What Is PEO (Professional Employment Organization) ?

Traditionally, clients hiring even one employee in China would be legally required to establish a representative office, branch office or subsidiary in China. However, due to the multiple administration procedures and the strict Chinese immigration law, setting business in China is a time- consuming and complex process as well as a significant reason for not entering the market.

In case a foreign enterprise does not have a legal entity in China or the entrepreneur is waiting for the completion of the establishment of a Wholly Foreign Owned Enterprise (WFOE), PEO services are the best solution to ensure the foreign enterprises legally have the employees working in China.

For companies looking to capitalize on these emerging markets, a Foreign Enterprise Service Company (FESCO) – also known as a Professional Employment Organization (PEO) – may prove to be the perfect partner. In addition to allowing companies to employ staff in China, PEOs provide comprehensive HR and administration services, which ultimately furnishes companies wishing to do business in China with everything they need for establishing or enhancing their Chinese workforce.

What is a PEO China?

PEO is an established and fully licensed legal entity that allows local and foreign companies to employ workers in the Chinese market and outsource their HR and administrative responsibilities. PEOs are important entities not least because workers in China must be paid locally in accordance with Chinese laws; it is not possible to employ someone in China and pay them from another country, nor to ‘employ’ them as independent contractors or similar. 


In fact, this is precisely the reason that PEOs are proving so popular with companies looking to dispatch labor in the Chinese markets. PEOs provide a fast and convenient means to establish or enhance a local workforce in China in a manner wholly compliant with Chinese laws.

Who can use a PEO? 
PEOs are available to companies whether or not they have a legal entity registered in China. This means that local Chinese entities are also able to benefit from PEOs, not just foreign ones.

For local companies, the main attraction of using a PEO is being able to outsource HR and administrative needs. Local companies may wish to do this for a number of reasons. It may, for example, be more cost effective to hire temporary staff through a PEO than bring them into the company’s existing systems. It may also prove more cost effective in compliance terms, as using a PEO could be cheaper than hiring a labor lawyer to review the company’s employment arrangements.

For foreign entities, PEOs provide a particularly beneficial service because not only provide all of the facilities enjoyed by local entities (outsourced HR and administration) but they also greatly increase the speed of entry into the Chinese market. Establishing a new legal entity in China is complex, expensive, and time-consuming. Often, these costs negate the value of the original opportunity, and accordingly can effectively prohibit companies from expanding into what could be very fruitful markets for their business. Using a PEO is one way to ensure rapid, compliant, and convenient labor dispatch in China.

What are the main services offered by a PEO? 
PEOs serve as excellent partners for the HR and administrative aspects of employing talent in China. The services offered by PEOs are many and various, but the main ones include:

* Contract Drafting and Negotiation: Having a local presence to draft and negotiate the contracts of your new hires is imperative, not only for obtaining the best substantive agreement but also for ensuring compliance with Chinese laws and full comprehension in Chinese language.


* Tax Arrangements: China’s Individual Income Tax (IIT) laws change often, and a PEO can safeguard against any legislative or regulatory developments that may impact your business. Since October 2018, tax changes have affected high income and foreign workers in particular, so compliance must remain a priority for local and foreign businesses alike. Deductions are also a complex matter, with the standard deduction increasing to RMB 60,000 per annum for both resident and non-resident tax payers and other deductions, such as childcare (up to RMB 12,000 per child per annum), education (up to RMB 4800 per annum), and care for the elderly (up to RMB 24,000 per annum) also applying in certain circumstances. PEOs arrange for the requisite deductions to be made from salaries in accordance with Chinese law, relieving their clients of significant legal and administrative responsibilities.


* Social Security: China’s social security system is complex. Five types of social security are taken (pension, medical, unemployment, work injury, and maternity), along with a contribution to the Housing Fund – which employers and employees must by law contribute to evenly – that ranges from 5-25%. Contribution rates vary by city and by employer, thus it is preferable for businesses to have an expert team – like those offered by PEOs – available to implement the correct arrangements. 

* Dispute Resolution: Employer/employee disputes are difficult at the best of times, and they are undoubtedly complicated by the fact that the employer may not even be present in China. PEOs are highly experienced in managing conflict and ensuring a legally-compliant resolution to any formal disputes. 


* Visa Arrangements: Where a visa is necessary to work in China, PEOs are well-positioned to apply for and monitor applications. With local teams that are familiar with the complicated immigration laws in China, outsourcing this especially challenging part of employing talent in China is attractive to businesses of all types. 

Are there any potential disadvantages of using a PEO? 
As with any business decision, there are disadvantages as well as advantages in choosing to use a PEO in China. Accordingly, companies considering a PEO should be aware of the following concerns:

* PEOs may not always be suitable for hiring ‘core’ staff, as the administrative arrangements tends to be better suited to temporary or part-time staff.

* PEO labor contracts are limited by law to two years (although, it may be possible legally to terminate the contract within two years and then issue a new contract to the same person, if necessary).

* PEOs may indirectly obscure transparency in aspects of employment (for example, payroll) because of the fact that they handle all HR and administrative needs in one comprehensive service.


Thankfully, though, for the vast majority of companies, the advantages of using a PEO will greatly outweigh the disadvantages.

Summary 
It is clear that PEOs provide a high level of value to both local and foreign companies wishing to establish or enhance their workforce in China. The Chinese market and legal landscape can be prohibitively complex, but PEOs can take on many of the burdens and responsibilities, allowing companies to focus on their mission, goals, and expansion into China. To find out more about Talent Spot could serve as a PEO for your business, please get in touch.




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