What the social insurance reductions mean for labor management

From May 1, 2016, regions, provinces and municipalities in which the percentage of basic old-age insurance premiums of employees paid by the enterprise exceeded 20% have had their rate capped at 20%. Regions with an existing payment ratio of 20%, and with a cumulative pension insurance fund balance that is able to cover more than nine months of payments as of end-2015, have had their ratio reduced to 19% in stages for a two-year period. The detailed implementing plans are to be set locally.

Specifically, 21 regions/provinces/municipalities nationwide will benefit from the policy. Shanghai's rate has dropped from 21% to 20%, and 20 other qualified areas, namely Beijing, Tianjin, Shanxi, Inner Mongolia, Jiangsu, Anhui, Jiangxi, Henan, Hubei, Hunan, Guangxi, Hainan, Chongqing, Sichuan, Yunnan, Guizhou, Tibet, Xinjiang, Gansu and Ningxia, are to enjoy a reduced rate of 19% from 20%.

Lowered unemployment insurance premiums

From May 1, 2016, the total unemployment insurance premium rate has been decreased to 1%-1.5% on the basis of a 1% reduction in 2015. The personal premium rate is to not exceed 0.5%. The reduction period is set for two years, and the specific plans for implementation are to be determined by each region, province or municipality.

Effect on labor-management relations

Firstly, the reduced social insurance premium rates can relieve pressure on enterprises without affecting the employees in any way.

Zhang Yizhen, Vice-Minister of the MOHRSS, emphasized at the State Council policy briefing on April 15, 2016 that, lowering these rates—particularly doing so in stages—will have no impact on social insurance benefits.

Taking old-age insurance as an example, the benefits of a retired worker are composed of the basic and personal pension accounts. The size of the basic pension is mainly dependent on three factors: the worker's average monthly wage during the year before he retired, the average wage on which he paid the premiums, and the number of years he paid them—none of which have any connection to the rate paid by the enterprise or the individual. The amount stored in a worker's personal account depends on the rate at which he pays the premiums himself, meaning that this portion of income will only be affected if the rate of the worker's premium payments is reduced.

However, the adjusted pension insurance percentages set by the new Circular only involve the portion paid by enterprises in most places, while leaving the amount paid by, and the benefits of, the employee unchanged.

Secondly, the Circular allows enterprises to allocate their employment costs more flexibly.

According to preliminary calculations by the MOHRSS, if the old-age insurance premium reduction policy is fully implemented in the qualified locations, Rmb38.6 billion can be saved annually at the enterprise level. The total unemployment insurance rate decrease of 0.5% to 1% nationwide could also cut costs by approximately Rmb30 billion to Rmb60 billion every year. And, if the successive decreases in unemployment insurance, work-related injury insurance and maternity insurance premium rates since 2015 are also all taken into account, corporate costs can be reduced by at least Rmb120 billion in total each year.

In other words, companies will have greater disposable income without any investments or industrial restructuring. Particularly for a large enterprise, even an adjustment of a mere 1% can have a marked effect. This, on one hand, increases production capacity and shrinks the need to make personnel cuts while, on the other hand, gives businesses the right to allocate employment costs in a more flexible manner. For instance, a company could use this extra money for employee benefit outlays or to upgrade office conditions.

Thirdly, the plan has the potential to lower the chances of labor disputes triggered by social insurance issues.

In current practice, there are many instances of underpaying or failing to pay social insurance premiums due to economic pressures (or even negligence), giving rise to a large number of employment disputes concerning social insurance benefits. These conflicts are not conducive to healthy labor-management relations. Cases often involve employees seeking severance pay on grounds of being compelled to resign, demanding full compensation for maternity or work-related injury insurance benefits, and appealing to the human resources and social security bureau for back payment of social insurance.

The Circular's lowered rates also aim to make companies more willing to pay the required premiums in full within the lawful scope. This encourages compliance and decreases the odds of disputes arising from both substantive rights and social insurance issues.

The premium reductions will have no impact on employees and, in fact, can actually promote corporate enhancement of employee benefit schemes. Companies will feel less pressure to make personnel cutbacks or terminations, thereby stabilizing labor-management relations as well.

Response to supply-side reforms

Exports, investment and consumption have been the three factors underpinning PRC economic growth ever since the country began opening up to the rest of the world, with greater weight given to the former two. However, after the U.S. subprime mortgage crisis and the gradual slowdown of the PRC economy, these growth drivers have experienced a profound change. Inherent problems started to manifest through the paradoxical co-existence of both structural over- and under-supply, and domestic demand emerged as the primary driver and breakthrough of economic growth.

