INTRODUCTION

In China, all foreign employees working in the country are required to pay social insurance; however, Shanghai companies been exempt due to a municipal legislation (No. 38) that said that foreign employees in Shanghai MAY pay social insurance.

Upon the expiration of this legislation, the immediate question is whether firms with foreign employees in China now must make social insurance contributions which will cost companies more money with arguably little actual benefit to those foreign employees.

While the legislation had effectively made it optional for companies to contribute, many companies over the past ten years had begun making contributions anyway.  Yet some still have held out and have been wondering what to do next.

WHAT IS SOCIAL INSURANCE IN CHINA?

When hiring personnel in China, firms must take into account many aspects of the country's social security system.

The Chinese Social Insurance System includes five statutory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) as well as a housing fund (only applicable to Chinese employees).

This social security legislation was enacted by the central government, but it is administered and implemented by local governments. For example, the rates and bases of employee and employer payments vary by local jurisdiction and are subject to yearly modifications and revisions.

Foreign employees from countries that have signed bilateral agreements with China on mutual social insurance exemption do not have to participate in all five categories of social insurance. The notification documents issued by the General Office of the Ministry of Human Resources and Social Security are included in the scope of mutual exemption. China has bilateral agreements with Denmark, the Netherlands, Japan, Serbia, Switzerland, Germany, Canada, Spain, Luxembourg, Korea, and Finland at the moment.

Furthermore, commercial insurance acquired by companies for their employees does not substitute for the payment of social insurance.

DO THE FOREIGNER EMPLOYEES GET ANY BENEFITS FOR PAYING IT?

Paying social insurance can benefit international employees, but the question is by how much?

Foreigners who participate in social insurance may be eligible for benefits such as endowment insurance, medical insurance (although many supplement with private insurance), maternity leave, and work-related accident insurance. If a foreign employee leaves China before attaining the requisite pension age, his or her individual social insurance account will be retained, and the number of years for social insurance payment will be determined on an accumulative basis when he or she returns and works in China again. The employee can also withdraw the balance of the social insurance individual account if he or she submits a written request to discontinue the social insurance connection.

CAN THE MONEY BE USED OR REDEEMED ONCE YOU LEAVE CHINA?

Parts of it, like every other social security system, function as insurance. You pay into health insurance, and if you need to go to the hospital, the insurance covers. This only applies to local hospitals.

A retirement fund accounts for a big portion of the contributions but is complicated. If the employee has paid into the system for at least 15 years, he or she should be eligible for a pension when they retire. The legal retirement age is presently 55 for blue collar males workers, 50 for blue collar female workers, 60 for white collar male workers, and 55 for white collar female workers. Of course many foreigners do not retire in China although that may be changing as China’s economy and hospital systems continues to advance.

WHAT TO DO IN THIS SITUATION?

For all foreigners (and companies) in China:

1) Schedule a meeting with your HR - It is critical for international employees to meet with their HR and discuss the next steps.

2) Keep an eye on policy changes - Shanghai may continue to not enforce the required social insurance participation. If this is the case, foreign employees will continue to be free from social insurance, and labour costs, IIT responsibility, and HR management would stay unchanged.

As a result, it is recommended that employees and HR departments pay close attention to important policy revisions on employers' social insurance contributions.

3) Understand the possible consequences - Because the probable change in social insurance policies may influence employees' IIT responsibility and take-home pay, it is critical for companies and foreign employees to fully comprehend, model out, and plan for the implications.

Expand into China without setting up a company, by employing or relocating key staff to take a first step in exploring the market. A professional employer organization (PEO) service can act as the official employer of record (EOR) for your staff in China while you expand your business. With the support of our trusted partner network, we can facilitate local hiring and employment without the time and cost of setting up a legal entity in country.

Contact us for more information at inquiries@ChinaLawSolutions.com