Insurance for all

Applicable to all employers

The SIL requires that all employers participate in the social insurance programmes. This requirement extends the programmes to a national scale when previously only employers in urban areas were required to participate. Thus, employers in rural areas that previously may not have been required to enroll employees and make contributions for employees may find themselves required to provide these benefits.

Notably, the persons benefiting from social insurance are not described as “employees”. Instead, the term used is “individuals”. Thus, the door appears open for persons to participate who do not have “employment relationships” with their employers, such as students and individuals who are past the legal retirement age. Other individuals, such as part-time workers, may participate on a voluntary basis in certain programmes.

Expanding coverage for migrant workers

The SIL provides a general principle that “rural residents” (for examples, individuals who hold rural hukou (户口household registration)) working in urban areas must participate in social insurance programmes. What is unclear from this requirement is whether the programmes must provide the same benefits and require the same contributions as programmes provided to employees with urban hukou or resident permits.

Even if it may be possible to create two-tiered system, the fact that migrant workers will be required to participate, and their employers required to make contributions, will likely lead to higher labour costs for employers. Moreover, while most migrant workers may welcome the opportunity to participate in social insurance programmes, the elimination of the possibility that these employees may not opt out of the social insurance programmes and therefore avoid employee contributions could result in some employees refusing to take certain job positions.

Inclusion of foreign nationals / THM residents

Although current national regulations could be interpreted to require foreign national employees to participate in social insurance programmes, and a few local regulations in fact required such participation, as a practical matter, participation was not required nor even permitted.

The SIL helps to clarify this situation somewhat, stating that foreign nationals “employed in China” must participate in social insurance programmes. This requirement will likely be interpreted to apply only to foreign nationals who are employed by PRC-registered companies, and would therefore not included seconded foreign nationals (who presumably would enjoy statutory social programmes in the registered country of their employers). Possibly caught in participation requirements are foreign nationals who are fail to obtain work permits, but otherwise would be deemed to be employed by local companies.

The SIL will also likely prompt enforcement of social insurance obligations of residents of Taiwan, Hong Kong, and Macao (THM) who are directly employed by PRC companies. Although these employees have been required under national regulations since 2005 to participate, enforcement has been limited.

For both foreign national and THM employees, implementation of social insurance requirement are likely to be slow and on a city by-city basis, and possibly on a voluntary basis. These employees may be excluded from certain programmes, such as unemployment insurance and maternity insurance.

If participation in pension insurance is required, it is unresolved whether accounts could be cashed out when the employees leave China. Shanghai and Nanjing regulations currently permit PRC nationals who emigrate to cash out part of their pension accounts.

Contribution requirements

The SIL specifies that employers and employees are responsible for making contributions for pension insurance, medical insurance, and unemployment insurance, while employers alone must contribute to occupational injury insurance and maternity insurance.

The State Council is expected to provide for uniform national contribution rates for pension insurance, medical insurance and unemployment insurance. Local authorities, however, have the right to set local rates after obtaining central government approval. Given the differing local conditions, it is likely that the current system resulting in different contributions rates will remain.

Although this is a common practice for most urban areas, certain programmes in suburban areas and rural areas may be affected. For example, suburban programmes in Shanghai do not require employee contributions for any of the five types of insurance with all contributions coming from employers. Requiring employees to begin contributing could likely result in employers being forced to raise wages to retain employees.

National/Provincial accounts

A significant obstacle to the development and popularity of the social insurance system was that accounts are established at the local level. In other words, accounts could generally be established only in the location where the employer was registered and benefits enjoyed in that location. For employees temporarily working in other cities, including China's increasing mobile white-collar workforce, accumulating benefits were not popular with the alternative to either forego benefits or try to have contributions paid in the home of the employee through an agent, such as Beijing Foreign Enterprise Human Resources Service (Fesco).

Under the SIL, pension accounts will be established at the national level, with the other four insurance accounts established at the provincial law. For employees, it would mean paying into one pension account with benefits determined, in part, on the contributions made at the different rates applicable in the local area where the employee worked.

For the other four insurance programmes, employees would be able to enjoy benefits on a provincial-wide basis. For example, an employee working in Suzhou could use medical insurance for hospital expenses in Nanjing because both locations are in the same province. However, given that these provincial accounts do not address the situation of employees working in other provinces, employers will likely still be requested by some employees to file social insurance contributions in other provinces through agents.

Although many provinces have created provincial pension accounts, the changes under the SIL to create national and provincial accounts are subject to State Council implementation. Progress may be slow, with opposition possibly coming from wealthier locations within provinces that do not want resources pooled with poorer locations.

Occupational injury insurance

The SIL relieves employers of some of the financial burden for taking care of employees who suffer occupational injuries by providing that hospital food allowances, and certain travel and housing expenses for medical treatment are covered by occupational injury insurance.

Stiffer enforcement penalties and measures

Penalties for employers that fail to make social insurance contributions have been increased under the SIL from 0.02% per day to 0.05%. In addition, the SIL gives the authorities the power to require employers to provide collateral to cover amounts owed, as well as the power to apply to courts to freeze, attach or auction assets of employers for payment of amounts owed.

Conclusion

The adoption of the SIL was a late achievement of a goal of the 11th Five Year Plan (2006-2010) to include more citizens in the social insurance programmes. However, for many individuals in China, converting the general principles of coverage and actually receiving coverage likely awaits State Council and local regulations. Moreover, the long-standing reluctance of many employers – and even some employees – to participate in the programmes and make the required financial contributions raises the question of how widespread compliance will be, particularly in rural areas with new programmes, and areas where local authorities have been slow to require compliance. Buyers in acquisitions may find that one of their biggest problems in completing China deals could actually become worse: unfunded social insurance obligations of target companies.

Going forward, proposals announced for the 12th Five-Year Plan (2011-2015) include further emphasis on the social insurance system and expanding coverage to all individuals in rural and urban areas. Officials of the Ministry of Human Resources and Social Security have reportedly estimated that conversion of the pension insurance programme to a national system could be completed by 2012. Reforms to the medical insurance programme, however, will likely take longer. Officials reportedly estimate that while the creation of municipality-based programmes may be completed by the end of 2011, creation of provincial-level programmes may take until the end of 2015.

Jeffrey Wilson, Jun He Law Offices, Shanghai