China: Preparing For Changes To The Social Insurance Scheme And Shanghai Issues Regulations On Employee Representative Congresses, A Driver To Unionize In The PRC

Last Updated: 4 May 2011
Article by K. Lesli Ligorner, Erika A. Collins and David A. Livdahl

UPDATES TO THE SOCIAL INSURANCE LAW

On July 1, 2011 the first national law which specifically provides for the establishment of the five social insurance systems, the PRC Social Insurance Law, goes into effect.1 The five social insurance systems consist of the basic pension insurance system, basic medical insurance system, work-related injury insurance system, unemployment insurance system and maternity insurance system. We highlight below certain developments set to take effect as of July 1, 2011 and which will affect all employers.

Expenses Related to Work-Related Injury

Under the Social Insurance Law, employers will be required to pay for additional costs in the event that an employee suffers a work-related injury. In particular, employers will now be responsible for paying for the following expenses related to a work-related injury:

  • wages and benefits during the treatment period for the work-related injury;
  • the monthly disability allowance for employees with disabilities of grades 5 and 6; and
  • the lump sum subsidy payable to disabled employees with respect to the termination of their employment.

The Work-Related Injury Insurance Law, which the State Council amended on December 20, 2010, and which came into effect on January 1, 2011, provides additional details regarding these expenses.

Revised Pay Structure during Maternity Leave

Under the plain language of Article 56 of the Social Insurance Law, the maternity allowance during a female employee's maternity leave will no longer be based on her base salary as of the date she goes out on leave. While the employee will not receive anything less than what she is entitled to receive under current laws and regulations, the cost of the maternity allowance to an employer may increase or decrease, depending on a company's wage scales and where the employee fits within that scale of wages.

Under current regulations, a female employee who is entitled to receive maternity insurance will receive a set amount under the social insurance scheme, and the employer is required to make up any difference between the maternity insurance payment and the employee's base monthly salary as of the date that she goes out on leave.2

In contrast, as of July 1, 2011 employers will be required to calculate the maternity allowance according to the average monthly wage for all employees of the employer in the previous year. In cases where there is a difference between the average monthly salary of the employer and the actual monthly wages received by the employee, and the maternity insurance allowance does not cover this gap, the employer must make up the difference, which is also required under the current system. Using the average monthly salary of the employer rather than the employee's base salary may create a significant disparity in these two figures where the wage levels in a particular organization differ greatly. For example, under Article 56, a female production line worker, receptionist or trainee will likely be entitled to receive a maternity allowance that is higher than her regular monthly salary, while a senior engineer, A-share banker or sales manager will receive by statute a maternity allowance that is lower than her regular monthly salary.3 Employers should consider whether they will gross up the maternity leave payments for those highly paid employees who fall under the latter category and will receive a dramatic decrease in pay during their maternity leave.

Notably, under the new maternity allowance calculation, lower paid female employees could end up with a windfall if the employer's average monthly wages are high. At the same time, depending on the delta between a female employee's actual monthly wages and the average monthly wages of the employer, this "bump" in salary could encourage more employees with low pay to have a second baby to the extent that it complies with the family planning policy.

If the pregnancy is not in compliance with the applicable family planning regulations, the employee is not entitled to any maternity leave benefit as a matter of law. Accordingly, employers that do provide a maternity leave allowance to employees whose pregnancy does not comply with the family planning regulations may continue to pay the employee based on her then current monthly salary, in accordance with current regulations, rather then the employer's average monthly wage. Alternatively, employers are also free to exercise discretion and choose between the two schemes and pay the lower or the higher amount.

Recommended Actions:

  • Employers should review their existing policies to ensure that they are in compliance with PRC law and are in line with the company's values;
  • Employers should revise their policies now to accommodate the change in calculation of the maternity leave allowance; and
  • Employers should review and potentially revise their policies to address employees whose pregnancy is not in compliance with family planning regulations to avoid ad hoc and potentially discriminatory decisions in the future.

