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Employer Social Insurance In China. I See Foreign People.

Posted in China Business, Legal News

In the last three years, I estimate that about 25% of the China employee wage/labor disputes on which my firm has worked have involved foreign (i.e., non-Chinese) employees. I think there are two reasons for this. One, companies do not bother calling us if the dispute involves a Chinese employee being paid $12,000 a year. In those cases, they typically just settle the case themselves as quickly and as cheaply as possible. Their foreign employees always make way more than that.

The second reason is more important. Far too many companies are under the mistaken impression that China’s labor laws do not apply to foreign workers when they most certainly do. China’s labor contract law applies to all of your China-based employees, foreign or not. China’s labor contract law even applies to those foreign employees who have a contract with you saying United States or some other country’s laws apply. To put it another way, all employment law is local. 

So what this means is that in many ways you are at greater risk from your non-Chinese employees than from your Chinese employees because foreign employees still generally make considerably more than Chinese employees. 

The congruity between foreign and Chinese employees recently got even closer with China’s very recent (July 1) enactment of its new Social Insurance Law, which law applies equally to Chinese and foreign employees.

The new social insurance system will cover the following:

  • Pension insurance
  • Unemployment insurance
  • Work-related injury insurance; and
  • Maternity insurance.

Local governments (provinces and cities) determine the contribution rates for employers and employees. We generally tell our clients to expect to have to pay about 40% of an employee’s wages in social insurance.  

The new law lessens the employer’s burden for covering work-related injury costs. The new law also includes penalties against employers that fail to make sufficient or timely insurance contributions. This penalty is set at .05% a day on the outstanding contribution. If the employer fails to pay the penalty, additional fines can be imposed by the local administrative department. If things get really bad, the local social insurance administrative department has the right to collect outstanding amounts directly from the employer’s bank account. The law also requires that each employer register with the local insurance administrative department within 30 days of incorporation and register any employee within 30 days of employment.

Were you aware that your foreign employees in China are now covered by social insurance? What have you done to comply with this new law? How has/will this new law impact your bottom line?

  • Slow Learner

    I was one of those people. We had five employees, three foreigners and two Chinese. We were paying the foreigners six figures and then I learned that two of them were working with a competitor while also “working” for me so I fired them. They then turned around and sued me for not having a written employment contract with them and I lost. Had I known that they were covered by Chinese law I would have given them the same contracts that I gave to my Chinese employees. My Chinese lawyer told me they were not covered. That is, he told me that until he learned otherwise after they sued me. Lesson learned. Thanks for telling me about the social insurance so I don’t have to look like an idiot twice.

  • Mike

    Is there any way to find out what the exact rules are? Ask 10 officials get 20 different answers, all of them vague at best, flat out wrong in most cases.
    Besides, 40%? The rules for locals (here) used to be about 31% of salary (2/3 employer 1/3 employee) with a minimum salary of 60% and maximum 300% of the average local wage, i.e. if the average Zheng makes 3000 RMB in your town/suburb, then contributions would range from about 560 to 2790, i.e. if you’d make 1800, contributions would be 560, 2790 when you make 9000, but when you make 500 your contributions would still be 560, if you’d make 20000 it would still be 2790. Has this changed at all? Note that many employers make staff sign ‘contracts’ stating that they don’t want social insurance, or just want the ‘minimum’ amount, etc. And they seem to get away with this too, i.e. without lawsuits or penalties, stating they have “good relations” with the local gov’t. But that’s another matter.
    On the flip side, 40% or 31% of min/max 60/300%, is this just another tax-grab or is there any real possibility of seeing any actual benefits? Again nobody at the social insurance place was either willing or able to say what happens with the money you pay. The only thing they all agreed on was “you pay 15 years, you get a pension”. However, this did not seem to imply 15 years of monthly payments, just 15*12*X-amount, nor did they know/say what level of pension you could expect, not even ball-park, and what relationship there was to the level of contributions you made. Contrary to social insurance schemes in other countries (e.g. “Super” in Oz, “401K” etc, most of the European schemes, the Chinese system seems particularly “Chinese”….
    Any of you lawyers care to tell us non-lawyers to what extent we’re getting screwed this time?
    (note that this is/was not a rant against compulsory social insurance contributions in principle —don’t get me/us started—, just want to know what’s really going on…)
    So,

  • Mike

    ….and how a middle aged bloke like me benefits from maternity insurance…. or are there differences/advances in Chinese anatomy I don’t know about…. should I be worried about getting knocked-up?

  • Gretry

    @Mike. The employer contributions go into a social pool. Men contribute to the maternity portion just as women do in China. You don’t claim as your a man but your wife could. Its fair otherwise women have more deductions than men. Individuals can only claim back what they paid in, not what the employer paid in.

