what we think

By Maarten Roos

• In Beijing, a new policy prohibits third-party HR agencies from filing social insurance in Beijing for employees of companies not registered in Beijing.
• Companies with employees based in Beijing that do not have a registered entity (incl. branch) must as soon as possible find an alternative solution to file social security for their Beijing-based staff.

Many international companies in China are based in one city, but may need to have employees based in another city. These employees will generally want social security in the place where they live and work, as this gives them crucial benefits in regard to medical care, schooling and housing. However, only locally-registered companies can make payments of social security premiums.

Establishing a branch, subsidiary or sister company is the optimal solution, but this brings additional cost and administration. Many companies have been able to avoid this by working with HR agents such as Fesco or CIIC, which are registered locally and can pay social insurance premiums (as well as housing fund contributions) even if the employee is employed by a non-resident entity.

Legally speaking this practice is a grey area, but practically it has been the accepted approach all over China for many years. Until now. Through an internal notice, HR agents in Beijing were informed last month that they would no longer be able to provide this service, i.e. for contribution of social insurance premiums in Beijing the employer of record must be a Beijing-registered entity.

Foreign-invested companies registered elsewhere that so far have used an HR agent for their Beijing employees, must immediately implement an alternative solution. The main options available are:

1. Pay social insurance premiums for Beijing employees at the location where the company is registered (i.e. outside Beijing), rather than in Beijing. However very few employees will accept this solution as it could make their life very difficult.
2. Transfer the employees to a third-party employer in Beijing, which formally employs the Beijing staff on its behalf and dispatches them to the actual employer – a PEO structure. Besides the additional cost, indirect employment means less control / management over the employee, and can lead to problems with confidentiality, non-competes, termination etc. 
3. Establish a branch (or subsidiary) in Beijing and transfer the employees to such branch. Though this results in some additional costs and administration, these can be limited through the support of a third-party law firm or corporate service provider.

Most companies are choosing the third option, though the final choice will depend on the actual circumstances of the business and – especially – the employees in Beijing. Key is to implement a solution in time, because a break in the social security of the employees in question could be hugely detrimental to their local benefits.

Meanwhile, the question remains whether other cities will see the same tightening of policies. This is difficult to predict, but based on our discussions with local departments in Shanghai, Shenzhen and Guangzhou it seems that at least for now, no changes are expected. Key point to note that as in Beijing, once a policy change is announced companies will have only a few months to find and implement a solution, and so foreign-invested companies that employ staff based outside their registered location are strongly advised to keep abreast of developments, and be ready to make a quick decision.

R&P provides legal support to international clients, and through its affiliate Acclime China provides corporate services including custodian services, treasury, payroll, accounting / tax to Chinese subsidiaries of international companies in China. For more information on how we can assist to support your structure and deal with policy changes, please contact [email protected] or your usual contact at R&P / Acclime China.