Employers of foreigners in China will be required to participate in China’s domestic social insurance system from 15 October 2011, with penalties for non-compliance and with the potential for a significant impact on existing employment arrangements.
The Ministry of Human Resources and Social Security (MHRSS) released the Interim Measures for the Participation in Social Insurance by Foreigners Employed in China (Social Insurance Measures) on 6 September 2011. The Social Insurance Measures clarify how the recently implemented national Social Insurance Law (SIL) will apply to foreign workers in China. The Social Insurance Measures take effect on 15 October 2011 and do not deviate materially from the draft interim measures (Draft Measures) that were released in June this year for public consultation (see Mallesons Client Alert on 7 June 2011 for further detail).
The Social Insurance Measures deal with the requirement set out in the SIL that all foreigners living and working in China participate in the local social insurance system. The PRC government is currently in the process of expanding and improving the coverage of its social insurance system in line with the goals as set out in the 12th 5-year plan.
1. Foreign employees covered by the scheme and treaty exceptions
The new obligations apply to all non-Chinese nationals who are legally employed in China, and (a) hold a work permit (《外国人就业证》/《外国人专家证》/《外国常驻记者证》) and a foreigner’s residence permit (《外国人居留证》/《外国人临时居留证》), or (b) hold a foreigner’s permanent residence certificate (《外国人永久居留证》) (collectively, Expatriate Employees) irrespective of whether the employment contract is signed with an employer inside or outside China. The broad coverage is consistent with the intention expressed in the SIL to include all foreigners working in China under the scheme.
In cases where there exists a bilateral or multilateral agreement between China and the home country of the employee or the employer, the arrangements under the treaty take precedence and as a result those Expatriate Employees and their respective employers could be exempted from certain social insurance obligations in China. As of the time of this Alert, only two countries (Germany and South Korea) have entered into such treaties with China. We understand that at least ten other countries, including the US, Belgium, France, Japan and Russia, are in negotiations with China on similar treaties. Discussions are also taking place between the Australian Chamber of Commerce in Beijing and the relevant Chinese authorities to obtain an exemption or relaxation of the rules in relation to Australian firms.
The Social Insurance Measures do not apply to residents from Taiwan, Hong Kong or Macau as they are governed by the Provisions on the Administration of the Employment of Taiwan, Hong Kong or Macao Residents in the Mainland (2005).
2. Social insurance contributions
The Social Insurance Measures require Expatriate Employees and their employers to make contributions to a mandatory social insurance portfolio covering pension, unemployment, medical, maternity and occupational injury insurance. Expatriate Employees and their employers must each contribute towards the pension, unemployment and medical insurance schemes while employers are solely responsible for contributions to the maternity and occupational injury insurance schemes. Employers shall deduct and pay the employee contributions from the employee’s salary. We understand that MHRSS may require contributions be made retroactively as of 1 July 2011 in line with the SIL to the extent that the employment contract with an Expatriate Employee is dated on or before 1 July 2011.
The contribution rates are based on an employee’s actual salary but capped at three times the local average monthly salary in the previous year (Reference Salary). In other words, if an Expatriate Employee’s actual salary is higher than three times the Reference Salary, the contribution percentages will be based not on the actual salary but on three times the Reference Salary. The Reference Salary and contribution rates may vary in different locations in China. For ease of reference, the following tables showing the monthly contribution rates in Beijing and Shanghai as of the time of this Alert are reproduced from our previous alert.
Click here to see tables
We understand that MHRSS may not include the benefits for Expatriate Employees’ wife/child (e.g. education coverage, housing allowance) when calculating the payment rate for social insurance contributions. Also, the individual income tax in China would be calculated on the net income sum after social insurance deductions.
3. Leaving China
Expatriate Employees who leave China prior to the statutory age of retirement (60 for men and 55 for women) may apply to terminate their social insurance account and receive a lump-sum payment of that portion of the social insurance contributions that were paid by the employee, although specific arrangements have not been clarified by the authorities. The social insurance contributions paid by an employer cannot be claimed by its employees as most employer contributions will go to a collective account (as opposed to the individual accounts where employee contributions are held). Alternatively, Expatriate Employees who leave China before retirement may elect to maintain their social insurance account, which will be reactivated if they return to work in China.
Expatriate Employees who remain eligible to receive their social insurance benefits while living outside of China must, at least once a year, obtain proof that they are still alive from China’s embassy or consulate in the country where they receive those benefits. Proof must be sent to the relevant social insurance agency in China or, alternatively, the Expatriate Employees may present themselves to their social insurance agency in person (alive!). This is an improvement on the Draft Measures, which originally allowed the social insurance agency to require production of such documentation at any time. While it remains unclear as to who will pay for the transfer costs with respect to the social insurance benefits if the Expatriate Employee lives outside China, we understand that MHRSS may follow the current practice for Chinese citizens who enjoy social insurance benefits but live abroad (i.e. the individual shall bear the transfer costs).
4. Registration procedures
Employers of Expatriate Employees are required to register an employee with the local Human Resources and Social Security Bureau (HRSSB) within 30 days after that employee has obtained a Work Permit. Employers who already employ Expatriate Employees must attend to the registration before 15 October 2011. HRSSB will forward the employee’s information to the local social insurance agency in due course. Due to the short transition period, it has been reported in the South China Morning Post that China may delay the implementation of the Social Insurance Measures.
5. Supervision and punishment of employers
The Social Insurance Measures include a new clause on the supervision of employers and set out sanctions that may be imposed on employers who fail to comply with the new obligations. The sanctions stipulated are those provided in the SIL and the Regulations on Labor Insurance Supervision (Supervision Regulations), which can range from:
- late-payment interest (0.05% of the overdue amount calculated on a daily basis);
- fixed penalties (up to 300% of the relevant amount in the case of non-compliance); and/or
- punitive damages (up to 500% of the relevant amount in case of fraud).
HRSSB has the power to actively supervise, investigate, order rectification, and punish employers. Under the Supervision Regulations any person has the right to report an employer to the relevant labor supervision authority for non-compliance. There is a two year statutory limitation period for bringing such claims against employers, which starts to run from the date on which the non-compliance occurred. After expiry of this period, the aggrieved party may still bring a civil suit, provided the statutory limitation period has not expired. The latter period starts to run from the date on which the aggrieved party knew or should have known of the non-compliance.
In addition to the above discussions, we also understand that MHRSS may address the below issues that are silent in the Social Insurance Measures as follows:
- Maternity Insurance: Only one child of Expatriate Employees will benefit from the maternity insurance.
- Retirement Age: The regulation concerning retirement age for Chinese citizens would not apply to foreigners. In other words, if the Expatriate Employee is over the retirement age but still wants to contribute to the pension fund in China, he/she will be allowed to continue the contribution until he/she has contributed to the pension funds up to 15 years on a cumulative basis.
- Dispatch Arrangement: Where the Expatriate Employee works shuffling between two or more cities, the dispatch place on his/her employment contract shall be the locality from which social insurance contributions shall be collected.
The Social Insurance Measures are designed to effect a new era of equalisation between local and Expatriate Employees. However, in the short term the Social Insurance Measures may result in even higher comparative costs for employers hiring Expatriate Employees (given their comparatively high salaries) thereby forcing more localisation. In relation to existing staff, the Measures impose additional administrative and financial burdens on Expatriate Employees and their employers. The extent of that burden is not yet clear as the new rules only provide a general framework for the implementation of the SIL. As such, it is expected that more detailed and local implementation rules will be published in due course.