Article by Martyn Huckerby, Sharon Wong and Maggie Shen
Originally Published 23rd January 2009
China's social insurance system is currently governed by a multitude of policies and directives at both central and provincial level. On 28 December 2008, the Commission of Legislative Affairs of the Standing Committee of the National People's Congress (NPC) issued a draft of China's first National Social Insurance Law (Draft Law). The NPC is seeking public comment on the Draft Law and the deadline for submissions is 15 February 2009.
According to government officials in the Ministry of Human Resources and Social Security of the PRC, the Draft Law is crucial to domestic employees as it guarantees the basic interests of individuals and ensures social stability. The Draft Law not only consolidates Tentative Regulations on the Collection and Payment of Social Insurance Premiums issued by the State Council in 1999, along with principles set out in other regulations regarding various social insurance schemes, but also introduces new rules on the administration and distribution of social insurance funds, which implies a move towards a nationwide social insurance system.
The Draft Law follows the promulgation of the PRC Labour Contract Law in 2008 and the recent issuance of the Arbitration Rules for Labour Disputes, all of which can be seen as part of China's broad initiative to further emphasise and protect workers' rights and social benefits.
The NPC has already received more than 47,000 submissions from the general public on various practical issues since its issuance of the Draft Law. It is expected that the Draft Law will be finalised and promulgated shortly. Some highlights of the Draft Law are summarised below.
Five mandatory social insurance schemes
Employers in China are obliged to pay or contribute to five types of social insurance on behalf of their employees, all of which have been governed by a disjointed number of policies and directives to date. The Draft Law, which consists of 12 sections and 91 articles, consolidates regulations that collectively comprise the framework for the five mandatory social insurance schemes and sets out the basic rules in relation to the payment of social insurance premiums and disbursement of social insurance payments.
Under the Draft Law, employers are required to pay insurance premiums and withhold the amount required to be contributed by employees from their remuneration based on the rate set out by local labour bureaus. The five types of mandatory social insurance are as follows:
- Old-age insurance: retirees in China are entitled to receive old-age pension fund on a monthly basis until they have reached the minimum retirement age and have paid the insurance premiums for 15 years. The old-age insurance premiums are jointly contributed by the employers and employees
- Medical insurance: medical insurance is designed for the purpose of compensating employees for medical expenses including such things such as the cost of medicine, outpatient and hospitalisation expenses
- Unemployment insurance: unemployed workers are entitled to receive unemployment insurance payments at an amount lower than the local minimum wage for 12, 18 or 24 months depending on the length of employment
- Work-related injury insurance: work-related injury insurance covers, in the event of work-related death or injury, compensation for employees, including medical expenses, disability benefits, nursing expenses and death subsidies. A welcome amendment for employees is that injured workers will be entitled to receive work related injury compensation insurance in advance even if an employer fails to contribute required insurance premiums and refuses to pay medical expenses for an employee, and
- Child-bearing insurance: premiums paid into child-bearing insurance are available to female employees or unemployed wives of male employees for childbirth allowances during maternity leave and cover part of their medical costs (i.e. medicine, examination, midwifery and hospitalisation expenses) in child-bearing.
Towards a nationwide social insurance system
Level of pooling
With regard to old-age insurance, the Chinese government's goal is to nationally pool the collection and distribution of pension funds. A national pooling system will assist in improving labour mobility in China and provide more flexibility for companies to contribute social insurance premiums for employees in different localities. Currently, pooling has largely taken place at the municipal level.
The Draft Law allows Chinese citizens who migrate to cities other than where they have been issued a "hukou" (or registered as a permanent resident in a particular area) the ability to pay pension premiums in one place and receive payments in another. Currently, retirees are only entitled to receive pension benefits from where their hukous have been issued. This raises difficulties for employees to both contribute old-age insurance premiums and receive pension funds. This provision is particularly significant as China has a large mobile population.
Administration and supervision
The Draft Law crystallises and reinforces a company's obligation to apply for social insurance registration at local social insurance agencies. A company is required to apply for its social insurance registration certificate within 30 days of its establishment date.
Local government social insurance agencies will be responsible for enumerating, collecting, administering, and paying contributions and benefits, as well as maintaining data.
Since 1998, China has been exposed to a series of social insurance fund embezzlement scandals in excess of RMB 16 billion (about US$ 2.3 billion - see China Daily article from 23 December 2008). The Draft Law sets down a framework so that funds can be managed with more transparency. Governments at municipal, provincial and the state level are expected to encourage and support the public's participation in supervising the administration and investment operation of insurance funds.
The Draft Law imposes stricter liability on companies should they fail to carry out social insurance registration, refuse to pay or delay in paying required social insurance premiums and sanctions include the imposition of fines, administrative punishment and criminal liability. For example, if an employer fails to effect mandatory social insurance registration, the relevant labour authority is entitled to impose a fine that is up to three times what a company would have been required to pay. Currently, penalties are only imposed on responsible personnel within a company.
A sound social insurance law is important to ensure social stability in China and existing legislation is disjointed and spread across various implementing rules at provincial level. The Draft Law has been formulated to strengthen and standardise the basic principles for collection, disbursement and management of social insurance premiums in the PRC.
Under the new system, mobile workers will benefit by being entitled to contribute and receive social pension funds in different locations and freed from current "hukou" restrictions. In this regard, the Draft Law can be viewed as part of a trend towards greater social benefits for individuals and workers and a fortified nationwide safety net, which may prove crucial at a time when China's level of growth is under threat.
Though there may be limited direct impact on companies who are obliged to pay employees' social insurance premiums regardless, the Draft Law will consolidate a web of legislation previously set down and accordingly reduce the level of rules and regulations that companies registered in China need to navigate through.
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.