With implementation details still unclear, foreign employees and their employers face uncertain financial and procedural hurdles.
China’s new Social Insurance Law, which took effect on July 1, 2011, established the first national, basic social insurance framework for employees across mainland China. The law requires that all employers in China enroll each employee in five insurance programs: basic pension; basic medical insurance; work-related injury insurance; unemployment compensation; and maternity insurance. The law also aims to set up social insurance programs for non-employee urban and rural residents, eliminate discrimination in social insurance registration based on an employee’s household registration status, and facilitate the transfer of personal social insurance accounts across provincial jurisdictions. Foreign employees and their employers must now contribute to the social insurance system, but implementation details are still unclear and will vary by municipality and province.
Though enforcement procedures and the long-term social implications of the law have yet to emerge, the PRC government has released clearer guidelines on how the system should work. As is often the case with new laws in China, however, some localities appear to be moving faster than others in establishing contribution rate schedules and implementing guidelines.
Broad coverage for all workers
Under the Social Insurance Law, both employers and full-time employees must contribute to five social insurance programs. Part-time workers are also covered, but are expected to self-enroll in the social insurance programs as employers are not responsible for enrolling them. The contribution base and rates are subject to local regulations and rules, and vary among jurisdictions. In Beijing and Shanghai, for instance, rates are set at the municipal level and contribution rates for the five social insurance programs vary (see Table). In other localities, rates are likely to be set at the provincial level.
The contribution levels are based on an employee’s average monthly salary over the last calendar year, with an upper limit at 300 percent and a lower limit at 60 percent (40 percent for some programs in Beijing) of the local average monthly salary. In addition, the contribution rate for work-related injury insurance is calculated on the individual company’s claims history and the risk level of an individual employer’s business and industry. For example, an employee who earns ¥10,000 ($1,575) per month in Shanghai will personally contribute ¥1,100 ($173) per month for the social insurance programs and his or her employer will contribute ¥3,700 ($583) per month. In contrast, due to the cap on the contribution base, an employee who earns twice as much, or ¥20,000 ($3,151) per month, will not have his or her contribution requirement (or the employer’s) doubled. His or her personal contribution will be capped at ¥1,286 ($203) and the employer’s contribution will be capped at ¥4,325 ($681) per month.
Inclusion of foreign workers
Before the Social Insurance Law, PRC law did not mandate that any foreigners enroll in social insurance programs. The 1996 Regulations on Employment of Foreigners in China, promulgated by the PRC Ministry of Human Resources and Social Security (MOHRSS) and other ministries, provided that foreign employees’ social insurance enrollment would follow applicable national rules. But no such national rules were ever released until the recent Social Insurance Law and the interim measures (as discussed below) were passed last year. Under the 2005 Regulations on Employment of Hong Kong, Macao and Taiwan (HMT) Residents in the Mainland, HMT residents and their PRC employers were required to make social insurance contributions to pension, medical, and unemployment insurance, but enrollment was sporadic and enforcement was uncommon. Before the Social Insurance Law, some cities—including Shanghai; Suzhou, Jiangsu; and Tianjin—also had promulgated local rules regarding foreign workers’ voluntary enrollment in basic pension, medical, and work-related injury insurance programs.
The law, however, mandates that foreign employees and their employers contribute to the social insurance system, which has garnered considerable controversy. To implement that aspect, MOHRSS in September 2011 issued the Interim Measures on Participation in Social Insurance by Foreigners Working in China (interim measures), which took effect on October 15, 2011. The interim measures require that the local employers or sponsors of foreign employees enroll them in all five social insurance programs within 30 days of obtaining PRC work permits. To strengthen enforcement of expatriate enrollment, the interim measures mandate increased coordination among government agencies with respect to foreign workers and require the authorities handling work permits for foreigners to share information regarding foreigners’ employment with the social insurance administration. The social insurance administration in turn must periodically check with other PRC authorities to obtain information regarding the foreigners who have obtained employment authorization.
Article 2 of the interim measures defines a “foreigner” as a person who is not a Chinese national; holds a PRC work permit (such as a work permit for foreigners, foreign expert certificate, or permit for permanent foreign journalists) and residence permit (permanent or temporary); and is employed lawfully in China. This definition includes foreigners who are officially employed overseas (outside of mainland China) but who are seconded to PRC companies.
