On July 1, 2011 the PRC Social Insurance Law, issued by the Standing Committee of the National People's Congress ("SIL"), took effect and established the first national, basic social insurance framework for employees across the PRC. The SIL requires that employers enroll each employee in five insurance programs – the pension, medical, work-related injury, unemployment and maternity insurance programs.
One of the most controversial aspects of the SIL is the purported mandatory inclusion in the social insurance system of expatriates. Before the SIL, PRC law did not mandate that any foreigners to enroll in its social insurance system.
Nonetheless, many questions about the enrollment of foreigners remain unanswered. On September 9, 2011, the Ministry of Human Resources and Social Security ("MOHRSS") promulgated the Interim Measures on Participation in Social Insurance by Foreigners Working in China ("Interim Measures"), which will become effective on October 15, 2011. The Interim Measures provide some answers to the outstanding questions, but do not attempt to answer all of them.
First, the Interim Measures define a "foreigner" as a person who (a) is not a Chinese national; and (b) holds a work permit (i.e., work permit for foreigners, foreign expert certificate and permit for permanent foreign journalists) and a residence permit in the PRC, or PRC permanent residence permit; and (c) is employed lawfully in China.1 This definition includes foreigners who are employed overseas (outside the PRC) and are seconded to branches and representative offices registered in China, so secondees working in the PRC are also required to participate in all five of the social insurance programs under the SIL.2 Notably, neither the SIL nor the Interim Measures make clear whether employees who are seconded to a WFOE or joint venture (which is not considered a branch or representative office under PRC law) by an overseas affiliated company are required to participate in the social insurance programs.
Further, the definition of a "foreigner" in the Interim Measures fails to include nationals of Hong Kong, Macau and Taiwan ("HMT Residents"). Notably, the draft measures issued in June of this year expressly included HMT Residents, but this reference was omitted from the Interim Measures. There is a possibility that HMT Residents will be or are already covered under separate regulations issued by local cities and provinces. For example, under current local Shanghai regulations, the employer may choose to enroll HMT Residents employees in three insurance programs – pension, medical and work-related injury insurance programs.3 In contrast, consultations with the Tianjin Labor Bureau suggest that HMT Residents are required to participate in all five insurance programs, just as local PRC employees.4
Moreover, neither the SIL nor the Interim Measures suggest whether enrollment of a foreigner can be voluntary or if an opt out option may exist if, for example, the foreigner already has medical insurance or is enrolled in a home country pension program. Rather, the Interim Measures provide that foreign employees may be exempted from enrolling in PRC social insurance programs in accordance with the social insurance treaty between his/her home country and the PRC.5 To date, only Germany and South Korea have reached bilateral social insurance treaties with the PRC. Despite these treaties, however, a German or Korean employee is only exempted from the pension and unemployment insurance schemes under the PRC-Germany treaty or the pension insurance scheme under the PRC-Korea treaty, and the German or Korean employee must still enroll in the other PRC social insurance programs.
In order to strengthen the enforcement with respect to the enrollment of foreigners in the social insurance schemes, the SIL requires the authorities handling work permits for foreigners to share information regarding their employment with the social insurance administration, and the social insurance administration must also periodically check with other authorities to obtain information regarding the foreigners who have obtained employment authorization.6
A key issue for many foreigners is that they will not likely benefit from enrollment in these programs. For example, foreigners generally do not frequent PRC hospitals covered by the statutory medical insurance scheme, largely for language and standards of care reasons. (The clinics and hospitals set up for expatriates are not currently covered under the PRC social insurance scheme.) Further, foreigners are not limited by the "one child policy" as PRC nationals are, and whether female expatriates can receive maternity insurance, regardless of whether they have more than one child, remains unknown.
In addition, female employees receive a maternity allowance instead of their regular wages during maternity leave, and the rate for the maternity allowance has changed under the SIL. As of July 1, 2011, employers are required to calculate the maternity allowance according to the average monthly wage for all employees of the employer in the previous year ("Employer AMW").7 In the past, although it varies from city to city, the maternity allowance was usually linked to the employee's own wages rather the Employer AMW.
