China’s top court has ruled that workarounds between employers and employees to avoid mandated social insurance contributions are invalid, reinforcing compliance requirements but raising concerns about business costs and job security. The decision underscores the government’s effort to strengthen pension funding while companies face pressure from slowing growth and weak consumer demand, according to a recent Reuters report.
Background on Social Insurance
Social insurance in China covers pension, unemployment, medical, work injury, and maternity benefits. Contributions typically amount to about 10% of gross income from employees and 25% from employers. However, many firms have been reluctant to fully participate, citing rising costs, deflationary pressures, and trade frictions. A 2019 report by the Chinese Academy of Social Sciences (CASS) warned that the national pension fund could run out by 2035, while a 2024 update suggested that delaying retirement could extend its solvency by eight to nine years.
Employer Workarounds
Reuters interviewed 18 employees across the country, of whom only three said their employers were contributing as required. Some firms have asked workers to sign contracts rebranding part of their wages as “social insurance subsidies,” without making actual contributions. In Guangxi, for example, a supermarket clerk reported being required to waive arbitration rights while her pay was reclassified. A real estate agent in Guangdong province described a similar arrangement.
A survey of 6,689 firms by human resources firm Zhonghe Group found that only 34.1% were fully compliant with contribution rules. Nearly 30% reported disputes with employees over social insurance in the past year.
Legal and Regulatory Response
Legal experts have described the wage reclassification practice as illegal. Peng Shugang, a senior partner at China Commercial Law Firm in Shanghai, noted that the country’s latest tax system allows real-time monitoring of contributions, making violations easier to detect. Organizers of the Canton Fair, one of China’s largest trade shows, have also begun requiring proof of social insurance contributions from exhibitors, though alternative documentation may be accepted.
Business Challenges
Employers have voiced concern that stricter enforcement could lead to widespread bankruptcies, especially among small and medium-sized enterprises already facing financial strain. A factory owner in Zhejiang province said he is covering contributions for permanent staff but not for part-time workers, citing uncertainty about future enforcement.
Not all businesses are avoiding compliance. Wang Hu, owner of Zhe Film, a wedding photography firm in Yunnan province, began paying contributions for his 70 employees this September. He estimated the annual cost at one million yuan, about 20% of his revenue, and said he wanted to provide benefits he never received while working for others.
Outlook
China’s effort to enforce social insurance contributions highlights the tension between strengthening its social safety net and supporting businesses in a slowing economy. While the Supreme Court ruling seeks to improve long-term funding for pensions, firms and workers continue to grapple with the immediate costs and trade-offs.
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