China: social insurance for inter-regional employees

Companies conducting business across China may face problems paying social insurance premiums for employees working outside the locality where the company is registered. We explain the problems below, and provide best-practice recommendations.

Social security payments for interregional employees

Employers in China must contribute to various social insurance funds for employees. These funds include aged pension insurance, medical insurance, occupational injury insurance, maternity insurance, unemployment insurance and housing funds. Employees must also contribute toward these funds.

Chinese social insurance laws and regulations require the employer to pay the social insurance contributions in the locality where the employer is registered. This requirement, however, creates problems for employers who engage employees to work in a different locality, and the employees who want social insurance to be paid where they work.

Two common but flawed options

In practice, service agencies can be engaged to pay social insurance premiums for the interregional employees on behalf of the employer. Such service is usually provided in one of two ways:

• the employee enters into a sham employment contract with a local service agency, and the service agency pays social insurance premiums through its own social insurance account at the cost of the employer; or
• the service agency is entrusted by the employer to pay social insurance premiums in the name of the employer through the employer's local social insurance account; however, this can only work if the local social insurance authorities allow the employer to open a local social insurance account without being registered in that locality.

The second option only works in some localities. The first option, though popular, remains controversial.

Risks of engaging service agencies to pay social insurance premiums

• Some service agencies are not properly licensed to engage in the social insurance premiums payment business. Payments made through such agents may not be recognized when future claims are made.
• Social insurance authorities may increase compliance audits. This might result in fines to the company, and difficulties for the employee wishing to claim their social insurance.
• Social insurance payments are determined, in part, on the local average wage of the place or payment. Accordingly, social insurance payments differ from locality to locality. One result is that the social insurance premiums where the employee lives might be lower than in the employer's place of registration. In turn, the employee may have access to less funding when claiming their social insurance funds, and may at that stage claim against the company.
• In some localities (such as Changsha and in Guangdong Province) recent regulations explicitly prohibit service agencies from entering into employment contracts with employees of other companies, or otherwise representing another company's employee as the service agency's own employees, for the purposes of paying social insurance premiums on behalf of another company.

Action points

To mitigate risks and comply with the law, employers who have interregional employees may consider:

• duly establishing a branch or a subsidiary in the place where the employer has business activities and paying the social insurance premiums through that branch or subsidiary. This is the most effective way to resolve social insurance risks for interregional employees from a risk perspective.
• negotiating with employees and obtain their consent to have their insurance premiums paid in the employer's locality. This can result in higher costs for the employer if, for instance, the employer is based in a higher-cost locality (such as Shanghai).
• to the extent permitted by national and local rules, use a labour dispatch or labour outsourcing arrangement instead of directly hiring employees.
• if paying social insurance premiums through a third party agency is permitted by local regulations, then engage a reputable agency and ensure that the arrangement is clearly documented with both the employee and the agency. This, however, should remain an option of last resort.

Written by Nanda Lau, Jasmine Chen and Alizee Zheng