Expanding into China offers companies many growth opportunities—but it is a notoriously challenging market in which to operate. This is especially true when considering its social security system that requires different employee and employer mandatory contributions between cities and states. These variations, coupled with China’s massive size, add layers of complexity to any global expansion. But keeping in mind these important factors can help companies better understand (and navigate) the complexities of China’s social security system.
How Are Contributions Calculated in China?
The first step is to calculate the social security contribution base, which uses the previous year’s salary divided by 12 (use the starting salary for new employees). There are minimum and maximum contribution bases, depending on the location of work. Next, the contribution rate is applied to the base, and that rate will vary between regions. In general, the employee’s contribution rate totals just over 10% and the employer rate ranges from 27-30%, subject to the ceiling for the contribution base. All factors are subject to fairly regular rate changes, which can make it difficult for many businesses to stay up to date. Likewise, it is the full responsibility of the employer to not only enroll with the Local Labor Bureau, but to make timely payments to each scheme.
Are Foreign Workers and Expats Required to Contribute to Social Insurance?
According to China labor law, the national system does require expat employees to contribute, however, some regions have different rules for foreigners. For example, Shanghai does not require expats to contribute to social insurance, and other cities may only require certain insurances to be paid such as medical.
Another exception is for foreign employees whose home country has a social insurance agreement with China, and in that case, it does not have to be paid (because the employee is still contributing at home). Those countries include Germany, Canada, Japan, and others, where pension and/or unemployment is exempted.
China's Social Security System: What Decision Makers Need to Know Before Expanding
There is a considerable amount of regulatory variation between city, state, and industry, but the following offers a general guideline of what to expect when navigating China’s social security system.
- Pension Insurance: Different industries will regulate pension requirements in different ways, so always make sure that you're following the rules dictated by your specific sector.
- Medical Insurance: At its core, this is designed to offer employees access to hospitals in the area. However, it is a very common practice in China for expats to use private insurance for access to private, higher-quality hospitals. Understanding the distinctions (and options) between public and private healthcare coverage in China is crucial.
- Unemployment Insurance: The ability to file claims against these types of policies will vary depending on the exit specifics of the employee in question. Generally, unemployment insurance is available for periods up to 24 months following someone's exit.
- Maternity Insurance: This is financial assistance paid to women after they give birth. Along the same lines, you also need to be aware that it is illegal in China to fire a pregnant woman for at least one year after she has given birth.
- Workers' Compensation: This is another factor that will vary significantly, both by the industry and by the location in which a business operates.
- Housing Fund: Maybe the most interesting thing about China's Housing Fund is that foreign employees do not actually contribute. How much other employees will contribute will again be different, based on the city in which a business is located, and the Hukou, the system of household registration used in mainland China.
All factors are subject to fairly regular rate changes, which can make it difficult for many businesses to stay up to date. Likewise, it is the full responsibility of the employer to not only enroll with the Local Labor Bureau, but to make timely payments to each scheme.
The Risks of Non-Compliance with China’s Social Security System
In addition to certain financial penalties, the major risk of non-compliance with any of the above is that labor law violations in China must now be made public. In 2017, the Ministry of Human Resources and Social Security (otherwise known as the MOHRSS) stated that companies that operate in China and commit "significant labor law violations" will have that information published.
Some have taken to calling this the "Name and Shame" approach, and it has already acted as a powerful deterrent for companies that reduce or fail to pay remuneration without reason, violate child labor laws, and more. The full name of the employer, their address, social credit code, name of the legal representative, and more will all be published.
Expanding into China Is Challenging. Rely on an Experienced Expansion Partner.
It's important for businesses operating in China to seek local support on a city-by-city basis. it's also essential that businesses always understand the resident status of their employees, for example; rural workers attempting to work in an urban center are subject to their own distinct rules, and staying up to date can quickly become a full-time job.
The complexities of China’s social security system (and regulation that comes with expanding into the world’s second-largest economy) serves as an important reminder of why so many organizations enlist the help of a global Employer of Record during their global expansion. An Employer of Record can provide guidance on regulation, hiring, and all aspects of expansion, allowing you to devote the maximum amount of attention to running your business.
Velocity Global’s Employer of Record solution enables companies to hire in more than 185 countries quickly and seamlessly—with many making China the next stop on their global expansion.