By Jake Laband

Companies operating in some of China’s major cities are facing significant cost increases following a change to employment social security fund payment calculations. Although announced by the central government, provincial governments are implementing the new calculation in different ways—if at all—leaving all companies unsure of how to comply.

Companies are required to fill a certain percentage of their workforce with disabled employees. Companies that do not meet that requirement were required to pay into China’s Disabled Persons’ Employment Security Fund, but municipalities had the authority to make those payments optional and could adjust the penalty payment based on local considerations. The national employment requirement was at least 1.5 percent of the company’s employees, but cities could adjust this baseline. In the past, Beijing required 1.7 percent, Shanghai 1.6 percent, and Shenzhen only required 0.5 percent of a company’s workforce to be disabled.

The new regulation, effective January 1, 2016, made payments into the disability fund mandatory and updated the penalty payment calculation to require companies to use the average annual salary of its employees, rather than the average wage of all workers in the municipality, which had been past practice for most cities. Companies with fewer than 20 employees are exempt.

For example, Beijing’s formula is:

Payable amount = (number of total employees the previous year × rate required by the local government (1.7%) – number of employed disabled persons) × average annual salary for all employees.

Local governments have the authority to implement these measures differently; USCBC has compiled a list of all publicly available implementation measures, available here.

The new calculation method could significantly increase operating costs across the board, especially for companies that require highly skilled workers with above-average salaries. The retroactive implementation of the new calculation creates additional problems, as companies have already finalized 2015 budget costs and the majority of 2016’s costs. This includes contributions to the disability employment security fund based on the previous calculation methods. Requiring payments for the previous year, retroactively and with such short notice, creates unanticipated costs for companies operating in China.  

Additionally, companies note that there are challenges in meeting the government’s required percentage of disabled employees, because it does not reflect the pool of potential employees. For example, the China Disabled Persons’ Federation reported that in 2014, only 1.27 percent of Beijing’s workforce (146,332 of 11.5 million) were disabled. The percentage of disabled people in the workforce is even lower in areas like Tianjin (0.84 percent) or Shanghai (0.68 percent). Furthermore, disabled workers are not evenly distributed throughout China, so they are not necessarily in urban areas where most companies operate.

Because each company’s needs and locations are different, and the number of qualified disabled workers is relatively small, there is frequently a disparity between available positions and qualified disabled workers who can fill them. Implementing a flexible disability fund policy that considers the available pool of potential employees would allow local governments to set the required employment ratio at a number representative of the local workforce and geography to account for this disparity, while still setting a reasonable fee for companies who cannot meet the hiring quota.

About the author:  Jake Laband is the deputy director of the Beijing office of the US-China Business Council, a private, nonpartisan, nonprofit organization of more than 200 American companies that do business with China.

Posted by Jake Laband