The Social Insurance Law ("SIL") was promulgated by the Standing Committee of the Chinese National People's Congress on 28 October 2010, which has taken effect since 1 July 2011. This is the first comprehensive law that focuses on Chinese social security system and also provides guidance on foreign employees' participation in Chinese social security system. This memorandum provides a general introduction to SIL with particular attention to its implication on foreign employees and Foreign Invested Enterprises ("FIEs") in China.
SIL sets out a framework for comprehensive social security system in China that is based on five areas of insurance:
1. Basic pension insurance
Insurance contributions are made by both the employers and the employees. On retirement, an employee who has contributed for at least 15 years will receive a pension from the government. The amount of the pension will be based on a number of factors, including the amounts contributed, the contribution period, the current local average wage (which is adjusted annually) and average life expectancy.
2. Basic medical insurance
Insurance contributions are made by both the employers and the employees. Some of an employee's medical expenses are covered (in whole or in part) out of the basic medical insurance fund.
3. Work-related injury insurance
Only the employer needs to make contributions to the work-related injury insurance fund. Premiums are set based on the injury rate in the relevant industry. Wages and other defined costs arising out of work-related injuries are paid either out of the work-related injury insurance fund or by the employer.
4. Unemployment insurance
Both the employers and the employees must pay unemployment insurance premiums. If these premiums have been paid for certain minimum periods then the employees may receive unemployment insurance payments, for a maximum of 24 months.
5. Maternity insurance
The employers must pay maternity insurance premiums. Such funds are used to make certain maternity leave payments and pay related medical expenses.
1. Continuation of Contributions to Pension Insurance Fund
Under SIL, employees who are ineligible to receive pension payments because they have not made contributions to the basic pension insurance fund for the requisite 15 years when they retire are now able to continue to contribute to the pension fund after retirement until the minimum contribution period is reached, so that they will then be able to receive the pension.
2. Transferability of Individual Social Insurance Accounts
Implementation of SIL encourages workforce mobility through the transferability of social insurance accounts across different locations, which means workers are allowed to transfer pension, medical and unemployment insurance from one city or province to another when they change their place of work. It also makes clear that the premium contribution years in different locations will be calculated cumulatively. This enables the portability of individual social insurance accounts and gives the employees more flexibility to better enjoy the pension benefits.
3. Reduction of Work-related Injury Costs Borne by the Employers
SIL reduces the costs to be borne by the employer towards an employee suffering work-related injury. Under the new regime, items such as food allowance, reimbursement or accommodation and transportation costs for medical treatment outside the city where the employee works, as well as the one-off medical subsidy required to be paid to an employee suffering work-related injury when his/her contract of employment is terminated which has previously not covered will now all be covered by the work-related injury insurance fund.
4. Liability for Non-compliance
SIL provides for new mandatory means to collect the social insurance premiums where an employer fails to pay the social insurance contributions in full and on time. The new means include making investigations and deducting the relevant amounts from the employer's bank account, ordering banks and other financial institutions to directly withhold the owed amounts from the bank account after applying to the local administrative authorities for permission to do so, requiring the employer to provide a guarantee for outstanding amounts, or applying to the courts to detain, seize and auction off the assets of the employer to the value equal to the social insurance premiums due and payable and deduct the outstanding social insurance premiums from the generated income of the auction.
5. Registration of Social Insurance
Under SIL, each employer must register with the local social insurance administrative department within 30 days of the employer's incorporation. In addition, the employer must register its employee(s) within 30 days of employment.
6. Foreign Employees' Participation
Article 97 of SIL provides that foreign employees may participate in the Chinese social security system. Please see the elaboration in detail below.
Foreign Employees' Participation
The participation of foreign employees in the Chinese social security system is on a voluntary basis and there is presently no further elaboration on how they are able to participate in the social insurance in SIL, which shall be further implemented in detail.
On 10 June 2011, China's Ministry of Human Resources and Social Security released the "Interim Measures for the Participation of Foreign Employee Employed in China in Social Insurance (Draft for Consultation)" (the "Interim Measures"). According to the Interim Measures, foreign employees who are legally employed by enterprises, public institutions, social groups, privately-owned non-enterprise units, foundations, law firms and accounting firms which have been registered or recorded in line with the laws in China are required to participate in the country's social insurance programs. All foreign employees who are legally employed in Mainland China will be issued social insurance cards and assigned social insurance numbers.
For foreign employees who enter into employment contracts with employers outside Mainland China and are dispatched to work in registered branch or representative offices or subsidiaries in Mainland China, such foreign employees are required to participate in the social insurance programs in accordance with relevant regulations.
The Interim Measures cover the citizens of Hong Kong Special Administrative Region and Macao Special Administrative Region, as well as citizens of Taiwan. However, citizens of countries that have entered into treaties with China in relation to social insurance (currently only Germany and South Korea) shall be handled in accordance with that treaty. The Interim Measures is presently only a draft, therefore it remains unclear how the Chinese authorities will provide for foreign employees wishing to participate in the social security system.
Obligations of FIEs under SIL
Notwithstanding the uncertainties of how foreign employees are able to participate in Chinese social security system, SIL has clearly set out the following obligations for FIEs:
- Pay social insurance contributions in accordance with SIL;
- For work-related injuries, pay the expenses which are not covered by work-related injury insurance;
- For unemployment, provide the unemployed individual with certification of the expiry or termination of their employment in a timely manner;
- Register with the local social insurance agency within 30 days after its establishment. If there are any changes occur to the registration or the employer is terminated by law, within 30 days of such changes or termination, undertake the procedures for change or deregistration;
- Register employees with the local social insurance agency within 30 days after the date of employment;
- Withhold and pay social insurances on behalf of the employees (the part which shall be borne by the employees) and inform the payment to the employees on a monthly basis;
- Provide accurate information regarding the contributions to social insurances when the social insurance administrative department conducts investigations and be willing to cooperate with authorities.
Blank Rome Comments
SIL sets out the basic framework for the revised social insurance regime in China. However, much of the details still remain to be fleshed out through the adoption of detailed implementing rules. Particularly, it is still unclear as to how the provisions relating to social insurance contributions by foreign employees working in China will be implemented. Depending on how it is implemented, SIL may cause an increase to the costs of doing business in China for foreign investors or for those looking to employ foreign employees.
We suggest that both domestic and foreign investors monitor implementation of SIL and carefully review the implementation rules when issued, and assess the potential impact on their cost structures accordingly.