Companies in China with employees working in cities where the firm doesn’t have a registered address may seek to engage third-party local agencies to assist with social insurance contributions for those workers. This arrangement is not in line with the legal requirements of the Chinese Social Insurance Law and may expose the company to potential legal consequences.
In China, there is no nationally integrated social insurance system. Local governments at provincial level oversee the administration of the schemes. This presents a challenge for companies with multiple offices because cross-city contributions are not possible.
According to the Social Insurance Law, an employer is responsible for making social insurance registrations and contributing social insurance premium payments for all its employees in the city in which it is registered.
Unfortunately, employees who live and work in other cities -where the company is not registered- may never enjoy the benefits of social insurance due to the lack of an integrated system. For this reason, some employers hire third-party local agencies to assist with social insurance contributions for these employees.
However, the Social Insurance Law does not recognize the third-party contributions because there is no employment relationship between the agencies and the concerned employees.
Further, the legal employer will not satisfy the mandatory requirement of contributing social insurance for all its employees in the cities of the registered locations.
Companies that use this method may face certain legal consequences. They are expected to stop using third-party agencies and rectify their contribution practice.
Beijing and Hangzhou recently prohibited third-party contribution arrangements. Companies that adopted such method had to rectify their contribution practice together with the third-party agency engaged within a given grace period.
Specifically, companies must establish their local subsidiary or affiliate, as well as a local social insurance account, to make contributions for their employees in the area in question. The grace period normally varies from two to three months. If the firm has no existing local entity, such grace period might be extended to around one year.
Additionally, administrative penalties may apply, such as orders to make up any social insurance contribution shortfalls and daily overdue fines of 0.05% of the under-paid premium. These fines could apply even if employers arranged and financed contributions at the concerned employees' request.
It is possible that some employees may make a claim on constructive termination and demand statutory severance pay on the ground that their employers failed to contribute social insurance for them.
If an employer can document that it arranged and financed contributions at the employee's request (written application or consent), it will mitigate the legal risk of the constructive termination and severance payment. However, such risk can never be totally ruled out.
When an employee applies for work-related injury benefits, the eligibility may be restricted under a third-party contribution arrangement because it is necessary to present proof of a local labor relationship with the entity that contributes social insurance for the worker.
If the relevant authorities strictly enforce the Social Insurance Law, an employee who suffered a work-related injury may not be eligible for insurance benefits. In this case, the legal employer would be ultimately liable for paying the work-related injury benefits that should otherwise be paid by the work-related injury fund.
Other social insurance benefits, such as unemployment subsidy, could also be impacted by the third-party contribution arrangement based on practices in different cities. The employee's claim for compensation, which is equal to their actual social insurance losses, may be supported by a local court. However, compared to the risk of paying the work-related injury benefit, this type of risk is relatively low.
When the situation is extremely serious, third-party contribution arrangements may expose the agencies and the legal employer to potential criminal liability. Fabricating documents and/or conditions to obtain social insurance benefits is considered a criminal offence in China. The third-party agencies are to assume the main criminal liability in such cases.
Though this practice has been common in the past and the Social Insurance Bureau has tolerated it despite it being illegal under the law, some cities have recently adopted strict measures and restrictions against third-party contributions and have asked companies to rectify any arrangements within a specific time frame.
Third-party contributions are no longer allowed in Beijing and payroll agencies and employers are given a grace period to make overall corrections and alternative arrangements. Similar requirements have also been seen in Hangzhou and Guangdong Province in the past year.
The revised Measure for Administrative Supervision of the Social Insurance Fund issued by the Ministry of Human Resources and Social Security, which came into effect last March, further set out a restriction on fabricating documents for social insurance benefits. This is a new measure and no related penalties have yet been imposed.
Experts believe that in the near future third-party contribution arrangements may be restricted in a more severe manner.
To avoid penalties, companies can rectify third-party contribution arrangements by establishing local subsidiaries and branch offices or using existing local store branch offices for the concerned employees; contributing social insurance premium for the employees in the city in which they are located.
Entities can also transfer the employment status of the employees from direct hires to dispatched employees or outsourcing workers, and have their social insurance contributed by the labor dispatch companies or the outsourcing companies (which are their legal employers).
This process may take a significant amount of time. For this reason, companies should make changes based on the level of risk.
In cities such as Beijing, Hangzhou, and Guangdong Province, where local governments do not accept third-party contribution arrangements and impose strict rules, employers must set up a local legal entity (branch office) to comply with the law.
In cities where third-party contribution arrangements are permitted, the current practice of paying through third-party agencies can be maintained. However, companies should closely monitor the situation and maintain close communication with local agencies. If there are any changes, employers should promptly align themselves with the regulations.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.