In the past years, many companies provided social insurance through HR agencies for employees at locations where they work or have their Hukou registered rather than at the registered location of the company. However, more and more HR agencies stop providing this service due to the stepped-up supervision of local governments. This puts many companies in a difficult situation. Please find below our overview and insight on this topic and suggestions on how to properly arrange for provision of social insurance for these employees.
According to the PRC Social Insurance Law, a company can only provide social insurance for its employees at its registered location. However, in practice, although signing employment contracts with companies, some employees actually work at locations where the companies do not have registered business units, or some employees, although working for the companies at the registered locations, prefer to have their social insurance provided at the locations where their permanent residence ("Hukou") is registered. Therefore, in the past years, many companies provided social insurance through HR agencies for these employees at the locations where they work or have their Hukou registered.
Starting from July 2020 in Beijing, especially recently, more and more companies, also in other locations, received notifications from the HR agencies that they will no longer provide the service of paying social insurance for employees. This puts many companies in a difficult situation and to make proper arrangements for the social insurance of employees at locations where the companies does not have registered business units becomes challenging.
Currently in China, the social insurance system is managed on a location basis. For example, an employee paying social insurance in Beijing, but working in Shanghai cannot directly pay medical fees for outpatient services or emergency treatment with his/her medical insurance account in hospitals in Shanghai. In the past, it took almost half a year to transfer the pension relationship of an employee from one location to another. Also, the pension benefits an employee can receive after retirement differ largely from one place to the other. In addition, if an employee is not provided with social insurance at the location where he/she works, the employee is not able to enjoy some local benefits such as the qualifications of transferring his/her Hukou to the work location, buying residential premises or cars, taking housing fund loans or even having children going to school at this location, etc.
In practice, many companies which do not have company registrations at the work location or "Hukou" location of the employees, provided social insurance for them through HR agencies in the following ways: the companies signed employment contracts with these employees but did not pay social insurance for them at the registered company location. Instead, the companies pay social insurance contributions for the employees to the HR agencies registered at the locations requested by these employees, and the HR agencies pay social insurance for these employees at these locations alleging that these employees are employed by them. Such statements of the agencies do not comply with the actual facts. But in the past, there were no clear regulations on punishment if a HR agency did so and the competent local administrative authorities did not make supervision on such situation.
Such practical solution brought a lot of convenience and benefits to both companies and employees. Companies could easily hire employees at any location nationwide for business purposes without setting up legal entities or branches there. Employees could easily enjoy social insurance benefits at the locations where they actually work. Employees intending to retire at their "Hukou" locations could enjoy pension benefits at their hometowns when they reach statutory retirement ages no matter where they work now.
In recent years, criminal cases of defrauding social insurance benefits frequently occurred in some locations. Starting from July 2020, the Beijing local government expressly prohibited local HR agencies from providing social insurance for employees not having employment relationships with them. Further, on 18 March 2022, the Measures for Administrative Supervision of Social Insurance Funds issued by the Ministry of Human Resources and Social Security of the PRC took effect. According to Article 32 of the new regulations, the practice of providing social insurance by a HR agency and consequently enjoying the social insurance benefits by an employee by way of artificially creating an employment relationship can be regarded as misconduct of making fraudulent claims for social insurance benefits through cheating or fake documentation. In such a case, according to Article 88 of the PRC Social Security Law, the employee can be required to return the social insurance benefits and the HR agency can be subject to a penalty amounting to 2~5 times of the social insurance benefits.
Also, starting from 2020, tax authorities became the competent authorities at the locations in charge of levy of social insurance contributions. In their data base, tax authorities can easily find out whether an employer pays salaries to its employees, withholds IIT and provides social insurance for the employees. If an HR agency is found out to only provide social insurance without paying salary and withholding IIT for the employees, the HR agency might encounter the legal risks mentioned above.
Further such arrangement also might bring legal risks for the employers. If the tax authorities find out that a company only pays salary and withholds IIT for the employees without providing social insurance, according to the PRC Social Security Law, the company can be subject to administrative liabilities due to failure of making registration and not fully paying social insurance for its employees. Further, if, as mentioned above, the social insurance benefits of an employee are taken back by the competent authority because the HR agency provided social insurance in breach of the law, the employee is entitled to ask his/her employer, i.e. the company, to pay compensation due to failure of enjoying social insurance benefits.
Properly Arranging for Providing Social Insurance for Employees
Because of the above, more and more local governments forbid HR agencies to provide social insurance for individuals who do not have employment relationships with them. Although in some locations the authorities do not expressly make such requirements yet, more and more HR agencies at these locations voluntarily stop their relevant service due to the potential legal risks. Therefore, companies have to change their practice concerning the provision of social insurance for employees at locations where the company does not have a business registration.
The above issues can be best solved by changing the social insurance registrations of the employees from the locations where they work or where their "Hukou" are registered to the location where the company is registered, or to set up registered business units such as branch offices so that the companies can employ the employees at these locations, or to engage employees by the way of secondment or outsourcing provided by the service providers registered at the locations.
Improvement of Chinese Public Service System
Fortunately, with the development of a unified national social insurance service system and overall planning of social insurance at the national level, in the future, employees can more easily transfer their social insurance relationships between different locations, or can enjoy the social insurance benefits at locations even if they did not pay social insurance contributions there.
Currently, the pension and unemployment insurance relationships of an employee can, on the official National Social Insurance Public Service Platform, be easily transferred online between different locations, and the pension relationship can then finally be transferred back to the location where the employee has his or her “Hukou” for retirement. There are no differences now on pension benefits among the cities in one province. With the overall planning of pension insurance at national level starting from 1 January 2022, the contribution policies and pension benefit adjustment polices will be gradually unified national wide. This means that the gaps of pension benefits between different provinces will be narrowed in the coming future.
Starting from 1 January 2023, by making recordal online such as on the National Medical Service Platform APP, an employee can directly pay medical fees incurred for hospitalization, outpatient services, chronic and special major diseases, and emergency treatment at the designated hospitals with his/her medical insurance account in a location outside the place where his/her social insurance is provided.
Further, except for megacities, the restrictions on transferring Hukou, buying residential premises or cars, taking housing fund loans or having children going to school depending on paying social insurance at this location will be removed step by step.
Therefore, employees will be less and less impacted if they work or have "Hukou" registered at locations different from where they participate in social insurance. The employees who used to have their social insurance provided at their work locations or "Hukou" locations will be more willing to accept that the social insurance is provided at the company' registered location.
Notwithstanding the above, companies may wish to adopt different solutions for different employees. When making decisions, companies may wish to check if it really necessary to provide social insurance at the locations required by the employees by take into consideration of the factors such as business needs, current public service system at the locations where the employees work, work duties of the employees at the location, willingness of employees and contribution costs, etc.
To properly arrange for the provision of social insurance for these employees, companies may also consider to restructure their business organizations by registering new business units at the locations where the employees' social insurance really needs to be provided, or to change the ways of engaging employees from directly hiring to secondment or outsourcing in order to set up their employment relationships at those locations for the purpose of paying social insurance for them there. Companies may also wish to explain to the employees about the current development of Chinese public service system so that they can change their traditional concepts to accept the social insurance to be paid at location other than the places where they work or have "Hukou" registered.