  • Chris

    This is really just a tax grab. There is no mechanism for foreign employees to claim a pension in China or to get a refund on contributions made. As such, it’s a couple of thousand RMB a month lost. Unemployment? That’s a joke… foreign employees have 30 days to leave China after a labor contract expires, they quit or get terminated. There is no chance at all any foreigner will ever get paid a red fen of this money, contributed monthly by both the employer and employee. It’s simply a tax. The workers comp scheme (in Beijing and Shanghai at least) is a joke. The insurance covers minimal hospital benefits if injury occurred in the workplace, but the employer basically picks up the salary bill (potentially forever).
    The only payment conceivably claimable would be maternity for female foreign employees. The scheme nominally covers salary for 3 months (4 months if the employee is over 28 I recall). Claiming it a major hassle but it can be done…
    That’s about it…
    Dan, my understanding is that the limits that apply to Chinese employees will also apply to foreign; ie. that deductions will only be taken for the salary component up to 3x average salary in the relevant jurisdiction (generally RMB12-14,000 in Guangzhou, Beijing, Shanghai). No deductibles beyond this for either the employee or the employer.
    Overall this is just a tax on foreign employees as there is basically no possibility that employer or employee contributions will ever be paid out as benefits or refunded. It will go into the general pool to fund the generous benefits received by government employees for whom nothing was ever contributed. Beyond government employees, very few Chinese citizens are ever able to draw from the pension fund in particular. Ho hum.

  • Mike

    @Gretry: The maternity thing sort of makes sense, sort-of, although it would make more sense if this just fell under medical insurance, or they add a prostate insurance and make women pay for that too.
    However, what about the rest (maternity is 0.5% or something)? Say I pay 15x12x560 (33600 comes out of my take-home pay, employer gets hit with another 67200), or for that matter 15x12x2790, then what….?
    Are you suggesting I can then get my 33600 (or 167400) back (with the wonderful benefit of not getting compound interest on it so with compound inflation it will be worth half as much, hooray!) and the 67200 (or 334800) goes where? Is this to fund audi’s for our glorious leaders?
    Or do I get a monthly payout that’s enough to buy KFC every other day (assuming I have a comfortable cardboard box to live in)?
    What about foreigners getting sacked, can they then get unemployment payments, being insured for that? Or a foreigner ends up in a wheelchair unable to work after being run over by a glorious black sedan, will said foreigner get an income, being insured for that? Or is it another ‘social pool’ thing, a.k.a. an ordinary tax-grab, just with a hip sounding name? I.e. get booted out of the country within three days on account of no longer being legally employed?
    Again, nobody has been willing or able to tell me (or any of the Chinese friends/co-workers who tried, including HR) such things, hand me/us a brochure or give a link to the relevant laws and regulations. Or does nobody really know and the government hopes that after 15 years people just sort-of forgot, or gave up on, or lost account details of their pension, and just bask in the glory of having a view of a(n obviously deserving) somebody’s BMW from their cardboard box?
    Yeah yeah, I should shut up, because when —insert indignant patriot telling me off for asking unpatriotic questions— was young, there weren’t even cardboard boxes and you’d be happy to retire in a wet newspaper on the side of the road, neither of which existed either….

  • http://www.startinchina.com Thijs (Shenzhen)

    As far as I know it’s not law yet that foreigners have to pay for social insurance, it was just a proposal waiting for feedback. It probably becomes law soon though. China Business News has excellent coverage of it.

  • anon this time

    Men who dislike paying maternity leave taxes ought to consider that their taxes also go for things they don’t directly “have” like schools. As far as I can tell China seems to be very much a collective in terms of paying taxes, corruption aside. For the tax attorneys/experts out there, are there ANY countries where you only pay taxes for services you use? Imagine if only parents with school aged children in the public school system paid taxes that supported education. We’d be lost.
    And I seem to remember something about maternity involving men at some point…
    Chin up, gents. Things *property taxes, cough cough* could be worse.
    http://www.csmonitor.com/World/Asia-Pacific/2011/0128/China-embraces-an-old-Western-tradition-property-taxes
    In fact they likely will get worse.

  • Peter M.

    Thanks for running this. I didn’t know.

  • http://www.startinchina.com Thijs (Shenzhen)

    @”anon this time”
    While I agree that paying taxes is a (necessary) evil and am in general not opposed to it, this time I do oppose it:
    1) they should announce such big changes at least a year in advance (from the moment the rules are frozen)
    2) they should provide clear guidelines for what we can expect, it is clear that at the moment nobody knows (I also asked our HR)
    3) the level of care in China is appalling, who wants to go to a Chinese hospital?
    4) how on earth are we going to claim benefits, if even Chinese cannot do it? The system is a mess and seems complicated on purpose
    5) only 1/5th of social taxes (at least unemployment) go to the unemployed. The rest is used to keep the system going. Do you want to contribute 80% of what you pay to the government in China? Doesn’t seem like a good deal, except for the government.

