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China’s Social Insurance Regulations in 2019: Minor Changes with Major Consequences

The current cease-fire in the U.S.-China tariff war must have elicited sighs of relief from many American textile and apparel executives, promising, if nothing else, a holiday season without additional upheaval. But if your business sources from China, don’t get too comfortable: whatever the outcome of the current tariff negotiations, there are some issues you need to get the jump on before ringing in the New Year.

On Jan. 1, 2019, China is introducing changes to the way social insurance premiums are levied from local businesses: specifically, by moving the collection function away from the social security agencies to the tax office. While this may seem a formality on the surface, this change can spell major challenges to Chinese businesses and their buyers.

What’s changing and why

Under China’s laws, social insurance is mandatory for all employees, entitling them to such benefits as pension, unemployment pay, maternity pay, compensation for work-related injuries and medical insurance. However, it is commonplace for companies to avoid or underpay social insurance premiums in order to reduce their tax burden. In most cases, this is done with the workers’ knowledge and consent. Some of the popular evasion methods are understating the headcount, or using a smaller tax base for calculating the social insurance premium (such as the minimum wage, with money in excess of it being paid in cash). These methods are illegal under Chinese law, but highly prevalent: during factory audits, QIMA found that over 90 percent of factories routinely have non-compliances in this regard.

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Figures like this make it obvious that China’s agency responsible for collecting social insurance premiums has been turning a blind eye to widespread evasion. However, this is about to change. On Jan. 1, 2019, China’s tax office will take over as the sole agency responsible for workers’ personal income tax and corresponding social insurance payments. Having all payments under one roof gives the authorities greater transparency of payroll records, and unlike the agency previously concerned with social insurance payments, the tax office has a real capacity to enforce the regulations.

The bad news and the good news

For businesses that haven’t been paying social insurance premiums properly, this change spells real trouble, and very real expenses. Going forward, they will need to report actual salary figures and worker head counts, which will considerably increase their total labor costs. Those currently paying the lowest possible amount of social insurance premiums may see the price of labor effectively double, with SMEs getting hit particularly hard.

Still, this is no reason to panic. The good news is that larger companies, especially in developed areas, are much more likely to already be compliant. In fact, roughly 95 percent of companies in Shenzhen were found to be in compliance with social insurance declarations, and in Dongguan and Guangzhou, the figure was 85 percent. For those companies, the changing regulation will really be little more than a formality.

As companies get smaller, things get more complicated, but considering that small and medium businesses account for upward of 60 percent of China’s GDP, no one expects the Chinese government to bring the SME sector crashing down. It’s certainly possible that some businesses, especially those with a long history of heavy violations, will get sizable fines to be made an example of. But overall, it makes sense to expect more carrot than stick (such as subsidies for businesses that are ready to pay their workers more, or amnesty for past violations conditional on continued compliance).

The buyer’s action plan

So what does all this mean for Western businesses that buy from China? The obvious outcome is the knock-on effect of increasing costs throughout your supply chain. For the price-sensitive textile and apparel sector, that alone is bad enough—but there are also hidden ethical risks to consider. Specifically, if your suppliers choose to continue avoiding social insurance payments, they may resort to using unauthorized and undeclared labor, potentially undermining years of effort made by the apparel industry to improve ethics and sustainability in supply chains.

Again, this is no time to panic. This is the time to take some concrete and practical steps to ensure that your supply chain is protected, in 2019 and beyond:

  • Keep open lines of communication with your suppliers. While it always pays to have clear communication with your supplier, it’s particularly important that you discuss this issue. Try to be as constructive as possible and understand their side of the problem—while communicating that compliance with labor laws and proper employment practices are important for your continued cooperation. A supplier workshop can be invaluable for getting the brand and the supplier on the same page, especially when organized by a professional auditing provider familiar with the issues.
  • If you don’t audit your suppliers regularly, carry out a supplier audit or re-audit. A third-party factory audit gives you a full and accurate picture of your supplier’s business, including a review of their employment and payroll records for any discrepancies. With accurate information, you can identify gaps and cooperate with your suppliers towards real improvement—while regular follow-up audits (at least once per year) help you monitor progress and maintain an active involvement.
  • If you audit your suppliers regularly, make sure your CSR protocols are up to date. If you have an established supplier compliance program, this is a good time to revisit your auditing processes and framework to ensure that sufficient focus is placed on your supplier’s labor practices, including proper employment records and compensation. This is equally important for initial audits of new factories, and for follow-up audits of suppliers you are already sourcing from.
  • Prioritize any remediation action related to labor practices. If you’re currently working with your suppliers to improve their employment and labor practices, including record-keeping, there is no time like the present to give these actions a boost, so that your supply chain is protected by the time new regulations roll around.

Sebastien Breteau is the founder and CEO of QIMA (formerly AsiaInspection), a leading provider of supply chain compliance solutions, that partners with brands, retailers and importers to secure, manage and optimize their global supply network. QIMA has on-the-ground presence in 85 countries, combining industry-leading experts for onsite inspections, supplier audits and lab testing with a digital platform that brings accuracy, transparency and intelligence for quality and compliance data. For all our clients in 120 countries who use the QIMA platform and benefit from 24/7 support in over 20 languages, QIMA is Your Eyes in the Supply Chain.