Cap on Employer Portion of Welfare Contributions May Be Removed

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China labor costs possibly set for dramatic increases

Op-ed Commentary: Adam Livermore

Oct. 19 – The cap on the amounts paid as contributions to social welfare funds by employers on behalf of their workforce may be removed, if recent policies enacted in Dalian are to be implemented nationally.

The Dalian ceiling, which we covered in some detail here, was previously capped at a total monthly salary amount of RMB11,154. This meant that regardless of salary paid to an employee over and above this amount, the calculation for the contribution to be made by the employer was based on this RMB11,154 figure – therefore effectively the maximum contribution per employee was RMB3,491 per month. This cap has now been temporarily removed and, subject to local government findings, if successful in raising welfare fund reserves in Dalian this policy may be rolled out on a national basis. If so, the costs of employing high-earning staff will dramatically increase in proportion to their salary.

The impact in Dalian has been an adjustment from employers paying a maximum of RMB3,491 when the ceiling was in place, to a total of 31.3 percent of total salary (whatever that amount is).

The Dalian ruling came into effect this September. Anecdotal evidence suggests that some companies in Dalian are taking a wait-and-see approach, as the additional cost for some employers with a large proportion of highly-skilled staff could be considerable. The government will have the option to impose fines for late payment on such companies if it feels such measures are justified.

In the medium-term it won’t be possible for Dalian to continue to operate a different social insurance regime from the rest of the country. New investment in high value-added projects for which highly-skilled labor is necessary will inevitably dry up and companies already located in the city will be forced to relocate. There are two possibilities. First, that Dalian re-instates the cap to fall back in line with the rest of the country. Secondly, that the rest of the country implements similar policies to Dalian.

There have been rumblings that other cities around the country might remove their caps, although nothing official has yet been released. If caps are removed nationwide, the cost of employing highly-skilled workers will jump. As a rough guide, subtract RMB10,000 from the monthly salary you pay each employee and multiply the remainder by 30 percent. This will give you an indication of the additional burden for your organization.

What this might mean for China remains to be seen. Certainly it would go a long way to filling any holes that might have developed in the social insurance funds, but could it lead to a brain drain? High-earning Chinese are a lot more internationally mobile than they used to be, and salaries for highly-skilled employees are already not very low in China these days.

As for expats, separate legislation has already dictated they will be caught in the social insurance net. The potential removal of the employer cap on social insurance contributions would make it more expensive to employ expats in China.

It would be a bold move by the Chinese government to roll out this policy nationwide, and the possibility that this becomes a reality in the coming months can certainly not be discounted.

Adam Livermore heads up the Payroll Services Division for Dezan Shira & Associates in China. Please contact the firm if in need of advice or input concerning planning for 2012 payroll overheads. Kindly email payroll@dezshira.com or visit the firm at www.dezshira.com.

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5 Responses

  • Chris Devonshire-Ellis says:

    This is a very serious financial issue that could have huge implications for all businesses operating in China. I will also address this subject next week in a piece about preparing for 2012 China budgets. In the meanwhile, investors in China would do well to take on board the potential risk of large operating increases occuring through their total head count should mandatory welfare be directly linked to salary and the current contribution caps removed.
    – Chris

  • Pondering says:

    1. “There are two possibilities. First, that Dalian re-instates the cap to fall back in line with the rest of the country. Secondly, that the rest of the country implements similar policies to Dalian.”

    Third option, that salaries decrease.

    Fourth, headcount goes down and efficiency goes up.

    Fifth, there’s probably a fifth.

    2. To my understanding most Chinese companies do not base their contribution on the actual amount but rather on the minimum wage in the area or something like that.

    3. Reading other posts on DS (P.S. congrats on your Singapore’s new office, I hoped you’d elaborate more on why in Singapore, though) it seems the sh*t is going to hit the fan and that money is needed NOW, thus more news like the above should be expected.

    4. Why isn’t anyone commenting on posts on this site? Is it the uninviting format for discussions?

  • Chris Devonshire-Ellis says:

    @Pondering – We suspect that the Dalian model will – eventually – be rolled out on a national basis. The question is when, and that is a concern when trying to budget for contingent liabilities. Its a typical example of China not yet having reached a platform of certainty when doing business in the country.

    Concerning Singapore, I gave some details about our reasons for establishing an office in Singapore here: http://www.china-briefing.com/news/2011/10/17/dezan-shira-opens-office-in-singapore.html and I thought those were quite clearly identified. However, should you have specific questions, please ask them on that piece.

    As for comments, we welcome these, but unlike blogs, we moderate our websites (many just have free comments and people can say what they want) and we cater anyway towards the quality and not quantity of reader. Much of our material is at a higher technical level of China’s legal and tax regulatory changes, it’s not so pertinent for attracting large volumes of commentary or debate. China Briefing’s readers read our material because it is high quality intelligence, not necessarily to discuss it. We are aware of our typical reader profiles because many of our online readers also subscribe, which allows us to both target what we provide at the appropriate level and to be sure we can meet their professional expectations. To subscribe (its free) you can visit here: http://www.china-briefing.com/en/subscribe.html

    We do run opinion pieces however, and these often attract healthy discussion. However as I said its quality and not quantity of reader we are geared for on China Briefing (although we do have a huge number of subscribers actually, we’ve been publishing China Briefing since 1999).

    But please, you’re most welcome to contribute online providing text is sensible and relevant. Thanks – Chris

  • Ah Suei Yeo Christensen says:

    Hi, I would like to have information on Labour Law in China, such as
    1. temporary employment contract and its compensation system
    2. when workers work overtime in exchange for vacation, how is the calculation method/system.

  • Chris Devonshire-Ellis says:

    Dear Ah Suei, these issues are all dealt with in the “China Briefing Guide to Human Resources In China”, which has just been updated in its second edition, and is available for immediate download from the China Briefing bookstore, priced USD40, here: http://www.asiabriefingmedia.com/store/index.php?main_page=product_info&cPath=98_72_91&products_id=450

    Best regards;
    Chris

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