  • Lakshee

    People should not be making such a big deal out of this. We have known it was coming for many months and it really was inevitable anyways. If foreigners did not become part of the system they would be cheaper to hire than Chinese, at least when it comes to their benefits, and no country would abide that. It is funny that people always are saying China needs to become more like developed countries and then when it does, everyone gets mad. I do not know what people expected here.

  • Chris

    @ Thijs
    These changes were foreshadowed last July and announced at the NPC meeting last November. Hence you did get notice, but the vast majority of managers chose to ignore it. It was even reported in the China Daily with great enthusiasm about the care the Chinese State would extend to foreign workers… Oh the joy!
    If your HR doesn’t know, then question their competence and professionalism. The specifics are all over Chinese language HR websites. See http://www.rlzygl.com or http://www.hr.com.cn. HR is being paid to monitor changes in HR law and policy and should have a solid understanding of how these will apply.
    Implementation will be progressive and roll out will commence in Beijing from July 1. Other cities to follow.
    As for Chinese hospitals, they are not that bad ;-) The few experiences with Chinese hospitals I’ve had when I’ve been out of major cities were as good or better than the exceedingly greedy expat clinics I’ve been to. I’m not sure whose medical ethics are worse. At the very least the Chinese hospitals did not overservice or overcharge and were competent. Not much privacy though…
    I do agree that expat workers will see zero benefit from these changes. These are designed to equalise the cost of expat and Chinese staff as well as to provide additional revenue sources for social welfare provision. The purpose is certainly not to deliver any benefits to expat employees. It is likely to cost you between RMB2000-3000 per month and your employer RMB3-000-4000 per month. Cost will vary by location as the schemes vary slightly in each city and the 3X average salary which sets the upper threshold for the scheme also varies in each city.
    Entertainingly, foreign employees are not eligible for the housing scheme which is the only decent part of the whole system. It enables you to take up to 10% of salary income tax free, gain an additional 10% from your employer, drop it into the housing fund and then draw it to pay your mortgage. That is the only component that my Chinese employees support. Quite tax efficient.

  • William

    I have a hard time seeing this as anything but an effort to push foreigners out of China. I very much resent the fact that this will almost certainly make it harder for me to get a raise, and I expect it’ll be extremely annoying or impossible to recover the money that is paid into the pension fund when I leave China. And of course I have no intention of using the local health insurance since my company provides an international plan.
    As for the implementation, HR at my company (a large, law-abiding enterprise with many foreign employees) says the regulations have not been finalized yet. So clearly the government has not done a good job of informing companies about what’s going on.

  • Gretry

    @Chris – its not a tax grab. Its nothing to do with tax. Its a “Lets get foreigners to contribute to the Chinese pension fund for Chinese people” grab. We’ll all be subsidizing the Chinese state social system.

  • http://inbeijing.tumblr.com Laobaixing

    Don’t expats working in the US on non-immigrant work visas pay social security tax? How is this any different?

  • Twofish

    Mike: Is there any way to find out what the exact rules are? Ask 10 officials get 20 different answers, all of them vague at best, flat out wrong in most cases.
    The problem is that no one knows what the exact rules are, because the exact rules have not been written.
    You have three sets of rules….
    The Law on Social Insurance which goes into effect in 7/1. The relevant article is this
    Article 97 of the Law stipulates that “Foreigners employed within the territory of the People’s Republic of China shall participate in social insurance analogically in accordance with this Law”
    That’s it. Now the MHRSS has issued draft regulations which people are talking about. However these are draft regulations, and they haven’t been officially ratified yet.
    And then there is the third layer of regulations which are the regulations that are issued by the local social security bureaus.
    Thijs: 1) they should announce such big changes at least a year in advance (from the moment the rules are frozen)
    The law was passed last year. They are not only announcing this when the rules are frozen, but they are making a big noise *before* the rules are frozen. One reason that there hasn’t been any official explanation of what is going on is that they officials themselves don’t know what the rules are going to be. They are still trying to figure it out themselves.
    Thijs: 2) they should provide clear guidelines for what we can expect, it is clear that at the moment nobody knows (I also asked our HR)
    Expect to pay something.

  • The Fine Point

    So what everyone seems to be saying is that this is both a way to tax foreigners without representation and a complete mess. I would have been disappointed by anything else.

