Interregional employment is an increasingly common arrangement in practice. Interregional employment means that the domicile of employer differs from the location where employment contract is performed. The difference is generally caused by the feature of employer’s business. For example, employer is registered in Beijing and does not have any branches in other cities. But employer needs to assign salesmen to work in other cities or directly hire salesmen in these cities for business operation. In this case, employees would be hired by employer registered in Beijing, while their employment contracts are performed in other cities.

In interregional employment, one practical problem that employer is frequently faced with is whether to pay social insurance for employee in the city where employer is located or city where employment contract is performed. It is a quite easily-answered question from legal perspective, as the law expressly provides that social insurance should be paid in the place of residence of employer[1].

However, in practice, some employers may choose to pay social insurance for employee through a third party at the location where employment contract is performed, so that employee could enjoy social insurance benefits expediently. As for those locally-hired employees, they normally reside in city permanently thus may proactively request employer to pay social insurance at the location where the employment contract is performed. Paying social insurance through a third party normally requires employee to sign nominal employment contract with the third party, which is called “social insurance paid through a third party” in practice.

As a temporary solution, the arrangement abovementioned is favorable to employee, thus rarely causes disputes. However, “social insurance paid through a third party” is associated with potential risks and it has started to be banned by local regulations in some places.

Risk warning

The risk of “social insurance paid through a third party” will manifest when it comes up with issues relating social insurance treatment (especially work-related injury treatment). Below is a brief summary of potential risks.

1. Employee may be unable to enjoy relevant treatment in case of work-related injury.

Some of local authorities are strict with ratification and payment of work-related injury treatment and require that the domicile of employer must be the same with the place of social insurance paid. As a result, under the situation of “social insurance paid through a third party”, social insurance authorities may refuse to pay on the ground that these two places are different.

In this case, employer has to assume all responsibilities for the work-related injuries, including lump-sum disability allowance, lump-sum work-related injury allowance, nursing fee and so forth. However, under normal situations, such payments should have been covered by the Work-related Injury Insurance Fund.

2. After application and collection of the treatment of work injury insurance, the injured employee may request the company to make up difference

In practice, the upper limit of the payment base of social insurance varies with different places. According to the rules of social insurance contribution, the upper limit is normally three times the local average wage. Beijing’s average wage is higher than that of any other city, making Beijing’s upper limit of social insurance payment base the highest across the nation. When the social insurance is contributed in another city rather than company’s domicile, the average wage of that city will apply. Hence, actual payment of the social insurance may be lower than that made according to rules of employer’s domicile, particularly when the company is registered in Beijing.

A low payment base of the social insurance would impact employee’ actual treatment of work-related injury insurance, as these two are closely linked.

For example, the standard of lum-sum disability allowance ranges from 7 months to 27 months of employee's average wages, which refers to employee’s average contribution base during the 12 months before the injury. Employee may claim that his/her work-related injury treatment is lower than statutory standard due to lower payment base of work-related injury insurance and ask employer to make up difference after the application and collection of work-related injury insurance treatment.

3. It may violate local regulations, incurring legal liabilities including fines on the third party paying social insurance and employees.

The arrangement of paying social insurance through a third party has already been expressly banned by some local regulations. From July 1st, 2016, such behavior will be deemed illegal in Guangdong Province and involved companies and employees will be recorded into credit files, and even be imposed a fine[2].

Implications and suggestions

Objectively, the practice of “social insurance paid through a third party” is not compliant with the law. However, it does not harm the interests of any party. As employees and employers have paid social insurance fees, respectively, and employees will enjoy social insurance treatment upon proper arrangement.

However, considering the compliance with current laws and regulations, paying social insurance in the domicile for employer is the most recommended method. However, if employer chooses “social insurance paid through a third party”, as a second recommendation, a clear agreement specifying the human resource service provider to apply for treatments triggered by certain social insurance issues, is suggested to be reached between employer and human resources service provider. Sure enough that a good collaboration from human resource service provider soothes potential legal risks of failure to claim social insurance treatment.

Lastly, as a result of the prohibition of “paying social insurance through a third party” in local regulations of Guangdong, human resources service provider in Guangdong may no longer accept such arrangement. The latest regulation is worthy of employers’ attention, in particular those who has such arrangement in Guangdong Province. Employers may need to negotiate with human resource service providers and rearrange the social insurance matter.