Earlier this month, the Dalian Local Tax Bureau issued a notification to companies in the region informing them that they are required to pay a levy to the Dalian branch of the All China Federation of Trade Unions (ACFTU). The levy for companies that have not set up their own trade union internally within their organization is two percent of the entire monthly salary of their employees (including bonuses, overtime payments and other special payments). The payment is requested on a monthly basis. For companies that already have their own union set up, the levy will be only 40 percent of this amount. We believe that most foreign invested companies in Dalian will fall into the former category.
In fact, there has been legislation relating to this issue in China for a number of years now. The Trade Union Law stipulates that companies should pay this levy on behalf of their employees (the charge may not be allocated back to employees). However, the law has not been universally enforced. Typically, only relatively large companies set up their own unions. Once they have done so, 60 percent of this two percent levy can be retained within their organization in a separate bank account to be spent on their own trade union activities and staff welfare issues. The remaining 40 percent is payable to the local branch of ACTFU. On the flip-side, these companies need to deal with the complications that can arise from having such a labor union. These can include restrictions on a company’s ability to terminate/release employees that are union representatives and the requirement to consult the union on various matters of interest to the company’s employees.
However, this request from the Dalian tax bureau is the first time we have seen the labor union levy pro-actively requested to be collected together with the company’s tax payments. Although in 2008 there was a circular issued by the Dalian tax bureau together with the Dalian branch of ACTFU concerning the matter, it is the first time a notice has been sent to every enterprise through the local tax bureau online filing system. In the past, many companies have not been proactive on making these payments, and the Dalian branch of the labor union has not been proactive in pushing companies to make the payments, nor to set up unions.
The law remains silent on the extent of potential punishments for companies refusing to set up a union or make the required payments; however, the notice from the tax and labor union states that they are able to impose penalties on enterprises that fail to pay. From our understanding from the local tax bureau officers, the tax bureau is not going to impose any penalties on companies not making payment of union levies – they are only assisting ACTFU to make the collection. ACTFU has not indicated that penalties will be levied in the near future. However, it is clear that the request/requirement for payment has been publicly made. If, at some point in the future, ACTFU wishes to try to impose some penalties on companies that don’t comply, they presumably will be able to do so.
Of course, strictly speaking, it could be considered most foreign invested companies in China will have been out of compliance with this requirement for many years. It is highly unlikely that the Dalian branch of ACTFU (or any other branch) will try to impose levies all the way back to the date of incorporation of the companies that remain out of compliance – this could potentially send some companies out of business. However, this active request for payment of labor union fees could signal a more proactive attitude from the Chinese government relating to labor unions in particular and employee protection in general over the coming months.
If you are managing a business in Dalian and have not heard this information yet, it might be a good idea to ask your local CFO or accounting manager about the matter sooner rather than later. Two percent of all salary (with no cap, unlike the social insurance contributions) can be a large burden, especially if you have high-earning expat staff on your local payroll. Generally speaking, there are three options open to companies concerning how to deal with this issue:
- Start to pay the union levy;
- Ignore the request, and hope that the situation goes away. The risk of doing this is that some penalties for non-payment may be levied in the future; or
- Set up a labor union in your company.
One final practical tip: If you do decide to set up a labor union in your company, please note that the people serving as representatives of that union may not be terminated by the company during their period of tenure as union representatives (generally speaking). If one of your team is suggesting the company to set up a union and offering to take a role as a representative, you might want to try to ensure this is someone you want to keep in your company for quite a long time before agreeing to their suggestion!
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