The definition of a “foreigner” in the interim measures fails to include employees from Hong Kong, Macao, or Taiwan. Notably, HMT residents were included in draft measures on foreign worker contributions issued for comment in June 2011, but the interim measures omit this reference. It is likely that HMT residents are expected to be covered under local regulations issued by cities and provinces as now written or in the future. For example, under current Shanghai regulations, an employer may voluntarily enroll their employees who are HMT residents in three insurance programs. In contrast, consultations with the Tianjin Labor Bureau suggest that HMT residents in that city are required to participate in all five insurance programs, as is the case with all local PRC employees and foreign workers.
Mandatory or voluntary participation?
Despite a flood of comments from foreign companies and trade associations on the draft regulations, neither the Social Insurance Law nor the interim measures clarify whether a local government may make enrollment of foreign workers voluntary, or if an employer may opt out of enrolling foreign workers who, for example, already have medical insurance or are enrolled in their home country’s pension system. Until this ambiguity is clarified, employers will have to “double enroll” expatriates in overseas programs as well as PRC programs, and contribute to both schemes.
The interim measures state, however, that foreign workers can be exempted from enrollment in PRC social insurance programs if there is a bilateral social insurance treaty between the expatriate’s home country and China. To date, only Germany and South Korea have concluded such treaties with China. But these two treaties provide only piecemeal exemption from the Social Insurance Law: a German employee is exempted only from the pension and unemployment insurance schemes, while a South Korean employee is exempted only from the pension insurance. It appears that a German or South Korean employee must still enroll in the other PRC social insurance programs not covered by the treaties.
Though the interim measures took effect on October 15, as CBR went to press in December 2011, most jurisdictions were not yet ready to enroll foreigners. Nonetheless, on December 20, 2011, MOHRSS released a notice urging local governments to enforce the enrollment of foreigners. The notice also clarified that foreigners will be eligible for maternity insurance benefits and subject to current retirement age regulations for pension purposes. According to the notice, foreign employees must be enrolled by December 31, 2011 or daily penalties would be imposed as of October 15, 2011.
As a general practice, each provincial or municipal jurisdiction will issue its own implementing rules for enrollment to solve practical gaps not addressed by the Social Insurance Law or interim measures. For example, both measures are silent as to whether contribution amounts for foreigners will match those required for PRC nationals. In many of the jurisdictions that had accepted voluntary enrollment of foreigners prior to the Social Insurance Law, the contribution rates applied were those applicable to PRC nationals. Due to the ambiguity in the national law, however, one cannot rule out the possibility that local governments might revise the contribution rates for foreigners, potentially raising them above those required for PRC nationals. For example, the language of the regulations in Dalian, Liaoning, does not cap an employer’s contribution base for either its PRC or expatriate employees’ pension insurance contributions, which could result in a sharp increase in both the employer’s and the employee’s contribution amounts. These increases are likely to hit employers with expatriate employees and the expatriates themselves the hardest, as expatriates’ income levels tend to be relatively higher than those of local employees.
To date, only Beijing has released local implementing rules. Based on unofficial consultations with various labor authorities, the status of the interim measures and the Social Insurance Law in some provinces or cities as of this writing is as follows.
- In Shanghai and Suzhou, Jiangsu, foreigners’ enrollment remains voluntary even after October 15. If a foreign worker and his or her employer choose to participate in these jurisdictions, so far the worker may only enroll in basic pension, basic medical, and work-related injury insurance programs. The contribution rates are identical to the rates paid by PRC nationals.
- In Wuxi, Jiangsu, labor authorities currently are not accepting enrollment because they are not ready, and local implementing rules are pending. Many companies are taking a “wait and see” approach before taking any action. Others are starting to save for this additional liability so, if required, they can make the contributions for prior months once the implementing rules are finalized and issued.
- In Beijing; Guangzhou and Shenzhen, Guangdong; and Tianjin, local labor authorities have stated that expatriate employees must enroll in all five social insurance programs. Foreign workers and their employers must start contributing immediately if they have not done so already.
It is clear that once the Social Insurance Law is fully implemented, employers will face increased labor costs with respect to their expatriate employees as a result of compulsory enrollment. As most expatriates are paid relatively high salaries compared to the applicable average monthly salary, generally they and their employers will be required to make the maximum contributions (assuming contribution levels remain the same as those for PRC nationals). By following the interim measures as currently written, an employer in Shanghai, for example, will incur at least an additional ¥52,000 ($8,100) per year per expatriate employee at current contribution levels. In the future, expatriates may ask employers, as a condition of employment, to bear the individual workers’ portion of social insurance contributions, which would further inflate PRC employers’ labor costs. Employers should begin to calculate the potential social insurance contributions for their existing expatriates and budget for these additional payroll costs. At a minimum, employers should consider accruing the employer portion of the social insurance contributions for expatriate employees before and until actual enrollment is enabled in a particular jurisdiction.
