Why workers' insurance matters

The longstanding issue of companies not complying with social insurance rules was highlighted by the April 14 Yue Yuen factory strike – one of the country's largest labour protests – where thousands of workers in Dongguan protested against the company over insufficient contribution payments. Many companies had been ignoring local requirements and calculating contributions using wrong base amounts, triggering serious unrest.

“Companies haven't been making full mandatory social insurance contributions for years and now employees are starting to raise the issue more and more through strikes,” said Baker & McKenzie partner Jonathan Isaacs. “Companies need to rectify this and see whether they should make back payments for the past.”

Legally, while employees can't argue that the employer has been paying them a low salary unless it's below the minimum wage, they can argue that the employer has been underpaying social insurance – a compliance issue that draws social attention. Employees can take collective action and even sue the employer.

Risks and consequences

A lawsuit can have a knock-on effect for all employees past and present, and companies are advised to manage this in a sophisticated and comprehensive manner. “It is essential for employers to recognise that, while they may get away with it in the short term, in the long term the costs of rectifying non-compliance are much higher and may be accompanied by potentially significant impact such as strikes and collective disputes,” said Joonho Tan of TransAsia Lawyers.

Such costs may escalate alarmingly if the problems are not dealt with. Expenses include administrative punishments and fines, late payment surcharges, litigation fees if the employees take action, severance payments if they terminate their contracts, and, if they demand more, housing fund and overtime payments. On top of these, if a strike occurs, businesses lose millions on each day of closure. Yue Yuen (the shoe manufacturer for Nike and Adidas) reported direct losses of US$27 million from its plant strike – increased benefits to workers cost it an additional US$31 million in 2014 alone.

The severity of the problem has increased since the 2008 PRC Law on the Mediation and Arbitration on Employment Disputes entitled employees to initiate dispute cases against employers for free and extended the limitation period from 60 days to one year. This opened up the potential pool of employee litigants because a worker who has left the company can still go back to it claiming his rights were infringed upon within that period.

Comply, audit and cooperate

“It's advisable to make the full payment according to law so as to eliminate any legal risks,” said Fangda Partners' Zhou Bo. “The government also conducts random inspections to check whether companies have been making full payments, and if any non-compliance is found a government penalty would be incurred.”

Zhou said that companies were partly motivated by the desire to save money, but were encouraged to take risks because of the lack of government scrutiny. And despite all requirements being clearly written out in the law, the issue lies in varying enforcement and implementation in different localities – this has proven to be especially difficult in the manufacturing hub of Guangdong province and the coastal areas which contain numerous factories.

“The key thing is to undertake a proper internal audit to ensure you're in compliance with local contribution requirements, even before there is a dispute,” said Tan.

“If you detect any non-compliance, it would be prudent to communicate with the local social insurance fund centre or labour bureau,” he added, emphasising that it is critical to seek their guidance on how to resolve the issue (especially on back payments of unpaid or underpaid contributions) as well as on how to minimise the effects of any potential collective action or disputes. Government support is essential, as companies will find it difficult to consult and negotiate with the employees without the backing of the social insurance authorities.

The underlying problem

Each month the employer makes a contribution to a government-run social insurance fund and also deducts a certain amount from the wages of its employees. The issue is that while the company is willing to make the back payment for its contributions, employees are not prepared to make back payments for the amounts that they have underpaid.

“The problem is that making the full back payment can be immensely costly, so companies take the gamble and say they'll be fully-compliant going forward, but take the risk of not paying for the past,” said Isaacs.

Recent strikes have brought this problem to the fore. “I've dealt with similar cases in Guangdong, Shenzhen and Dongguan, where there are lots of manufacturing factories, and I know that a lot of employees are underpaid in insurance,” said Zhou.

This issue often proves to be the final straw for dissatisfied workers. The solution is to first improve working conditions overall and respect employees' rights. “If they are happy with every other aspect of their employment, such as salary and other tangible benefits, insurance wouldn't be such a major issue. But if they aren't, insurance becomes a burning point in the dispute,” he explained.