At a glance
- Since China reopened its borders to foreign workers earlier this year, employers in China have resumed hiring and employing foreign talents.
- However, since the pandemic, there have been changes to the requirements for paying social insurance for foreign workers.
- In this article, we discuss the relevant legal requirements and risks for employers who fail to comply with these requirements.
Legal requirements for enrolment of foreign employees
Under the current laws, since October 2011, employers in China have been obliged to enrol foreign employees who are working in China (including Shanghai) into local statutory social insurance schemes.[1] Prior to 2011, such requirements were considered to be “non-mandatory” in Shanghai, and are, today, still considered to be non-mandatory by some HR and legal professionals on the basis of a previous legal document called “Hu Ren She Yang Fa [2009] No. 38” (Shanghai No.38 Document).
The Shanghai No.38 Document was originally issued by the Shanghai Municipal Human Resources and Social Security Bureau (the Bureau) in 2009 aiming to provide non-PRC nationals (then working in Shanghai) the opportunity to participate in the statutory pension, medical and unemployment insurance schemes in Shanghai. Prior to the Social Insurance Law and the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China (Interim Measures) taking effect in 2011, foreign employees were not allowed to participate in any statutory social insurance scheme in China. The Shanghai No.38 Document soon became “controversial” after the issuance of the Interim Measures because, under this local document, it was optional for foreign employees to participate in the stated three statutory social insurance schemes, which is contradictory to the national legislation. However, the document nonetheless had been confirmed by the Shanghai authorities in 2016 to continue to be applicable until 15 August 2021.
As a result, and until 15 August 2021, many employers in Shanghai (including many MNCs) had decided to rely on the Shanghai No. 38 Document as a reason not to pay social insurance for their foreign employees in Shanghai. However, now that the document has ceased to be effective, since 15 August 2023, more and more employers in Shanghai (including many MNCs) have started to make the payments because the enrolment of foreign employees is now mandatory under the Interim Measures.[2]
Legal exposure for employers not complying with enrolment requirements
Based on the relevant laws and current practice of the local labour and social insurance authorities in Shanghai, employers in Shanghai that have yet to pay social insurance for their foreign employees in Shanghai are exposed to potential legal risks, such as being requested by the foreign employees (whether current or former employees) to make back payments for them, having late fees imposed by the local social insurance authorities, being held liable for the social benefits that the foreign employees would have otherwise enjoyed (eg damages for the employee’s inability to receive pensions in China after reaching the statutory retirement age) etc. Further, a foreign employee may terminate their employment with the employer and claim for the statutory severance pay on the ground that the employer failed to pay social insurance for them.
Employers in Shanghai that are planning to hire foreign employees, or those who have hired foreign employees but have yet to pay social insurance should pay attention to the above developments and act on social insurance enrolment. In addition, the following issues are worthy to note:
- Any adverse impact on foreign employees’ individual income taxes in China arising from their enrolment in social insurance.
- Whether the employer will bear the employee’s portions of contributions for the foreign employees and how it may claim these back when the foreign employees leave China.
- Any implementation plan / timeline of contributing social insurance for the foreign employees including a communication plan with social insurance authorities, especially if there are multiple foreign employees.
Footnote 1: Article 97 of the Social Insurance Law, effective 1 July 2011, provides that foreigners working in China shall participate in social insurance analogically in accordance with the Social Insurance Law. Further, according to Articles 3 and 4 of the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China, effective 15 October 2011, employers in China are legally required to enrol foreign employees (including those directly employed in China and those employed outside China and seconded to work inside China) into the local statutory social insurance schemes in China.
Footnote 2: Even before 15 August 2021, if a foreign employee made a complaint, the local authorities in Shanghai would require the employer to enrol the foreign employee into the local statutory social insurance schemes in Shanghai.
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