Do you employ people in multiple locations? (Part 2)

Maggie Jia

Maggie Jia is a partner and heads the firm’s Employment & Compliance practice. She holds a bachelor’s degree from the East China University of Political Science and Law in Shanghai (China) and a master’s degree in Economic Law from the Friedrich Schiller University Jena, in Germany. She passed the China Bar examination in 2012. Prior to joining DaWo Law Firm, she worked in Shanghai and gained experience at a well-known Chinese law firm and at De Wolf Law Firm Shanghai.

Do you employ people in multiple locations? (Part 2)

In part 1, we mentioned the common compliance risks of Non-local Social Insurance Contribution. In part 2 we are going to briefly summarize the main legal provisions and possible legal consequences for each risk.

1.Supplementary Social Insurance Contribution

In accordance with Article 57 of the PRC Social Insurance Law, the employer shall apply for social insurance registration with the local social insurance agency. Based on our current practice and experience, both the social security department and the courts have tended to conclude that Non-local Social Insurance Contribution cannot replace the respective legal obligation to pay social insurance of the employer and the employee. Consequently, this means that the company, as the employer, may still be required by the social insurance department of the registered place to make supplementary social insurance contributions for its employees at its registered place and bear the corresponding overdue fine.

2.Termination of Labor Contracts

As mentioned above, the Non-local Social Insurance Contribution may result in supplementary contribution within the prescribed period required by the social insurance department; if the contribution is still not made after the deadline, the person may face a fine of up to three times the outstanding amount.

Meanwhile, according to Article 32 of Measures for the Administrative Supervision of Social Insurance Funds newly issued by the Ministry of Human Resources and Social Security, the act of fraudulently obtaining social insurance benefits by fictitious labor relations shall be handled in accordance with Article 88 of the PRC Social Insurance Law, i.e. the social insurance department shall order to return the fraudulently obtained social insurance benefits and impose a fine of at least two times and at most five times of the fraudulent amount.

Under the mode of Non-local Social Insurance Contribution, there is no real labor relationship between the human resources company and the employee, which falls under the scenario of “fictitious labor relations.” Hence, the human resources company is also at the risk of being punished by the social insurance department.

3. Obstruction of work-related Injury Insurance Benefits

In accordance with Article 41 of the PRC Social Insurance Law, wherein the employer fails to pay work-related injury insurance according to the law, it shall pay work-related injury insurance benefits to the injured employees. In Non-local Social Insurance Contribution, due to the fact that the employer and the contributor of social insurance are not the same, it is possible that the employer may be regarded as having failed to pay the work-related injury insurance according to the law when relevant authorities review the work-related injury insurance benefit application, which may result in that the injured employees cannot relish in the work-related injury insurance benefits. Under this circumstance, the employer shall pay corresponding work-related injury insurance benefits to the injured employee, including a lump sum disability allowance, a lump sum work-related injury medical allowance, as well as life care fees, etc.

4.Administrative Penalty

In accordance with Article 38(3) and Article 46(1) of PRC Labor Contract Law, where the employer fails to pay social insurance for the employee according to the law, the employee may terminate the labor contract and claim for severance pay. In Non-local Social Insurance Contribution, if an employer does not pay social insurance for its employees in the registered place, this may be regarded as “failing to pay social insurance for employees according to the law” and then the employees may have the right to terminate the employment contract and request severance pay.

Although such identification is controversial in practice, there still exists examples in which the court directly finds that “the employer fails to pay social insurance for employees according to the law” and supports the employee’s claim for severance pay.

5.Criminal Liability

In accordance with Article 266 of PRC Criminal Law and its interpretation by the Standing Committee of the National People’s Congress, obtaining social insurance payments or other social insurance benefits by cheating, forging evidentiary materials or other means constitutes fraud of public or private property, and may constitute the crime of fraud if the amount involved is relatively large. As described above, Non-local Social Insurance Contribution conforms to “fictitious labor relations” and may be regarded as social insurance fraud, and it is directly stipulated in legal documents in some areas in practice. Hence, the human resources company may face criminal liabilities.

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DaWo has helped numerous companies understand and address their specific Social Insurance needs and minimize the related compliance risk. Please reach out if you have any questions.

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