Labor Case Study: Social Insurance Contribution in China

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By Allan Xu  Manager, Business Advisory Services
Editor: Alexander Chipman Koty
Dezan Shira & Associates, Shanghai
As part of our mission to provide business intelligence on the legal, tax, and operational issues of doing business in China, China Briefing presents a series of case studies based on the practical experience of professionals at Dezan Shira & Associates.
Scenario

A pharmaceutical company establishing operations in China was approached by an employee with a request regarding social insurance payments. Mr. B joined the company in August 2011 as a salesman. Before inking the labor contract, the company and Mr. B signed a letter of commitments including the following:

  • Mr. B voluntarily requests the employer to not pay social insurance premiums during his employment, and agrees to accept the allowance from the company directly;
  • Mr. B agrees to not terminate the labor relationship or claim severance due to the company’s nonpayment of his social insurance premiums;
  • Mr. B signs the letter of commitments of his own free will and it will become effective on the date of signing by both parties.

In September 2013, Mr. B mailed a notice to the company to terminate the labor relationship on the grounds of the company’s nonpayment of his social insurance premiums. Thereafter, Mr. B filed the case with labor arbitration, demanding the company pay him two years’ worth of severance and social insurance contributions.

Although the company presented the letter of commitments as evidence in its defense, the Arbitration Committee ruled that the company was at fault and obliged to pay severance and social insurance to Mr. B for his two years of employment.

Professional Service_CB icons_2015RELATED: Payroll and Human Resource Services

Conclusion

In accordance with the Social Security Law of the PRC, the employer and employee shall jointly contribute to the basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance, and maternity insurance. Employers shall voluntarily declare and promptly pay social security premiums in full and social security premiums payable by employees shall be withheld by their employer. Employers who fail to promptly contribute social security premiums in full shall be ordered by the social security premium collection agency to make or supplement contributions within a stipulated period, and shall be subject to a late payment fine calculated from the due date at the rate of 0.05 percent per day. Where payment is not made within the stipulated period, the relevant administrative authorities shall impose a fine ranging from one to three times the amount in arrears. Based on the above stipulations, both the employer and employee are obliged to contribute social insurance premiums.

According to Article 52 of the PRC Contract Law, a contract, where illegal intentions are concealed beneath an appearance of legality, or where the mandatory provisions of laws and administrative regulations are violated, shall be null and void.

In this case, Mr. B signed a letter of commitments voluntarily renouncing the employer’s obligations to contribute social insurance premiums. This letter of commitments was deemed signed by the employer to avoid its legal obligations, which is in violation of the mandatory provisions of PRC laws. Thus, the letter of commitments was null and void.

In addition, according to Article 38 of the Labor Contract Law of PRC, where the employer fails to contribute social insurance premiums for the employee pursuant to the law, the employee may rescind the labor contract. Further, pursuant to Article 46, the employer is obliged to pay severance to the employee.

Since the Labor Contract Law of the PRC came into effect, many labor disputes have been emerging relating to employers failing to contribute social insurance premiums for employees pursuant to the law. In this situation, since the employer is legally at fault, the employee has the right to terminate the labor contract unilaterally and demand the employer pay severance. The employer also must bear the additional cost of violating the law. It is essential for employers to avoid contravening China’s complex labor laws and regulations. When a new employee is hired, it is up to the employer’s Human Resources personnel to transfer the employee’s social insurance account from his previous company to the new one within the first month of employment; thereupon the employer can contribute social insurance premiums for the employee in a timely manner.


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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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