Social Security Update for Foreigners in Shanghai

Maggie Jia

Maggie Jia is a partner and heads the firm’s Employment & Compliance practice.

Social Security Update for Foreigners in Shanghai

Much ado about nothing?

Recently some HR service providers have been informing their clients that, starting from August 15 2021, social insurance contributions will probably become “mandatory” for all foreign employees working in Shanghai. As most people will know, over the past 10 years, companies registered in Shanghai have made it a “practice” not to open a social security account for their foreign employees working in the city. As far as we were able to observe, to date, such practice has not been formally sanctioned, nor has it been explicitly outlawed, by the Shanghai Municipal Human Resources and Social Security Bureau (“Bureau”). Unsurprisingly the notices issued by the HR service providers have caused quite a stir. Clients and friends of DaWo have been calling frantically for the past week to ask for our guidance on how to deal with the “new” information. We chose to let the dust settled a bit, before to share with you our opinion on the issue.

1. Why August 15, 2021?

This is the date put forward in the notices issued by the HR service providers as the ultimate date for employers to regularize the social insurance situation of their foreign employees. In fact August 15 was the expiration date of the Circular of the Shanghai Municipal Human Resources and Social Security Bureau on Several Issues concerning the Participation in Social Insurance for Urban Employees by Expatriates, Personnel Having Obtained Foreign Permanent (Long-term) Right of Abode and Residents of Taiwan, Hong Kong and Macao Working in Shanghai (Hu Ren She Yang Fa No. [2009]38, “Circular”).

As you may recall, it has been argued by some that this Circular justified or at least explained the “practice” mentioned above. Allegedly, the Circular legally exonerated foreign employees working in Shanghai to subscribe to the mandatory social insurance. In our opinion this is a misunderstanding which may stem from the words used in the Circular where it says “may” instead of “shall” to describe the extent of the obligation of foreign employees to subscribe to the mandatory social insurance in China. In any case, the validity period of the Circular has now expired as its term was not extended by the Bureau, as had been the case previously, in 2016.

2. What is the effect of the expiration of the Circular?

Nothing, or at least not much in our opinion!

As we explained in our previous article on this subject the Circular does not, or we should say, did not, affect the mandatory character of the obligation to subscribe to the social insurance by foreign employees working in Shanghai. Hence, regardless of the expiry of the Circular, strictly legally speaking, it remains an obligation for foreign employees and their employers in Shanghai just as elsewhere in China, to contribute to the mandatory social insurance, today just as it was the case last week (subject to the conditions set out in the applicable laws, regulations and eventual international conventions). This obligation flows from the provisions of the Social Insurance Law and Interim Measures for the Participation in Social Insurance of Foreigners Employed in China. The only effect that can eventually be connected to the expiry of the Circular is that the obligation to subscribe now applies to all 5 branches (There are now 4 branches: maternity insurance has now been merged into medical insurance.) of the social insurance whereas, under the terms of the said Circular, if it is had been interpreted correctly, foreign employees were allowed to choose to subscribe to only 3 branches of social insurance (the basic endowment insurance, basic medical insurance for urban employees and work-related injury insurance) provided that the employee and the employer had explicitly agreed on this subject.

3. Why all the fuzz?

With the expiry date nearing and apparently informed that the term of the Circular would not be extended, some HR service companies took it upon themselves to advise their clients to formalize an agreement with their foreign employees with regard to the limited subscription and to quickly open an account in their name with the social security bureau, before the expiry date. The argument made was that after August 15th the exoneration provided by the Circular would end and foreign employees would have to subscribe to social insurance and contribute to all 5 branches of social insurance.

However such suggestion raised the question about the starting date of the mandatory contributions to the social insurance for the foreign employee. Should it be calculated from the date of the opening of the account with the social security or from the date of the start of the employment? It quickly appeared that without any official notice being issued by any relevant authority in this respect, there is no definitive or “good” answer to be had to this question.

4. A useful wake-up call

At this point you will probably be asking: “ok, so what are you saying DaWo? Should I, or should I not open a social security account for my foreign employees?” This is a question we have been receiving a lot since last week. Obviously, as we always do, we must advise our friends and clients to always strictly abide by all legal obligations imposed on them. That being stated, we would also advise that it is often better to remain coherent with regard to the way one chooses to apply the law to his/her situation. In other words, if you had made a choice previously not to open a social security account for your foreign employees, as such aligning with the “practice” which was established in Shanghai over the past years, there is in our opinion no good argument to be made to reconsider this position just because August 15th has passed. Still, if you do decide to revise your position on this subject now or later it would probably be better to first confirm with the Bureau, if possible, that such change in position will not automatically lead to a back-payment of all unpaid contributions since the starting date of the employment of the foreign employees.

If anything else, the expiry of the Circular serves as a useful wake-up call about this issue of social security contributions for foreign employees in Shanghai, especially if – as some professionals in the city appear to expect – it will inevitably lead the Bureau to a more stringent application of the relevant laws and regulations. Our recommendation in this respect is to communicate with your foreign employees about their rights and obligations arising around the issue of the contributions to Chinese social security. As always it is better to openly discuss the issue in order to eventually come to common agreements on how to deal with it, so as to avoid any possible misunderstanding or prevent disputes to arise later on. In the end it is the interest of both employer and employee to find common grounds on this matter. Actually, we have already been requested to advise on some budding disputes in this regard, for which were able to work out amicable solutions. .

Please do not hesitate to contact us if you have any further questions or comments regarding the contribution to social insurance in Shanghai.

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