China: Foreign Companies Hit With Much Higher Disability Payments

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By Mark Melnicoe

Multinational companies operating in China are starting to pay sharply higher amounts into the nation's disability fund under a revised formula set by the central government.

Although announced by the Ministry of Finance and the State Administration of Taxation, provincial governments are implementing the calculation and doing it in different ways, further complicating the landscape for foreign companies, practitioners say.

The Disabled Persons' Employment Security Fund was established to help with vocational training, education, rehabilitation and other services for disabled people. Companies have been required since 1990 to pay into the fund if a certain, small percentage of their workers are not disabled.

Change in Calculating Formula

A seemingly small change in the law is making a very big difference in what many companies must pay. That's because the new formula is based on each company's average workforce salary, not on the average salary for all workers within a city as before. Given that foreign companies, especially the larger ones, tend to pay high salaries in China, they are getting hit with sometimes huge increases.

“I would say it's a significant cost, as multinational employers pay much higher salaries on average,” Grace Yang, an associate at Harris Bricken in Seattle who specializes in Chinese employment law, told Bloomberg BNA in a Feb. 8 e-mail.

Average urban salaries in China are just over 6,000 yuan ($870) a month, according to figures from zhaopin.com, a leading job-search site, as cited by the state-run China Daily newspaper, but some multinational firms pay engineers and other technical workers as much as 50,000 to 70,000 yuan ($7,000 to $10,000) a month, which means their payments into the disability system can multiply tenfold or more.

“The implication could be hundreds of millions of yuan,” a professional who works with foreign businesses and who asked for anonymity, told Bloomberg BNA in a Feb. 8 phone interview.

Slow Rollout

The change, announced in September 2015, was effective at the beginning of 2016, but many provinces and municipalities have been slow in their implementation. Beijing, for example, did not issue its measures until June 30, 2016.

Yang noted that small companies (with 20 or fewer employees) get a break at first.

“They can apply to be exempt from the fund contributions for the first three years since their establishment for failure to employ the required number of disabled people,” she said.

The main way that companies can avoid the payments is to hire disabled people as employees, but they can be hard to find and the rules vary by locality. The national figure is 1.5 percent, but the nation's largest cities—Shanghai and Beijing—require 1.6 percent and 1.7 percent, respectively.

Data from the China Disabled Persons' Federation illustrate the challenge. In 2014, Beijing's workforce of 11.5 million people included 1.27 percent who were disabled. The figure in Shanghai was only 0.68 percent.

Companies complain the disparity between the requirement and the number of qualified disabled people to fill jobs means they cannot fill the positions. And there are no shortcuts.

“An employer is considered as having employed a disabled person only if it enters into an employment contract with the disabled person with a term of no less than one year, pays the disabled person the wage no less than the local minimum wage standard, and duly contributes the social insurances for this disabled person,” Andy Yeo, a partner and employment law specialist at Mayer Brown JSM in Shanghai, told Bloomberg BNA in a Feb. 9 e-mail.

Enforcement Spotty, Inconsistent

Further complicating matters for multinationals is the patchwork nature of enforcement, which is not uncommon in China as it continues to slowly modernize its economy.

“It can vary from city to city within the same province and sometimes even varies by district within the same city,” Yang told Bloomberg BNA. “It can be quite complicated for foreign companies, and they need to make sure they follow all aspects of the applicable laws.”

Yeo said the hit-or-miss nature of enforcement could even spare some employers.

“The manner of collection, if collected at all, differs from locality to locality, and so some enterprises including multinationals may not even feel any impact,” he said.

In addition, some regions are adhering to the old formula.

“It seems that it has not been strictly implemented in some areas,” Yeo said. “We found some announcements issued by local authorities (e.g. Hangzhou) in 2016 which still use the average annual salary of the previous year of the locality, instead of that of a specific employer.”

More Flexibility Considered Unlikely

The standard formula in most cities is to tax companies 1.5 percent of their average workers' salary during the previous year for every employee, subtracting for disabled workers. Those firms that exceed the threshold for minimum number of disabled employees pay nothing into the fund.

Some companies have called for a more flexible system, one that would allow local governments to set ratios based on the available pool of disabled workers, but Yang thinks this unlikely.

“It might make sense to do that,” she said. “However, I don't expect any law to come out anytime soon on this issue.”

Real Protection for Disabled Workers Lacking

China has other laws on the books aimed at protecting disabled workers, many of whom are vision- or hearing-impaired or have been diagnosed with mental illness, including psychosis. The two principal laws are the Regulation on Employment of the Disabled, issued by the State Council in 2007, and the Law on Protection of the Disabled, issued by the Standing Committee of the National People's Congress December 28, 1990

“However, the laws are not enforced well in terms of protecting the interests of disabled people,” Yang told Bloomberg BNA. “The fund that has been collected has not been fully utilized to benefit disabled people. The government support is still lacking. Most disabled people are not educated and end up doing some sort of menial work. The unemployment rate is quite high among the disabled in China.”

To contact the reporter on this story: Mark Melnicoe in Shanghai at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

The Administrative Measures for Collection and Use of Employment Security Funds for the Disabled is available in Chinese here.

For more information on Chinese HR law and regulation, see the China primer.

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