China has enacted its first Social Security Law

The Social Security Law of the People’s Republic of China (“Law”) was passed during the 11th session of the Standing Committee of the National People's Congress of China on 28 October 2010. The Law will take effect as of 1 July 2011. Before its promulgation, the social security policies were scattered throughout a range of rules and regulations at both national and local levels. The Law is the first comprehensive law of the PRC to address social securities and their related administrative issues. In addition to consolidating various existing social security rules and regulations, the Law also introduces some new provisions and policies. The key aspects of the Law are as follows:

Basic Social Security Scheme

The Law, for the first time, expressly clarifies that in China the social security system basically contains five types of insurances, that is (i) pension; (ii) basic medical insurance; (iii) unemployment insurance; (iv) work-related injury insurance and (v) maternity insurance, all of which are mandatory for both the employer and the employee of PRC companies. The Law expressly specifies that contributions to the pension, basic medical insurance and unemployment insurance shall be paid by both the employer and the employee while the contribution to the work-related injury insurance and the maternity insurance shall only be paid by the employer. The Law does not specify the contribution rates and the basis of calculation for each kind of social securities which leaves room for local governments to formulate their own policies in line with their local economic realities.

Transfer of Individual Social Security Relationships

In the past, if the employee changed his work location, it was not possible to transfer the social security relationship of an employee from one city to another. This restriction discouraged employees who work out of their hometowns to participate in the social security scheme. This restriction has now been lifted under the Law. An individual will be allowed to transfer his or her pension, basic medical and unemployment insurance relationships with him or her when the individual decides to move to another city to take up new employment. The social security contribution years will be calculated accumulatively regardless of the change in the work location of the individual concerned. As a result, this new significant change which is brought about by the Law will greatly facilitate the mobility of human resources within the PRC. Under the PRC employment law, the employer is obliged to help the employee to transfer his/her social security relationship in case the employment contract terminates or expires.

Participation in Social Securities by Foreigners

In the past, it was not entirely clear whether expatriate employees need to participate in the Chinese social security scheme. In practice, foreigners if they preferred could have participated in the pension, basic medical insurance and work-related injury insurances based on a contractual agreement with the employer in some cities such as Shanghai, Suzhou and Tianjin. This situation will change after the Law takes effect on 1 July 2011 as the participation in social securities by foreigners will be handled by taking reference of the provisions of the Law. This means that foreigners working in China will be able to participate in the Chinese social security scheme.

Reduction of Work-related Injury Costs to be borne by Employer

According to the current regulations, an employer is obliged to pay to its employee who has suffered a work-related injury a hospital food allowance, transportation and accommodation fees for medical treatment outside the city where the employee works as well as a lump-sum medical subsidy when the employee’s employment contract terminates. According to the Law, in the future, all the above fees and expenses will be covered by the work-related injury insurance fund.

Collection of Social Security Contributions enforced

Compared with the current regulations, the Law expressly empowers the social security collection body with more authorities to collect social security contributions when an employer who fails to make payments in full and on time refuses to rectifiy the situation within the requested time limits. These new authorities are as follows:

  1. access to the deposit account of the employer with banks or other financial institutions;
  2. right to deduct the outstanding social security contributions directly from bank account(s) of the employer upon the approval of the relevant administrative authority;
  3. right to require the employer to provide a warranty in case the balance of the employer’s bank account is insufficient to pay the outstanding social security contributions; and
  4. right to apply to the People’s Court to detain, seize and auction off the assets of the employer at the value equal to the outstanding social security contributions and deduct the outstanding amounts from the proceeds of the auction.

Employer’s Liabilities for Breach of Social Security Law increased

After the Law takes effect, if the employer fails to make social security registration and refuses to make a rectification within the ordered time limits, in addition to a standard penalty of anywhere between RMB 500 to RMB 3,000 imposed directly on the responsible persons which are directly in charge and involved, the employer will also be subject to a penalty which is calculated based on one to three times of the outstanding social security contributions.

Further in addition to a late payment fee of 0.05% of per day, according to the Law, the authority may now also impose a penalty in the amount which is equivalent to one to three times of the amount of the outstanding social security contributions.

In summary, the Law clarifies the obligations of the employers under the social security scheme and also aims to improve employers compliance in the scheme by increasing the penalties and the power of the authorities to enforce such penalties in case of breach. The promulgation of the Law will raise the employees’ awareness of their rights in respect of the social securities and allow them more freedom to work in different cities. As to the provision of the social securities for foreigners, it is still unclear whether such provision will be voluntary or mandatory.