  • Andeli

    http://www.troutmansanders.com/foreigners-caught-by-chinas-new-social-security-law-06-24-2011/
    I think the way out of this mess is “Under the Interim Measures, only foreign nationals whose countries have already executed bilateral or multilateral social security treaties with China will be exempt from participation provided they can prove that they are continuing to make contributions in their home countries.”
    I think we will see a lot of countries making such agreements with China and then everything will go back to normal. Still as of now it is one more reason to make your employee more efficient instead of hiring a new one. Not good for the employment situation.

  • Twofish

    It’s odd that people seem to be complaining that the government isn’t giving people enough time to react to the new system while at the same time complaining that the government isn’t giving exact details about what is going on.
    These are *draft* regulations. The government issued them specifically to get public feedback and reaction, and there have been situations in the past in which the feedback to a proposed or actual regulation has been so negative that the government has quietly withdrawn them.
    It’s possible that they’ll “not implement” the regulations, but based on the feedback that has occurred, it is very unlikely that they will do it in this situation.
    People will grumble and complain about the new social security system for foreign workers, but I don’t know of any company that thinks it is so bad that they are going to quit China, or any expatriate that is simply going to resign or riot rather than pay. Also, people are complaining about implementation details, but so far I haven’t seen anyone willing to give a strong argument against the basic principle that foreign workers should not be paying social security taxes.
    As such the government is going to see this and go ahead. For an example, of regulations that *were* withdrawn or non-enforced after foreign companies started screaming that they would leave China if this were enforced, a good example are restrictions on VPN’s and cryptography. Several ministries introduced regulations that limited the use of cryptography and they backed down after foreign companies said that they *would* rather leave China than to submit to the regs.

  • Joshua

    @ Chris – Housing Scheme
    I would like to know how Chinese employees really feel about the housing scheme? We looked into it for our employee and it doesn’t seem beneficial. From what we learned in Chengdu, you are only allowed to use the fund to purchase a house in certain neighborhoods in that city and the Housing Fund organization controls the money so you have to jump through their hoops in order to use it. Our employee doesn’t even live in the city our company is registered in and would never want to buy a house in that city. It just seems like we would be putting money into a fund that he would never use. Do others have any thoughts on this? Is it truely “mandatory” or can we make an agreement with out employee to give him the extra money? Please advise.

  • Gary

    A law to include foreigners in the same social programs while in China is essential to its Society & Law. Social services are, to a socialist country, an essential need for all individuals (a basis for equality in that place), and in a country who’s citizenship is still largely linked to race & birthright, lines of citizenship can’t be used concerning the treatment of people in a progressive society. I prefer foreign hospitals and insurance, but they’re also extremely expensive and there are thousands of foreigners who’d receive coverage for the first time. For this law to be applied more reasonably, loopholes should be created for people who are already contributing in other countries or to private companies for insurance services.
    1) Many foreigners aren’t making big bucks and would benefit from this! Maybe they have no other medical coverage. This law isn’t aimed at the upper earners (3x average earnings limit on contributions).
    2) In terms of society and law, if China offers social coverage to ethnic Chinese citizens but not to foreigners, could it be argued that their social systems treated non-Chinese unfairly, not even covering medical? Could the race imbalance even be brought in (due to the great difficulty in becoming a Chinese citizen as a non-Chinese? A WHO issue?… A law covering foreigners (but hopefully better written yet, to penalize some individuals less), is essential to and progressive for China’s society & law.
    3) Foreigners who have Intl. medical coverage: Monthly/annual fees paid by employers/individuals to private medical should be deductible, to reduce the required individual social benefit contribution. Does anyone know if this is possible for Chinese people who have Intl Medical Insurance?
    4) Foreigners broadcasting critically about China medical facilities: “When you’re a guest in someone’s house, never complain; If you see something you don’t understand, walk in their shoes to understand, and if that fails, ask why in a private or non-obtrusive manner”… I respect your opinion, but see a lack of respect in your comment (as do many Chinese reading it). Such comments are too common and an embarrassment. Don’t spit on China’s streets with your “China complaints”. China’s facilities have progressed massively in the past 20 years, and should be a source of pride and dignity in the communities they serve. They deserve to have dignity in their own homes and have cause to be proud of those facilities. Try learning to ask questions & learn why something is, as it is now, instead of using written spittle to express your OWN limitations in a way that ends up offending others.
    I would like this law written in a manner which better serves the individuals included in the group that its determined to cover, which may mean a few loopholes, options, and sub categories (I don’t belong in the same class as someone with no insurance today). I won’t benefit from this law, as written, and it will cost me money, but if its better written, I’d support it.

  • alex

    Is there anyway that I can check to see if my Chinese employer has been paying my insurance contributions, or that he has been sending my contributions to the government and not just pocketing it?