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Legal Update

Changes Introduced by the New PRC Social Insurance Law

1 December 2010
Mayer Brown JSM Legal Update

The new PRC Social Insurance Law (the Social Insurance Law) was promulgated by the 11th session of the Standing Committee of the National People's Congress on 28 October 2010 after four readings and will take effect as of 1 July 2011. This article takes a look at some of the main changes under this new social insurance regime and analyses its impact on HR management for employers operating in the PRC.

Overview of the new law

The Social Insurance Law regulates five basic social security insurances, i.e. basic pension, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. It is the first comprehensive law of PRC to regulate the five social insurance schemes and associated administrative issues, such as collection of social insurance premiums, management of social insurance funds and supervision of social insurances schemes. Whereas, under the current legal regime, provisions regarding social insurances have been scattered throughout a range of regulations and rules at both national and local levels and treated in practice with low legal effect and weak enforceability.

The new law covers all employing entities within the territory of the PRC and all individuals, including city residents, flexible employment individuals, migrant workers and foreigners working in the PRC. The new law is not intended to cover all of the details for implementation of the five social insurances schemes, and has not provided for national united social insurances contribution rates. Therefore, employers would still need to refer to the local regulations for contribution rates of the social insurance schemes.

Some key changes under the new Social Insurance Law

Enabling portability of individual social insurance accounts

The new law allows the basic pension, basic medical and unemployment insurance relationships of an individual to be transferred/carried with him/her when the individual changes a job or moves to another province or city, and make clear that the premium contribution years in different locations will be calculated cumulatively.

Flexibility for contribution to pension insurance when reaching retirement age

For employees reaching statutory retirement age (normally 60 for male employees, 55 for female officers and 50 for female workers) but have contributed to the basic pension insurance for fewer than 15 years, he/she may choose to continue to contribute to the pension plan until completion of 15 years and then enjoy the pension benefits monthly. Alternatively, he/she may transfer the social insurance account to the New Rural Pension Scheme or Township Resident Social Pension Insurance to enjoy the pension benefits according to the provisions to be formulated by the State Council.

This gives the employees more flexibility and will enable them to better enjoy the pension benefits. Whereas in current practice, in many localities, such as Shenzhen, according to the existing policies, if an employee reaching statutory retirement age but the contribution years has not reached 15 years, they are not allowed to continue their contribution and will not be able to enjoy the pension benefits monthly and instead a lump sum payment is provided to him/her, which is usually the balance in his personal pension account.

Costs relating to work-related injury to be responsible by employers reduced

The new law reduces the costs to be responsible by the employer towards an employee suffering work-related injury. Under the new regime, items including food allowance, reimbursement of accommodation and traffic fees for medical treatment outside the city where the employee works, as well as the one-off medical subsidy required to be paid to an employee suffering work-related injury when his/her contract of employment is terminated will be covered by the work injury insurance fund.

New means to collect social insurance premiums

In addressing the issue that enforcement of employer contributions has been one of the biggest obstacles facing local governments, the new law provides for new mandatory means to collect the social insurance premiums where an employer fails to pay the social insurance contributions in full and on time. The new means include checking the employer's bank account, ordering banks and other financial institutions to directly withhold the owed amounts from the bank account after applying to the local administrative authorities for permission; requesting the employer to provide collateral; or applying to the courts to detain, seize and auction off the assets of the employer to the value equal to the social insurance premiums due and payable and deduct the outstanding social insurance premiums from the income of auction.

Eligibility of foreigners to participate in the social insurance schemes

According to Article 97 of the new law, foreigners working in China may participate in the social insurance schemes in accordance with the provisions of the Social Insurance Law. Foreign employees in China will be entitled to the same social insurance benefits. But entitlement still needs further interpretation and implementation rules on how an employer may make social insurance contributions in respect of foreign employees. It is perhaps true to say that most employers in China currently do not pay any kind of social insurances in respect of their foreign employees. Some locations, such as Tianjin and Suzhou, has promulgated local rules regarding foreigners and Taiwan, Hong Kong and Macau residents participating in the social insurance schemes.

Additional details for social insurance contribution for employees

Under the new law, an employer is required to:

  • within 30 days of hiring an employee, apply to the social insurance agency for social insurance enrolment for the employee and shall pay all social insurance premiums in respect of the employee pursuant to the law
  • advise the social insurances contribution details to each individual employee on a monthly basis
  • issue the certificate of termination of employment relationship to a terminated and unemployed employee in a timely manner, and advise the name of such individual to the social insurance agencies within 15 days of termination of the employment relationship

Greater liability for non-compliance

Under the new law, an employer who fails to make payment of the social insurance contributions in full and on time may be penalised with a late payment surcharge at a rate of 0.05 percent of the outstanding payment per day from the date of default. If the employer fails to pay within the time limit ordered by the authorities, it may be fined between 100 percent and 300 percent of the amount of the social insurance premiums outstanding.

Impact on Human Resources Management of Employers

The new law improves the penalties imposed on employers failing to pay the required social insurance premiums in full and on time. It gives additional means to the social insurance authorities to collect the premiums and therefore increases the chances of recovery of social insurance fees from employers. Employers should comply with the obligations of contributing to social insurances given the higher costs involved due to violation. The promulgation of the new law will raise the employees’ awareness of their rights in respect of the social insurance. Violation of the law will no doubt give rise to more disputes with and claims brought by the employees.

An employee may not contract out of his/her entitlement to be enrolled in the social insurance schemes by signing a waiver or agreement with employers. An employer cannot avoid payment of the social insurance premiums in respect of its employees even if the employees voluntarily give up such rights.

As the new law contains provision relating to social insurance for foreigners working in China, employers should closely watch for any national or local implementing details in contributing social insurances for foreign employees.

Also, implementation of the new law could facilitate the mobility of human resources between different locations by enabling individuals to enjoy pension and medical care benefits across different regions through transferring of social insurance relationships, establishing social insurance number, and allowing medical expenses incurred in one place to be repaid in another city under the medical insurance system.

For inquiries related to this Legal Update, please contact:

Duncan Abate ( )

Hong Tran ( )

Susan Deng ( )

Learn more about our Hong Kong office, Employment & Benefits and Insurance & Reinsurance practices.

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