Cap on Employer Portion of Welfare Contributions May Be Removed

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China labor costs possibly set for dramatic increases

Op-ed Commentary: Adam Livermore

Oct. 19 – The cap on the amounts paid as contributions to social welfare funds by employers on behalf of their workforce may be removed, if recent policies enacted in Dalian are to be implemented nationally.

The Dalian ceiling, which we covered in some detail here, was previously capped at a total monthly salary amount of RMB11,154. This meant that regardless of salary paid to an employee over and above this amount, the calculation for the contribution to be made by the employer was based on this RMB11,154 figure – therefore effectively the maximum contribution per employee was RMB3,491 per month. This cap has now been temporarily removed and, subject to local government findings, if successful in raising welfare fund reserves in Dalian this policy may be rolled out on a national basis. If so, the costs of employing high-earning staff will dramatically increase in proportion to their salary.

The impact in Dalian has been an adjustment from employers paying a maximum of RMB3,491 when the ceiling was in place, to a total of 31.3 percent of total salary (whatever that amount is).

The Dalian ruling came into effect this September. Anecdotal evidence suggests that some companies in Dalian are taking a wait-and-see approach, as the additional cost for some employers with a large proportion of highly-skilled staff could be considerable. The government will have the option to impose fines for late payment on such companies if it feels such measures are justified.

In the medium-term it won’t be possible for Dalian to continue to operate a different social insurance regime from the rest of the country. New investment in high value-added projects for which highly-skilled labor is necessary will inevitably dry up and companies already located in the city will be forced to relocate. There are two possibilities. First, that Dalian re-instates the cap to fall back in line with the rest of the country. Secondly, that the rest of the country implements similar policies to Dalian.

There have been rumblings that other cities around the country might remove their caps, although nothing official has yet been released. If caps are removed nationwide, the cost of employing highly-skilled workers will jump. As a rough guide, subtract RMB10,000 from the monthly salary you pay each employee and multiply the remainder by 30 percent. This will give you an indication of the additional burden for your organization.

What this might mean for China remains to be seen. Certainly it would go a long way to filling any holes that might have developed in the social insurance funds, but could it lead to a brain drain? High-earning Chinese are a lot more internationally mobile than they used to be, and salaries for highly-skilled employees are already not very low in China these days.

As for expats, separate legislation has already dictated they will be caught in the social insurance net. The potential removal of the employer cap on social insurance contributions would make it more expensive to employ expats in China.

It would be a bold move by the Chinese government to roll out this policy nationwide, and the possibility that this becomes a reality in the coming months can certainly not be discounted.

Adam Livermore heads up the Payroll Services Division for Dezan Shira & Associates in China. Please contact the firm if in need of advice or input concerning planning for 2012 payroll overheads. Kindly email payroll@dezshira.com or visit the firm at www.dezshira.com.

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