In the long term, this policy of reducing social insurance premium rates will improve employee benefit schemes and promote a healthier and more satisfied workforce. And with respect to businesses' output, the regulatory support provided by the Circular will reinvigorate enterprise productivity levels, and ultimately help to achieve a balance between the structural adjustments of supply and demand. It is a positive response to China's supply-side reforms and lays a firm foundation for the policies to follow.

Youping Deng, Partner, and Shu Chen, Associate
Jingtian & Gongcheng, Beijing

34/F, Tower 3, China Central Place
No.77 Jianguo Road
Beijing, 100025
China

Youping Deng

Tel: (86 10) 5809 1033
Fax: (86 10) 5809 1100
Email: [email protected]

Mr. Deng graduated from Wuhan University, Peking University of China and University of British Columbia of Canada, with Bachelor of Science, Master of Law, and Master of Arts degrees, respectively. He has practiced for nearly 11 years. Mr. Deng has worked with Jingtian & Gongcheng since 2005 and became partner in 2010.

Mr. Deng practices primarily in the areas of labor & employment, commercial litigation and arbitration, corporate governance, state assets-related affairs, FDI and M&A.

Mr. Deng was admitted to the Chinese bar in 2005. Mr. Deng works in Mandarin (native) and English (fluent).

Shu Chen

Tel: (86 10) 5809 1580
Fax: (86 10) 5809 1100
Email: [email protected]

Mr. Shu Chen earned his LLB and LLM from Southwest University of Political Science & Law and Beijing Technology and Business University, respectively.

Mr. Chen has more than three years of experience in the corporate employment practice. He mainly deals with salary payment, medical period, employee dismissal, large personnel cutbacks and other common issues.

Mr. Chen is licensed to practice in the PRC and his working languages are Chinese and English.

The Ministry of Human Resources and Social Security (MOHRSS), together with the Ministry of Finance, issued the Circular on Reducing Social Insurance Premium Rates in Stages (Circular) on April 14, 2016, in accordance with the PRC Social Insurance Law. The Circular proposes to reduce old-age and unemployment insurance premiums in stages, and to merge the maternity and basic medical insurance schemes. It is aimed at relieving enterprises' cost burdens in light of the economic slowdown.

While the Circular has left the housing fund insurance rate unchanged, the Ministry of Housing and Urban-rural Development is currently working with the National Development and Reform Commission, the Ministry of Finance and the People's Bank of China on the Circular on Regulating and Appropriately Reducing in Stages the Percentage of Contributions to Housing Reserve Funds. This addresses issues such as capping contributions to the housing reserve fund at 12%; reducing the percentage of contributions in stages and implementing the policy from May 1, 2016 for a provisional period of two years; and permitting enterprises that are experiencing production and operational challenges to also apply for deferring their housing fund contribution payments.

The social insurance Circular

Merged maternity and basic medical insurance

Each region will continue to implement policies and provisions to reduce the insurance premium rates for work-related injury by 0.25% and maternity by 0.5%. The actual consolidation of maternity and basic medical insurance is subject to the State Council's directions—the central government will soon put forth the implementing procedures for merging these two schemes.

Reduced old-age insurance premiums

From May 1, 2016, regions, provinces and municipalities in which the percentage of basic old-age insurance premiums of employees paid by the enterprise exceeded 20% have had their rate capped at 20%. Regions with an existing payment ratio of 20%, and with a cumulative pension insurance fund balance that is able to cover more than nine months of payments as of end-2015, have had their ratio reduced to 19% in stages for a two-year period. The detailed implementing plans are to be set locally.

Specifically, 21 regions/provinces/municipalities nationwide will benefit from the policy. Shanghai's rate has dropped from 21% to 20%, and 20 other qualified areas, namely Beijing, Tianjin, Shanxi, Inner Mongolia, Jiangsu, Anhui, Jiangxi, Henan, Hubei, Hunan, Guangxi, Hainan, Chongqing, Sichuan, Yunnan, Guizhou, Tibet, Xinjiang, Gansu and Ningxia, are to enjoy a reduced rate of 19% from 20%.

Lowered unemployment insurance premiums

From May 1, 2016, the total unemployment insurance premium rate has been decreased to 1%-1.5% on the basis of a 1% reduction in 2015. The personal premium rate is to not exceed 0.5%. The reduction period is set for two years, and the specific plans for implementation are to be determined by each region, province or municipality.

Effect on labor-management relations

Firstly, the reduced social insurance premium rates can relieve pressure on enterprises without affecting the employees in any way.

Zhang Yizhen, Vice-Minister of the MOHRSS, emphasized at the State Council policy briefing on April 15, 2016 that, lowering these rates—particularly doing so in stages—will have no impact on social insurance benefits.