Enrollment of Foreigners in Social Insurance Schemes

Article 97 of the Social Insurance Law provides that foreigners who are employed in the PRC must be enrolled in the social insurance scheme. However, it is unclear how and to what extent this requirement will be enforced.

Based on our no-names telephone consultations with the Ministry of Human Resources and Social Security ("MHRSS"), we understand that the MHRSS is contemplating national implementing rules but it is unclear when the MHRSS will issue implementing rules. Based on our no-names telephone consultations with the Beijing and Shanghai labor authorities, we understand that the local governments are also contemplating issuing local implementing rules to enforce these requirements over time. For example, the Beijing local government plans to establish implementing rules this year regarding the enrollment of foreigners in the pension insurance scheme. However, prior to the release of national and/or local implementing rules, it does not appear that an employer will be able to enroll a foreigner in the social insurance scheme.

At this time, it is difficult to predict when the national and/or implementing rules will come out, and how and to what extent they will be enforced. Nonetheless, employers should be aware that the expansion of the PRC social insurance scheme to cover foreigners will mean an increase in labor costs for employers. Additionally, it is unclear whether or how foreigners may "cash out" of the social insurance scheme once they permanently leaves the PRC, as there is no provision regarding this issue in the Social Insurance Law. Finally, while Article 97 clearly applies to foreigners who are employed under local employment contracts in the PRC, it remains unclear whether Article 97 also applies to foreigners who are seconded to work in the PRC at a wholly foreign owned enterprise ("WFOE") or whether this provision will extend to foreigners seconded to a representative office.

Recommended Actions:

  • Employers should begin to revise their offer letters and employment contracts for expatriates to consider the possibility of enrollment in the PRC social insurance schemes; and
  • Employers should consider the increase in labor costs and the potential decrease in net pay for expatriates because the social insurance schemes mandate contributions from both the employer and the employee.

SHANGHAI'S NEW REGULATIONS INCREASE PRESSURES TO UNIONIZE AND ENGAGE IN COLLECTIVE BARGAINING

The All China Federation of Trade Unions ("ACFTU") continues to intensify its efforts to unionize foreign-invested enterprises ("FIEs") and implement collective bargaining agreements across China. The national government supports these efforts as a way to maintain social harmony in the workplace.4 The use of collective bargaining agreements that contain annual wage adjustments and other guarantees with respect to pay practices are viewed as a way to reduce labor unrest by granting workers greater co-determination in the workplace and lining their pockets with higher salaries.

In order to satisfy the national government's and the ACFTU's goals, local jurisdictions such as the Municipality of Shanghai are issuing their own local rules to quicken the pace of unionization and collective bargaining by employers.5 On May 1, 2011 the Shanghai Regulations on the Employee Representative Congress, issued last December by the Standing Committee of the Shanghai Municipal People's Congress (the "ERC Regulations"), come into effect. The ERC is required to hold at least one meeting annually to discuss and pass resolutions on issues that affect the material interests of employees. Under the ERC Regulations, all companies in Shanghai which employ at least 100 employees will be required to establish their own employee representative congress ("ERC").6 The ERC is the body through which workers may exercise their democratic power vis-à-vis the employer.7 According to the ERC Regulations, the ERC's purpose is to permit employees to participate in the democratic management of the employer, support the lawful business operation and management activities of the employer, and protect the employees' own lawful rights and interests through the ERC.8

To achieve their purpose, the ERC Regulations grant the ERC a broad range of authority including, among others, the authority to:

  • review and provide suggestions related to a company's operations including operational and management decisions, establishment and/or revision of company's internal policies;
  • review and approve matters related to the employees' immediate interests, such as drafting a collective contract regarding wages, working hours, rest and leave, insurance and benefit plans, protection of female employees and labor safety and health; and
  • review and supervise company implementation of proposals and resolutions passed by the ERC and the performance of collective contracts.9

In keeping with the key goals behind the ERC Regulations, we anticipate that the initial focus of a newly established ERC will be to initiate the collective bargaining process, with a focus on wage adjustment provisions.

