Added Employee Costs to Hurt Dalian-Based Companies

October 3, 2011 Posted by China Briefing Reading Time: 4 minutes

By Adam Livermore

Oct. 3 – A couple of weeks ago we reported some details of the recent announcement by the Dalian Social Insurance Bureau concerning changes to the calculation base for contributions by employers. We summarize the most important points here:

The basis for calculation of the company contribution will be the total previous month’s salary paid to employees in the company.
The ceiling amount for the calculation that was previously imposed (and is currently in place in all other cities in China) has been temporarily removed. This ceiling amount was RMB11,154.
The company should include the salaries paid to foreign employees (including those from Hong Kong, Macau and Taiwan) into the declaration of “total previous month’s salary), effectively requiring the company to make social insurance contributions on behalf of their foreign staff as well as mainland Chinese staff.
The percentage contribution remains unchanged at 31.3 percent (possibly slightly more depending on the specified rate for work injury insurance).
The announcement was made on August 30 and came into effect from September.

So far, most analysis of this change to the system has focused on the large negative impact it will have on companies based in Dalian. Effectively, the cost of hiring highly-skilled Chinese employees rises, because the company needs to pay 31.3 percent of the entire salary for such individuals, instead of a maximum monthly contribution of RMB3,491 when the ceiling was in place. Additionally, the cost of employing a foreigner also increased by 31.3 percent. However, we would like to point out that the change in policy will also affect companies located elsewhere in China that have employees in Dalian, even if they have no formal entity or branch registered in the city. As long as the mandatory benefit contributions are being made on behalf of the employee in Dalian (for instance through an agent such as a FESCO), the new calculation should apply.

It has come to our attention that some companies have not been informed by their agent of this change and/or its implications, and that in some cases contributions are continuing to be made based on the old policy. We want to remind such companies that they do face the possibility of incurring a penalty if the contributions are not made in full.

We are aware that many companies are discussing internally whether or not to comply with this regulation, as the extra cost involved in complying with the rule can be large. Below we would like to point out one potential consequence of non-compliance that some companies may be overlooking when they reach this decision. It relates to maternity insurance.

The calculation of benefits payable to female employees during their period of maternity has recently changed from being based on the individual’s salary prior to maternity to being based on the average salary paid by the company to all employees. This average salary will be determined by the figures provided by the company to the social insurance bureau relating to salaries earned by their employees. We can infer that this average salary amount will be lower for companies which do not comply with the new Dalian regulations; in other words those that:

Continue to use the ceiling amount for calculation of contributions for their highly-paid Chinese employees and / or;
Do not include contributions for their foreign employees.

Looking forward to next year, we can anticipate that any staff taking maternity (or paternity) leave will be expecting to receive their benefit allowance based on the average salary of the company. If companies with a lot of highly-paid staff or a lot of foreign staff do under-report their contributions, the amount of benefit allowance receivable for such a person on maternity leave will be reduced. The potential effect could amount to thousands of RMB per month. As the period for receipt of this allowance is five months for most women, the impact on their income during this period might be quite large. Companies can expect questions and comments from employees negatively affected during this period.

Therefore, companies will risk punishment from government authorities if they do not make contributions in line with the new regulations and, additionally, they may also face labor disputes with affected employees due to benefit payments from the system being lower than employees would justifiably expect.

At the moment, verbal feedback from the social insurance bureau is that for the month of October companies are expected to make contributions in compliance with the written regulations. This is in contrast to advice received by some companies in September which was for companies not to make contributions on behalf of their foreign employees during that month. There is still general lack of clarity over specific situations, for instance whether companies with employees from Germany or Korea will have to contribute for these employees (the new nationwide social insurance law states that such situations will be governed by bilateral treaties in place between the countries, however it is unclear what, if any, relationship the new regulations in Dalian have to the implementation of this new national law). Both companies based in Dalian and employees working here are looking forward to more clarification from the local government on these issues after the October holiday.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, Vietnam and India. For further information and clarification on Dalian’s new social insurance policies or on China’s new Social Insurance Law, please email payroll@dezshira.com.

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