Taking old-age insurance as an example, the benefits of a retired worker are composed of the basic and personal pension accounts. The size of the basic pension is mainly dependent on three factors: the worker's average monthly wage during the year before he retired, the average wage on which he paid the premiums, and the number of years he paid them—none of which have any connection to the rate paid by the enterprise or the individual. The amount stored in a worker's personal account depends on the rate at which he pays the premiums himself, meaning that this portion of income will only be affected if the rate of the worker's premium payments is reduced.

However, the adjusted pension insurance percentages set by the new Circular only involve the portion paid by enterprises in most places, while leaving the amount paid by, and the benefits of, the employee unchanged.

Secondly, the Circular allows enterprises to allocate their employment costs more flexibly.

According to preliminary calculations by the MOHRSS, if the old-age insurance premium reduction policy is fully implemented in the qualified locations, Rmb38.6 billion can be saved annually at the enterprise level. The total unemployment insurance rate decrease of 0.5% to 1% nationwide could also cut costs by approximately Rmb30 billion to Rmb60 billion every year. And, if the successive decreases in unemployment insurance, work-related injury insurance and maternity insurance premium rates since 2015 are also all taken into account, corporate costs can be reduced by at least Rmb120 billion in total each year.

In other words, companies will have greater disposable income without any investments or industrial restructuring. Particularly for a large enterprise, even an adjustment of a mere 1% can have a marked effect. This, on one hand, increases production capacity and shrinks the need to make personnel cuts while, on the other hand, gives businesses the right to allocate employment costs in a more flexible manner. For instance, a company could use this extra money for employee benefit outlays or to upgrade office conditions.

Thirdly, the plan has the potential to lower the chances of labor disputes triggered by social insurance issues.

In current practice, there are many instances of underpaying or failing to pay social insurance premiums due to economic pressures (or even negligence), giving rise to a large number of employment disputes concerning social insurance benefits. These conflicts are not conducive to healthy labor-management relations. Cases often involve employees seeking severance pay on grounds of being compelled to resign, demanding full compensation for maternity or work-related injury insurance benefits, and appealing to the human resources and social security bureau for back payment of social insurance.

The Circular's lowered rates also aim to make companies more willing to pay the required premiums in full within the lawful scope. This encourages compliance and decreases the odds of disputes arising from both substantive rights and social insurance issues.

The premium reductions will have no impact on employees and, in fact, can actually promote corporate enhancement of employee benefit schemes. Companies will feel less pressure to make personnel cutbacks or terminations, thereby stabilizing labor-management relations as well.

Response to supply-side reforms

Exports, investment and consumption have been the three factors underpinning PRC economic growth ever since the country began opening up to the rest of the world, with greater weight given to the former two. However, after the U.S. subprime mortgage crisis and the gradual slowdown of the PRC economy, these growth drivers have experienced a profound change. Inherent problems started to manifest through the paradoxical co-existence of both structural over- and under-supply, and domestic demand emerged as the primary driver and breakthrough of economic growth.

In the long term, this policy of reducing social insurance premium rates will improve employee benefit schemes and promote a healthier and more satisfied workforce. And with respect to businesses' output, the regulatory support provided by the Circular will reinvigorate enterprise productivity levels, and ultimately help to achieve a balance between the structural adjustments of supply and demand. It is a positive response to China's supply-side reforms and lays a firm foundation for the policies to follow.

Youping Deng, Partner, and Shu Chen, Associate
Jingtian & Gongcheng, Beijing

34/F, Tower 3, China Central Place
No.77 Jianguo Road
Beijing, 100025
China

Youping Deng

Tel: (86 10) 5809 1033
Fax: (86 10) 5809 1100
Email: [email protected]

Mr. Deng graduated from Wuhan University, Peking University of China and University of British Columbia of Canada, with Bachelor of Science, Master of Law, and Master of Arts degrees, respectively. He has practiced for nearly 11 years. Mr. Deng has worked with Jingtian & Gongcheng since 2005 and became partner in 2010.

Mr. Deng practices primarily in the areas of labor & employment, commercial litigation and arbitration, corporate governance, state assets-related affairs, FDI and M&A.

Mr. Deng was admitted to the Chinese bar in 2005. Mr. Deng works in Mandarin (native) and English (fluent).

Shu Chen

Tel: (86 10) 5809 1580
Fax: (86 10) 5809 1100
Email: [email protected]

Mr. Shu Chen earned his LLB and LLM from Southwest University of Political Science & Law and Beijing Technology and Business University, respectively.

Mr. Chen has more than three years of experience in the corporate employment practice. He mainly deals with salary payment, medical period, employee dismissal, large personnel cutbacks and other common issues.

Mr. Chen is licensed to practice in the PRC and his working languages are Chinese and English.