Despite the increased costs that enrolling foreign workers will bring, employers may benefit in several respects. First, in the case of a work-related injury, the insurance fund will cover medical expenses and a significant portion of the allowances that companies must pay to the injured employees under law. An employer without insurance would have to bear those medical expenses and allowances itself. Second, the maternity insurance can reduce the employers’ costs. Under the 1992 PRC Law on the Protection of Women’s Interests, a female employee’s salary may not be lowered during her maternity leave. Instead of paying a female expatriate employee her regular salary during maternity leave, the employer may be relieved of all or a part of this expense because female employees will receive a maternity allowance paid by the insurance fund. The employer will likely, however, need to make up the difference between the maternity allowance and the employee’s actual wage if the allowance falls short of actual wages. As of July 1, 2011, employers are required to calculate the maternity allowance according to the average monthly wage for all employees of the individual employer in the previous year. In the past, though it varied from city to city, the maternity allowance was usually linked to the employee’s own wages rather the employer average monthly wage.
Despite these potential benefits to employers, some foreign workers and their employers may believe that foreign workers will not benefit from enrollment in these programs. For example, expatriates generally do not use PRC hospitals covered by the statutory medical insurance scheme, largely due to language barriers and concern over standards of care. Clinics and hospitals set up for expatriates are not currently covered by the local medical insurance system. Foreign workers are also not limited by the “one-child policy” as PRC nationals are, and whether female expatriates can receive maternity insurance benefits for multiple children remains unknown.
Furthermore, many expatriates will work only temporarily in China, and are likely to think that they will not fully benefit from mandatory contributions to the social insurance funds. The interim measures state that an expatriate may receive pension benefits after leaving China, provided that he or she has become eligible for the benefits. An employee becomes eligible when he or she has cumulatively contributed to the pension insurance scheme for 15 years or more or when the employee reaches the statutory retirement age, generally age 60 for men and 55 for women. An employee who has not become eligible may maintain his or her personal account until returning to China, whereupon the employee will receive credit for prior contribution periods upon the resumption of making contributions. Alternatively, the expatriate may apply in writing to withdraw the balance of his or her individual pension account in a lump sum payment when he or she departs China, and thereby terminate enrollment in the social insurance scheme. The regulations do not permit either the employer or expatriate to withdraw the employer’s contributions to the social insurance scheme upon the employee’s departure, and it is the employer contributions that make up the lion’s share of the total contributions for each employee. There do not appear to be any provisions for refunds for contributions to the other four social insurance funds.
Keeping a close watch
Compulsory enrollment of foreign workers in PRC social insurance programs under the interim measures, if strictly enforced, will no doubt increase labor costs for companies that employ expatriates in China. Nevertheless, it is unlikely that most foreign companies will decrease expatriate hiring, especially of senior executives, given the relatively small contributions required. These contributions, when compared to most expatriate compensation packages, are unlikely to render their employment unacceptable for employers who need their skills in China. Yet foreign-invested enterprises that heavily rely on low- or middle-income expatriates, such as language schools, may see a much greater impact. Nonetheless, these positions are not easily filled by Chinese nationals, and such schools may attempt to pass these increased costs on to customers by increasing tuition.
Mandatory enrollment in social insurance programs is a well-known part of business in many other countries. For example, enrollment in US Social Security is generally mandatory for non-US workers in the United States. Thus, while concern over increased labor costs is understandable, enrollment of foreigners in social insurance programs is standard practice in many other countries. Over the long term, the PRC government may anticipate that more countries—other than Germany and South Korea—will attempt to negotiate new bilateral social insurance treaties with China to avoid their companies and workers making dual contributions. Such treaties would also provide reciprocal benefits to PRC nationals who work abroad, especially for those who work for PRC state-owned companies overseas. In the short term, however, US and other foreign companies operating in China should anticipate new administrative and fiscal responsibilities as the Social Insurance Law’s local implementation rules are enacted.
Lesli Ligorner ([email protected]), a partner based in Shanghai, co-chairs the international employment law practice of Paul Hastings LLP and chairs the firm’s employment law and anticorruption practices in China. Gordon Minghao Feng ([email protected]) is an associate in the Employment Law Department of Paul Hastings’ Shanghai office. Mitchell Mosvick ([email protected]) is an employment law associate at Paul Hastings and focuses on international employment law.