Some local governments have issued their own rules to clarify the maternity allowance. For example, the Shanghai Municipal Government issued a notice on adjusting the maternity insurance policies, effective July 1, 2011, which provides that if the Employer AMW exceeds three times the local average monthly wage in the previous year ("Local AMW"), the social insurance fund will only pay a maternity allowance of up to three times the Local AMW, and the employer must make up the difference between the maternity allowance paid by the fund and the Employer AMW. Through consultations with the Shanghai Labor Bureau, we understand that currently an employer is not required to make up the difference between the employee's actual monthly wage and the Employer AMW if the employee's actual monthly wage exceeds the Employer AMW. Accordingly, from the employee's perspective, a low income employee may receive a maternity allowance during her maternity leave that exceeds her regular salary. On the contrary, a highly paid senior employee may receive far less as a maternity allowance than what she regularly earns. Considering that in general expatriates receive the higher salaries in most organizations, expatriates may receive considerably less under the SIL during their maternity leave.
Nonetheless, paying an employee less than her regular salary during her maternity leave potentially violates the PRC Law on the Protection of Women's Interests, which provides that a female employee's salary may not be lowered during her maternity leave.8 Thus, it is unclear whether the local implementing regulations under the SIL will trump the requirements of non-discrimination under the PRC Law on the Protection of Women's Interests, or whether the PRC Law on the Protection of Women's Interests will trump the local implementing regulations of the SIL.
Notably, the Interim Measures do provide that an expatriate may receive social insurance benefits after leaving the PRC, provided that he/she has become eligible for the benefits. If he/she has not become eligible, the employee may maintain his/her personal account for when he/she returns to the PRC, and the employee will receive credit for the prior contribution period upon the resumption of making contributions. Alternatively, the expatriate may, upon his/her written application, choose to withdraw the balance of his/her individual account in a lump sum payment and terminate enrollment in the social insurance scheme.9 The regulations to date do not permit the employer or expatriate to withdraw the employer's contributions to the social insurance scheme, which scheme makes up the largest percentage of the social insurance contributions for an employer and an expatriate.
Another ambiguity in the SIL and the Interim Measures is whether the contribution amounts for foreigners will match those for PRC nationals. At present in many jurisdictions, the same contribution rates that apply to PRC nationals apply to foreigners. However, we cannot rule out the possibility that local governments will revise the contribution rates for foreigners. The contribution rates vary from city to city. The chart below shows the current monthly contribution rates for employers and employees in Shanghai and Beijing.
The contribution base is an employee's average monthly salary over the last calendar year, with an upper limit at 300% and a lower limit at 60% (40% for some programs in Beijing), of the local average monthly salary. In addition, the percentage of work-related injury insurance varies depending on the risk level of an employer's business. As most foreigners are paid relatively high salaries compared to the applicable average monthly salary, generally foreigners and their employers will be required to contribute the maximum contributions, to the extent that the contributions will remain the same as those for PRC nationals.
What is clear is that employers will face increased labor costs with respect to their expatriate employees in the PRC – starting in October, when the Interim Measures take effect. And employers will need to determine whether they will cover these new costs for their employees by grossing up their salaries. Accordingly, employers should begin to budget for these additional payroll costs and begin to document the potential social insurance contributions for their expatriates in the employment documentation.
1 Interim Measures, art. 2.
2 Interim Measures, art. 3.
3 Notice regarding Participation in Urban Social Insurance System of Foreigners, Individuals holding permanent residence permit in foreign countries and residents of Taiwan, Hong Kong and Macau, issued by Shanghai Human Resources and Social Security Bureau, effective Oct. 10, 2009.
4 See Interim Regulation on the Collection and Payment of Social Insurance Premiums, effective Jan. 22, 1999; Provisions on the Administration of the Employment of Taiwan, Hong Kong and Macao Residents in the Mainland, effective Oct. 1, 2005; Provisions on the Participation in Social Insurance of Foreigners and Taiwan, Hong Kong and Macao Residents, issued by Tianjin Labor and Social Security Bureau, effective Jan. 1, 2008.
5 Interim Measures, art. 9.
6 Interim Measures, art. 4.
7 PRC Social Insurance Law, art. 56.
8 See PRC Law on the Protection of Women's Interests, issued by the Standing Committee of National People's Congress, effective October 1, 1992, art. 27.
9 Interim Measures, art. 5.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.