What changed in 2019?
The Chinese social insurance system was initiated in 1997, gradually developed over the years, and finally established by the PRC Social Insurance Law in 2011. Under this law, employees should be provided with social insurance including: pension, basic medical, unemployment, work-related injury and maternity insurance. Both the employer and the employee are obliged to pay social insurance premiums every month. The premiums will be calculated based on the employee’s average monthly salary in the previous year, and shall be higher than the minimum amount but capped by the maximum amount announced by the local government annually. The social insurance premiums payable by the employee shall be withheld by the employer from the employee’s monthly salaries and paid to the authorities on their behalf.
Over the years, the implementation of the social insurance scheme encountered many problems. First of all, many enterprises complained that the social insurance premiums payable by the employer were very high. Secondly, some enterprises did not provide the social insurance, or paid premiums much lower than the statutory standards. In 2018, the Chinese Government announced its intention to reform the social insurance policies. This article by Jeanette Yu of CMS Legal discusses the changes implemented in 2019.
Change of institute for collection of social insurance premiums
China’s social insurance scheme has strong geographical features. According to the Interim Rules released by the State Council in 1999, premiums shall be collected by institutes determined by provincial-level governments, which could be either tax authorities or handling agencies (social insurance agencies) established by the social security administrative authorities at the local level. For example, in Shanghai and Beijing, the collecting institutes were social insurance agencies; in Guangdong province, the collecting institutes were the tax authorities.
An advantage the tax authorities have over social insurance agencies is that they hold information on employees’ remuneration and can easily check whether enterprises are providing an adequate amount of social insurance. This allows the authorities to collect the premiums more efficiently and accurately.
On 21st March 2018, the central government decided that tax authorities shall be the sole institutes for collection of social insurance premiums. The Central Committee of the Communist Party and the State Council made a follow-up announcement that, starting from 1st January 2019, the premiums shall be uniformly collected by tax authorities. Local governments successively issued relevant policies about the implementation and transformation of these changes.
At the time of writing, the change of collecting institutes is still undergoing implementation in many places. However, trends are showing that enterprises will have less and less opportunities in the future to reduce labour costs by not providing social insurance for employees or paying premiums lower than the statutory standard.
Making up the outstanding social insurance premiums by enterprises
According to the law, if an enterprise fails to fully pay social insurance premiums for its employees, the authority may require it to make up the outstanding payments within a certain time and pay late payments fees at the rate of 0.05 per cent per day of delay. If the enterprise fails to meet the deadline, an additional penalty of between one to three times the outstanding payments may be imposed. The statute of limitation for pursuing a claim is two years from the date the enterprise makes rectification.
In practice, in the past, social security administrative authorities seldom voluntarily pursued enterprises for outstanding payments, unless an individual employee raised a complaint. However, after the decision on the change of the collecting institutes was announced, in some areas, enterprises were ordered to immediately make up unpaid social insurance premiums, which sometimes amounted to more than one million Chinese yuan (CNY). But this practice was immediately stopped by the central government, and local governments were required to properly deal with historical arrears and strictly forbidden from ordering enterprises to make up a shortfall within a short time.
This move by the central government efficiently eliminated panic among enterprises. In the near future, it is unlikely that local governments will voluntarily require enterprises to make up past underpaid social insurance premiums, though individual employees still have the legal rights to raise their complaints. This provides enterprises with a good chance to make rectifications now, in order to avoid being pursued for administrative liabilities for misconduct of up to two years ago.
Reducing the social insurance premiums
In the meantime, the Chinese Government has been working on reducing employers’ social insurance premiums. Starting from 1st May 2019, the contribution rate to the pension fund payable by the employer was reduced to 16 per cent nationwide; the unemployment and work-related injury insurance contribution rates will be reduced periodically until 30th April 2020. If the accumulated balance of the work-related insurance fund is sufficient for the payment of benefits for a period of 18 months or more, the contribution rate can be further reduced by between 20 to 50 per cent. Furthermore, the minimum and maximum amounts for calculating the social insurance premiums shall be weighted by the average salary of employees from both privately- and non-privately-owned business units at the provincial level rather than on non-privately-owned business units only.
This has been the most significant reduction in social insurance premiums since 2016, when the Chinese Government decided to reduce the labour costs of enterprises. Ironically, due to different levels of economic development across the country, in some areas the adjustments to the weighting method actually increases costs for enterprises. For example, in Shanghai, under the new standard, such minimum and maximum amounts are increased by CNY 228 and CNY 1,137 respectively, amounting to CNY 4,927 and CNY 24,633.
With the aforementioned changes, the social insurance scheme will be implemented more strictly in China. But the Chinese Government does not have a big margin in which to further reduce the social insurance premiums. Furthermore, the statutory minimum wage and the average monthly salary of employees are still increasing every year. Therefore, European companies doing business in China should not rely on government adjustment of social insurance policies to reduce their labour costs, but instead find other solutions.
Jeanette Yu is Partner and Head of Employment & Pensions Practice Area Group of CMS in China. She has more than 16 years’ experience in advising clients on a wide range of PRC labour law issues. Jeanette also acts as chair of the European Chamber’s Human Resources Working Group. CMS provides legal advice to clients in the areas of corporate and M&A, employment, distribution and commercial, banking and finance, insurance, competition, real estate and construction, IP, dispute resolution as well as tax and customs. CMS has been active in China for several decades.
 The PRC Social Insurance Law, 1st July 2011.
 Interim Rules on Collection and Payment of Social Insurance Premiums of the State Council, issued on 14th January 1999, updated on 24th March 2019.
 Ibid, Article 6.
 The Plan for Deeping Reform of Party and the State Institutions of the Central Committee of the PRC Communist Party, 21st March 2018.
 The Reform Scheme on National and Local Tax Collection and Management System of the Administrative Offices of the Central Committee of the PRC Communist Party and the State Council, 20th July 2018.
 Article 86, PRC Social Insurance Law, 1st July 2011.
 Article 20, Labour Security Supervision Regulations of the State Council, 1st November 2004.
 The Emergency Notice on Implementing the Spirit of State Council Executive Meeting and Stabilising the Social Insurance Collection Work of Administrative Office of Ministry of Human Resources and Social Security, 21st September 2018.
 The Comprehensive Scheme on Reducing Social Insurance Contribution Rates of Administrative Office of the State Council, 1st April 2019.