, the laws remain unenforced. BUT there are cases where freelancers and their “employers” are getting into trouble if they perform a service that should only be performed by a licensed entity in China.

Here is one common example:

Dangers of hiring a freelance QC inspector

Some foreigners hire freelance Chinese to do product inspection. The freelancer goes to the foreigner’s supplier in China and conducts an audit of the factory or does a product inspection. After the visit a report is provided to the foreign customer. Actually, this field is highly regulated and only AQSIQ licensed firms with AQSIQ registered auditors/inspectors should be doing inspection/auditing work.

The danger for the foreign customer is as follows:

1. If the Chinese supplier wants to remove the inspector because that inspector is finding a lot of defects. The suppliers can secretly turn the inspector into AQSIQ. So suddenly, the overseas buyers find themselves without eyes and ears at the factory.
2. If the freelance inspector does a poor job and doesn’t find defects or reviews the wrong shipment… the overseas company has little recourse.
3. Most overseas company’s try to get the lowest price freelancer out there. Yet they ask this freelancer to inspect product which may have a significant value. This situation is ripe for bribery.

Say you pay the freelancer 100 bucks to visit a factory and give the yes/no on a 100,000 USD order. Factory knows they have defects, but they get paid from you when the goods ship, so they give the freelancer 400 USD to turn a blind eye and send you are report that says the order “100% OK”. Since there are no ramifications for the freelancer (keep in mind you can’t sue him because you don’t have a legally binding contract with him under PRC law), they are highly likely to go to the dark side and accept the bribe and you get a load of junk.

Additional resources:

www.SupplierBlacklist.com is a great site if you want to see the problems international buyers have when dealing with freelancers, agents and factories in China. Here is a case study of a Canadian company, published on the CSIC blog.