New PRC Social Insurance Law — Guest Posters Nestor Gounaris and Amanda Rose McCreight

A new social insurance law (the “SI Law”) passed by the National People’s Congress will become effective on 1 July 2011 and be applicable throughout the People’s Republic of China (the “PRC”).

The SI Law will have a direct impact on employment costs as it alters administrative and financial obligations for employers and calls for the inclusion of foreign nationals in PRC social insurance schemes.

Employers should note that employees may not waive their rights and benefits granted under the SI Law; these impacts cannot be contracted away.

Administrative Burdens
Employers’ Responsibilities
The SI Law lays out both new and enhanced obligations for employers in regard to social insurance. Such obligations include:

    (i) enrolling employees with the relevant social insurance agencies and initiating social insurance contributions (“Contributions”) within 30 days of employment;

    (ii) advising employees of Contributions on a monthly basis;

    (iii) issuing termination certificates to employees and registering such terminations with the relevant social insurance agencies within 15 days of termination; and

    (iv) maintaining and sharing adequate financial records and information regarding Contributions with employees who make inquiries at any time during or after employment.

Portability of Social Insurance Benefits
The SI Law will allow employees to contribute into and access their social insurance benefits throughout the PRC.

Under the existing social insurance regime, Contributions and associated benefits are anchored to the geographic location where the employee is registered (i.e., has a hukou). Therefore, under the current regime, the employee loses the ability to make Contributions and access benefits if he or she is working somewhere other than where his or her hukou is registered. In a dramatic change, the SI Law indicates that employees’ abilities to make Contributions and access benefits will no longer be anchored to the geographic locations of their hukou.

The implications of this proposed revision will have wide reaching macroeconomic effects by allowing an even greater mobility of the work force, and can be expected to introduce significant administrative burdens for both the state and the employer.

Financial Burdens
Potential Increases in Contributions
Employers and employees can expect Contributions to increase as a result of the SI Law, which expands benefits but does not specify the corresponding sources of funding.

The burden of payments associated with work-related injuries will be shifted largely to the work-related injury insurance fund. Many payments are currently made directly by the employer, including those for hospital food, transportation to and from treatments, and hospital accommodation fees, as well as the one-off medical subsidy required upon termination of an employment contract due to a work-related injury. Such expenses will now be covered by the work-related injury insurance fund.

Furthermore, maternity insurance, currently provided exclusively to female employees, will be available for the unemployed female spouses of male employees.

In addition, retirees having worked for less than 15 years when reaching retirement age, who are currently restricted to receiving a lump sum payout, will now be able to choose between:

    (i) continuing to make Contributions up to the 15 year mark and enjoying corresponding monthly pension benefits; or
    (ii) enjoying pension benefits according to the future provisions of the state council.

Employers must remain aware of all on-going regulations to determine how these enhanced benefits will be funded. For example, will employers be obligated to match ongoing Contributions until such retired employees reach the 15 year mark? Will employers be obligated to keep employment relationships with employees active until the 15 year mark?

Enforcement, Penalties
The SI Law introduces a strict enforcement protocol to ensure that employers make Contributions in full and on time, with enhanced penalties for non-compliance.

Fines will be assessed where employers do not conduct registration and refuse to register (RMB500-3,000), do not pay Contributions (100 to 300 percent of the owed amount and a late fee of .05% per day) or underreport (and underpay) Contribution obligations (110 percent of the owed amount). Where non-compliant employers are identified, the SI Law allows authorities to access such employers’ bank accounts and seize such employers’ assets in order to recover any owed fines and Contributions.

Foreign Nationals
Applicability to Foreign Employees
The SI Law will require foreign nationals employed in the PRC to be covered by social insurance schemes, although the degree to which this will be enforced is unclear.

Shanghai, Tianjin and Suzhou currently allow and have corresponding infrastructures for employers to make Contributions on behalf of foreign nationals employed in the PRC. However, significant questions arise when considering the nationwide application of such a system, especially given the existing challenges that have developed for a similar social insurance approach to compatriots from Hong Kong, Taiwan and Macau that are living and working in the PRC.

In addition, a host of significant questions arise surrounding the inclusion of foreign nationals in social insurance schemes. Will benefits be transferrable when the foreign national leaves the PRC? Can employers (and employees) be excused from making Contributions where the employee already makes similar contributions in his or her home country?

Enhanced Awareness, Maintaining Vigilance
Repeated inquiries with various local social insurance bureaus in major cities across the PRC have made clear that responsible officials are eagerly waiting for further insight and guidance as to how developments arising from the SI Law will be implemented and funded. Employers are well-advised to maintain the same level of interest and vigilance.

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About the authors: Nestor Gounaris is managing partner of China Solutions LLC, and has been advising foreign investors on effective and successful foreign direct investment in China for over ten years. He has taught Chinese business law at University of California Los Angeles Law School and University of Virginia School of Law. Amanda Rose McCreight is an associate at China Solutions LLC and has been a labor law specialist in China for over four years.

China Solutions is a Shanghai-based advisory firm that assists clients in achieving commercial and operational objectives in China.

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