Legal Update on the Social Insurance Requirements for Foreigners and Hong Kong, Macau and Taiwan Residents Working in Shanghai

A specific policy issued by Shanghai government in 2009 provided that foreigners and Hong Kong, Macau and Taiwan residents “may”(instead of “must”) participate in the social insurance scheme in relation to their employment in Shanghai (the “Shanghai Policy”). The Shanghai Policy expired this week on 15 August 2021. Effective from 16 August 2021, all companies in Shanghai must enrol the Relevant Employees in the social insurance scheme and make contributions for them, in accordance with the national social insurance laws.

Requirement for participating in the social insurance scheme

On the national level, it is not a new requirement for foreign employees and employees from Hong Kong, Macau and Taiwan (the “Relevant Employees”) to participate in the social insurance scheme:

  • For foreign nationals, the Interim Measures for Social Insurance System Coverage of Foreigners Working within the Territory of China (the “Interim Measures for Foreigners”) has been in force since 15 November 2011.
  • For Hong Kong, Macau and Taiwan residents, the Interim Measures for Participation in Social Insurance by Hong Kong, Macau and Taiwan Residents in the Mainland China (the “Interim Measures for Hong Kong, Macau and Taiwan Residents”) has been in force since 1 January 2020.

According to these two legislations, companies in China have the duty to enrol the Relevant Employees in the social insurance scheme and pay for their contributions.

Shanghai issued its own local policy in 2009, which effectively made social insurance optional for the Relevant Employees. Due to this policy, the local authorities had taken a soft position in enforcing the national social insurance laws, where in practice they would only take enforcement actions when complaints or proceedings are launched by the employees.

Issues in relation to participating in the social insurance scheme

After the expiration of the Shanghai Policy, companies in Shanghai must enrol the Relevant Employees in the social insurance scheme and make the contributions accordingly. In making the contributions for these employees, companies should be aware of the following issues:

1. 

Time limit for enrolling the Relevant Employees in the social insurance scheme

A company should enrol the Relevant Employees in the social insurance scheme and make contributions accordingly, within 30 days after an foreign employee has obtained his/her employment certificate or after a Hong Kong, Macau or Taiwan employee has commenced his/her employment.

2. 

Calculation of the social insurance contributions

Social insurance contributions are calculated based on an employee’s average monthly salary. As of 2021, the minimum threshold of salary for contributing to the social insurance is RMB 5,975 per month, and the maximum is RMB 31,014 per month.

The contributions to be made by the company and the individual to each of the four types of the social insurance are calculated as follows:

Types of the social insurance 

Company 

Individual

Total

Pension insurance
(similar to MPF in Hong Kong)

16%

8%

24%

Medical insurance + Maternity insurance 

10.5%

2.00%

12.5%

Unemployment insurance

0.50%

0.50%

1.00%

Work-related injury insurance

0.16%-1.52%

/

0.16%-1.52%

Total

≈27.16%

10.50%

≈37.66%

 

For example, if an employer’s salary exceeds RMB 31,014 per month, the company would need to pay contributions of approximately RMB 8,000 per month and the employee himself would need to pay contributions of approximately RMB 3,000 per month.

For avoidance of doubt, the housing fund is still optional for the Relevant Employees. As distinguished from social insurance, housing fund is still up to the mutual agreement between the companies and the employees.

3.

Potential exemptions

Foreign nationals

China now has bilateral treaties with 11 countries or regions including Germany, Japan, Denmark, Netherlands, Switzerland, Spain and Canada, in relation to the exemption of certain types of social insurance. Employees of these countries which have bilateral exemption treaties with China can apply for exemption from certain social insurance. For example, an employee enrolled in an equivalent social insurance scheme overseas may be exempted from the contributions to the pension insurance and the unemployment insurance.

Residents of Hong Kong, Macau and Taiwan

Employees who have been enrolled in equivalent social insurance schemes in Hong Kong, Macau and Taiwan and remain in such equivalent schemes, may be exempted from the pension insurance and the unemployment insurance, by providing a certificate from the relevant authority.

Consequences of failure to contribute to the social insurance scheme 

1.

Company may be liable for the loss sustained by employee as a result of the failure to contribute to the social insurance scheme.

For instance, if an employee suffered from work injuries and could not be reimbursed due to the company’s failure to contribute to the medical insurance and work-related injury insurance, the company would be liable for the medical costs and compensation for the work injuries.

2. 

An employee will be entitled to terminate employment and claim for compensation on termination.

Under Article 38 of PRC Labour Contract Law, an employee is entitled to terminate the contract unilaterally if an employer fails to contribute to the employee’s social insurance. Upon termination, the employee would also be entitled to claim for severance pay and other compensation.

3. 

Enforcement actions and penalties 

Social insurance authorities may order a company to pay the contributions within a time limit, and impose a fine of 0.05% per day from the date of default. In case of continuing default, there may be a fine imposed on the company, ranging from one to three time(s) of the outstanding payment.

4.

Blacklisting

A company which does not comply with the social insurance laws may be backlisted by the authorities, and negative credits may be imposed on the company in the Enterprise Credit Information Publicity System. As a consequence, the company may be restricted in terms of government purchase, transportation, tender, licensing, lending, market access, preferential treatment in tax, awards and etc.

Our observation

1.

 Review of the social insurance arrangement for the relevant employees

In recent years, the Chinese government has put increasing emphasis on social insurance policies and widely implemented the policy to authorise tax authorities to collect social insurance with tax. Hence, it is unlikely that the Shanghai government will extend the Shanghai Policy again. Under this circumstance, companies would need to take active measures to ensure compliance with the social insurance laws, including but not limited to, reviewing its current social insurance policies for the Relevant Employees. Otherwise, the risks are such employees could launch complaints with the authorities or the authorities may take enforcement actions against the companies in breach.

2.

Risks of demand for retroactive contributions

Foreign nationals

If a foreign employee complains to the authorities, requesting the company to comply with the social insurance laws and make contributions to his/her social insurance retrospectively, there is a risk that the company would be required by the authorities to do so. We would expect the authorities to fix the relevant period for such retroactive contributions from the date when the Interim Measures for Foreigners was implemented (i.e., 15 October 2011) to date.

Residents of Hong Kong, Macau, and Taiwan

Similarly, companies employing residents of Hong Kong, Macau and Taiwan may also be required to make the contributions retrospectively. We would expect the relevant period for such contributions to be from the date when the Interim Measures for Hong Kong, Macau and Taiwan Residents was implemented (i.e., 1 January 2020) to date.

3.

Optimisation of the compensation packages for the relevant employees

Companies may need to review and optimise the compensation packages for the Relevant Employees, considering comprehensively their salaries, social insurance contributions, salary tax, and any subsidies from overseas parent companies, etc., so as to reduce the costs for the company and increase the income for the employees to the extent possible provided full compliance with laws and regulations.

In conclusion, companies employing foreigners and residents of Hong Kong, Macau and Taiwan, in particular, foreign invested enterprises, need to take active measures to ensure compliance with the social insurance regulations after the expiration of the Shanghai Policy. We will be happy to assist you in adapting to the regulatory changes in PRC, providing services including but not limited to reviewing the social insurance policies, structuring the taxation arrangement, and optimising the compensation packages for employees.