Companies that have been enrolling their Beijing employees in state social insurance schemes through third-party agencies need to rethink their employment model, as Beijing is cracking down on the legitimacy of such enrollment. In particular, an employer that is not based in Beijing but employs employees who are physically resident in Beijing may no longer use an unrelated third party to enroll employees in the requisite local Beijing social insurance schemes.
In the People’s Republic of China (PRC), many employees work in locations other than where their employers are located and registered. This is particularly common for sales employees who may be hired out of companies registered in larger cities, such as Beijing and Shanghai, but who cover, for example, sales in the southern, northern, western, or northwestern regions of the country. In many cases, the company does not have a local entity in the location where the employee is physically based and working. In order to enroll these employees in the PRC’s state social insurance schemes, which enrollment is generally required of all full-time employees, many employers have been making their social insurance contributions through a local staffing agency—a common practice, but not legally compliant. As enforcement of social insurance enrollment becomes stronger, companies using this method to enroll employees must revise their practices to come into compliance.
Increased enforcement also brings increased scrutiny around proper contribution rates and levels. As a threshold issue, rates for social insurance contributions vary by jurisdiction and are progressive based on an employee’s income. For the initial year of employment, the rate is often based on the employee’s contractual salary for the first salary payment, or if the first month of employment is not a full month, then it should generally be the first full month of salary paid to the employee. After the initial year of employment, the employer is required to report the employee’s annual wages, which includes overtime payments and some allowances, such as heat, meal, and transportation allowances. This then becomes the new base for which the social insurance contribution rate is calculated for the following 12 months.
Our January 2019 LawFlash discusses the anticipated reform of the social insurance scheme taking place in the PRC. In April 2020, Beijing started to reform its social insurance scheme by exercising greater scrutiny over the relationship between the individual being enrolled and the party enrolling the individual. Before that, to our knowledge, there were only random inspections and audits of companies on this issue, performed by social insurance bureaus in some cities.
On April 26, 2020, the Beijing Social Insurance Center (Center) issued an internal announcement, the Opinion on Handling the Issues Regarding Libin Zhao’s Participation in Social Insurance Scheme in Beijing (Opinion), directing that the district social insurance centers in Beijing conduct a comprehensive review into situations where (1) an entity in Beijing makes social insurance contributions for an individual for whom there is no employment relationship between the enrolling party and the individual; (2) the Beijing entity enrolling the individual in the social insurance scheme does not pay salary to the individual being enrolled; and (3) the Beijing entity enrolling the individual does not submit an income tax declaration with respect to the individual.
According to the Opinion, Libin Zhao (Zhao), the subject of the Opinion, was employed by a company in Zhejiang Province, and the employer arranged for Zhao to be enrolled in the social insurance scheme in Beijing through two Beijing agencies in two different but consecutive periods. As the two agencies making social insurance contributions for Zhao did not have any employment relationship with Zhao, did not pay his salary, and did not file income tax declaration on his behalf, the social insurance contributions were not proper and the Opinion directed that they be refunded. The Opinion then suggested that Zhao’s employer could make supplemental payments to the local social insurance center in Zhejiang Province for Zhao and then transfer the social insurance relationship into Beijing in accordance with the relevant regulations and procedures.
On June 30, 2020, the Center issued an internal notice, the Notice on Issues Regarding Labor Dispatch Enterprises and Human Resource Service Enterprises Participating in Social Insurance Scheme (Notice), effective from July 5, 2020. Although the Notice was not issued to the public, it is binding on employers in Beijing.
Since the Notice was issued, employers are now required to submit supplemental information related to employment contracts when completing the social insurance registration for new hires in the online social insurance service system (Online System). In addition, since the Notice was issued, the entity that registers the social insurance for a new hire needs to confirm in the Online System whether the new hire is a dispatched employee or a direct hire of the entity completing the registration. If the “dispatched employee” option is chosen, the company handling the registration procedures is required to input the “actual employing entity” and may be required to upload the relevant labor dispatch agreement(s) or employment contracts.
Further, since the Notice was issued, if the “actual employing entity” is not input into the Online System, the social insurance registration stalls and the process cannot be completed. Practically, if the actual employing entity is not registered in Beijing, this translates into the dispatch company’s not being able to make social insurance contributions on behalf of the employing entity of the individual.
The Notice and the attendant requirements in the Online System serve to block employers located outside of Beijing from making social insurance for their employees in Beijing through an agency or a third party, and prevent those agencies without the legal qualifications for labor dispatch from handling social insurance contributions on behalf of another entity. In this way, the Notice and Online System implement the requirement from the Opinion that only those entities that have an actual employment relationship with the “employee” are permitted to make social insurance contributions for him/her.
Although the Notice is currently applicable to Beijing only, it is highly likely that the practice in Beijing will carry considerable influence nationally and will encourage other cities to issue similar regulations or take similar actions gradually. Further, against the backdrop of the coronavirus (COVID-19) pandemic and its impact on the economy, as an increasing number of individuals file medical and unemployment claims, we anticipate that the local social insurance centers will exercise greater scrutiny on the issue of proper enrollment in the applicable local social insurance schemes.
Those companies that do not have local entities in Beijing but engage workers in Beijing have a few options to consider in order to come into compliance in this area:
Increased enforcement in the area of proper social insurance is likely. While employers may continue hiring employees through their main company in China, making social insurance contributions in the same city in which the company is located, and arranging for the employees to work in another city, increased enforcement means that social insurance benefits will gradually no longer be available under this arrangement, and retention of these remote employees will be challenging.
With more office workers working remotely due to the pandemic, employees may not be able to enjoy the social insurance benefits in the location where they are physically working, which could affect their qualification to obtain hukou (household registration). Companies will likely need to open more branches or adjust their workforces to accommodate the impact that remote working and working in locations other than that of the employing entity will have on social insurance enrollment.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: