China Employers Face NEW and SEVERE Punishment For Failing to Comply with Social Insurance Laws

It is not news that Chinese labor authorities have been cracking down on employer’s that fail to make social insurance payments for their employees. What is news is that Chinese labor authorities are taking that enforcement to the next level. Last week, 28 government departments (including the National Development and Reform Commission, the People’s Bank of China, the Ministry of Human Resources and Social Security, and the State Administration of Taxation) jointly executed a Memorandum of Understanding on Joint Punishment against Serious Dishonest Enterprises and Related Personnel in the Social Insurance Sector (the “MOU”) that defines “serious dishonest employer behavior” to include the following:

(1) Failing to participate in social insurance in accordance with the law and refusing to rectify the situation;

(2) Failing to truthfully declare the social insurance contribution base and refusing to rectify the situation;

(3) Failing to pay social insurance premiums;

(4) Concealing, transferring, misappropriating or embezzling social insurance premiums, funds or engaging in illegal investment operations;

(5) Participating in fraud by, among other things, falsifying certification materials or social insurance fund expenses or social insurance benefits;

(6) Illegally obtaining, selling or disguising trading of social insurance personal rights and interests data;

(7) Refusing to assist the social insurance administrative department in its efforts to investigate accidents and problems; refusing to assist the taxation department in its efforts to supervise or inspect social insurance, and failing to provide relevant information related to social insurance; or

(9) Otherwise violating applicable laws and regulations.

Numbers 1, 2 and 3 above — that is, not paying or under-paying employee social insurance — are the violations our China employment lawyers most often see among foreign employers in China, and even before the MOU, we often saw foreign employers get in trouble for such violations.

The Ministry of Human Resources and Social Security, the State Administration of Taxation and the Medical Security Bureau will pass on information regarding employers that violate the social insurance laws to other Chinese government departments via the national credit information sharing platform and publish that information on Credit China (China’s National Enterprise Credit Information Publicity System) and on the official websites of these government agencies. In other words, the dishonest parties will be publicly named and shamed.

Employers/relevant personnel determined by Chinese government authorities to be dishonest may face a number of adverse consequences imposed by different government departments –not just limited to social insurance. Punishment might include restrictions on participating in government procurement as a supplier, financial subsidies and social security funds support, government assistance on streamlining the handling of social insurance, and participating in social insurance cooperation projects. The list of potential punishments also includes enhanced scrutiny or regulations. For example, when a dishonest enterprise applies for customs-related business, its import/export activities will be more strictly supervised and regulated, such as more stringent customs inspection, supervision and audit. The relevant authorities will also consider the “dishonest behavior” of the employer, its legal representative, actual controlling person, directors, supervisors, officers, and senior management in determining whether to grant preferential policy support. Punishment also may include prohibitions on purchasing airplane tickets and withdrawals of previous honors (e.g., taking back a previously-awarded model of high morality honor).

In October of this year, China’s Ministry of Human Resources and Social Security released a set of draft Interim Measures for the Management of a Blacklist for Serious Dishonesty in the Social Insurance Sector for public comments. This blacklist would be publicized on local and national credit information platforms and be made available to all government authorities. The MOU mirrors the spirit of these draft Measures. As always, the localities are expected to come up with their own detailed implementation rules.

Life in China for foreign employers has never been easy, but don’t make it harder by getting your company and its personnel on the “blacklist.” Can you confidently state that your company is in full compliance with its social insurance obligations? If not, you need to take action now to make sure it is.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.