The ERC Regulations specify the manner of electing and the make-up of the ERC's representatives. The ERC should consist of individual representatives that are elected by a simple majority of the company's employees and should serve three- or five-year terms. The majority of the ERC should consist of front-line workers, and generally no more than 20% of the representatives may be from middle- and upper-level management. The regulations also require representation by female employees in proportion to their ratio against all male employees in the company.10

Companies with less than 100 employees may establish a general assembly or an ERC with no less than thirty representatives.11 Companies that employ between 100 and 3,000 employees must have at least 30 representatives, with at least five representatives for every additional 100 employees. If a company employs more than 3,000 employees, it must have no less than 175 employee representatives.12

The ERC Regulations provide that a company's labor union is the "operating organ" of the ERC and is responsible for the ERC's daily activities. The ERC Regulations provide the trade union's responsibilities and obligations with respect to the ERC in detail, including the following:

  • to organize the election, dismissal, replacement and training, etc. of the employee representatives;
  • to prepare the documentation for the ERC;
  • to put forward the recommended candidate name list for members of the ERC presidium, members of the special team (committee) for democratic administration, as well as the employee representative for the board of directors and board of supervisors; and
  • to represent the employees in collective negotiations with the employer and to prepare the draft collective contract, the draft special collective contract, the explanation of the draft and the report on collective negotiations, etc.13

In the event that a company does not have its own trade union, the regulations provide that the local trade union should participate directly and supervise the ERC. Accordingly, an indirect (and likely intended) result of the ERC Regulations will be to compel companies in Shanghai to establish their own trade unions, if they do not want the local union to come into the company and supervise its ERC. Companies of all industries and sizes should therefore be proactive and formulate a response to this new indirect pressure to unionize and means of organizing the employees with respect to collective bargaining.

Recommended Actions:

  • As an initial step, companies should consider unionizing in order to exercise greater control over the ERC. This consideration should include identifying which employees would be beneficial on a union preparation committee and the structure for the union if the company has multiple branches or entities across China;
  • Companies should consider setting up an ERC;
  • Companies should review their current compensation (including overtime) practices, as these are likely to become the subject of collective bargaining once an ERC is established; and
  • Companies should consider proactively drafting template collective contracts. The speed at which industry-wide and national and regulatory developments are taking place requires advance preparation. Companies cannot afford to be caught unprepared by a request to unionize or engage in collective bargaining.

Footnotes

1 PRC Social Insurance Law, issued by the Standing Committee of the National People's Congress, Oct. 28, 2010.

2 See, e.g., Several Rules on Beijing's Implementation of Regulations on Employment Protection of Female Employees, effective as of Jan. 1, 1990, art. 6 (providing that female employees are entitled to their regular wages during maternity leave).

3 We note that based on our no-names inquiries with labor authorities in several jurisdictions, the full effect of the use of the employer's average monthly wage as the basis for calculating the maternity leave pay may be revised through local implementing regulations.

4 For background on these issues, see China Matters: The Renewed Unionization Campaign in China Coupled with Collective Bargaining.

5 Last August the Shenzhen People's Congress released the Draft Rules on Collective Bargaining in the Shenzhen Special Economic Zone for comment. While there have been some changes based on public comment, the regulations remain in draft form, and it is unclear if further revisions will take place. If implemented, the Shenzhen regulations will set the manner by which employees may force collective bargaining negotiations in the workplace and how employers must respond and protect employee representatives in the negotiations. On April 6, 2011 the city of Wuxi in Jiangsu Province issued the Collective Bargaining Regulations on Wages for Wuxi Enterprises which become effective on June 1, 2011. These regulations provide that the collective bargaining process should address an annual salary adjustment mechanism and other compensation matters. These regulations further provide that bargaining should be completed within 30 days, followed by an additional 10 days to conclude the written agreement.

6 See Shanghai Regulations on the Employee Representative Congress, effective May 1, 2011, art. 3.

7 See id.

8 Id. art. 4.

9 See id. arts. 8-9.

10 See id. arts. 15, 21.

11 Id. art. 20(III).

12 See id. art. 20.

13 Id. art. 34.

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.

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