China Employment Law Update - December 2016

Executive Summary

1. The Supreme Court published the latest opinions on employment disputes.
2. China Sets Up New Office to Reform Individual Income Tax.
3. Social Security Agreement signed between China and France

The latest opinions of the Supreme Court regarding employment disputes is published

On 30th November, the Supreme Court published a summary of its opinion on the eighth session Working Meeting on Civil and Commercial Law Trails of the National Courts, which was held on the 23rd and 24th December 2015 (the "Summary"). The Summary outlines the Supreme Court’s opinion on several disputes. A summary of the employment-related issues is set out below:

• Firstly, tortious liability will not be alleviated or waived where the claimant is covered by social security insurance. In addition to compensation that can be recovered from the defendant, the claimant may also apply for the insurance benefit of the Industrial and Commercial Insurance Fund and other types of related insurance. Further, if an employer does not pay the Industrial and Commercial Insurance on time, it could be liable to pay compensation in equal value to that of the Insurance Fund. This payment is distinct from any liability arising from tort.
• Secondly, it was ruled in the Interpretation of the Supreme Court on Certain Issues Concerning the Application of the PRC Contract Law (II) ("Interpretation II"), that an award of liquidated damages could be decreased if the Court finds that it is obviously high. The Summary states that any penalties for the violation of a non-competition agreement can be regulated in line with the Interpretation II. In other words, if the penalty associated with a non-competition agreement is obviously higher or lower than the real damage, either the employee or employer can ask for an adjustment on the penalty.
• Finally, it suggests that where an employer dismisses an employee by reason of "holding the lowest rank within the employment" or "failing to secure a job through competition", thus breaking the contract illegally, employees have the right to request that their employment is reinstated or to receive compensation.

The Special Deduction is to be formed with the Rapid Developing Pace of Chinese Individual Income Tax

According to a report issued by Xinhua News Agency on 10th November [Link], China's Ministry of Finance has established an office on 8th November to focus on handling individual income tax. It will shoulder the process of introducing much awaited reforms aimed at reducing the income gap through a special tax deduction plan.

The new tax system is going to focus on tax deduction under certain circumstance ("Special Deduction"). The present monthly deduction, which applies equally to everyone, may hardly be essentially fair to people in difficult livelihood. Thus, adjusting the Special Deduction to reflect the current taxation system will be more reasonable. It means that the amount of tax an individual should levy will depend on how they receive their income and their living situation. For example, a different Special Deduction will be offered on raising a child, which depends on whether the child is studying in primary school, high school or university.

Furthermore, differently from the original tax system levies the tax on people individually, the integrated tax system is likely to be introduced, which means that people will be taxed as a whole family unit, and will benefit single-income households and people raising a big family. As a result, the integrated tax system will alleviate the burden of middle-aged adults who are raising both their young children and old parents.

If such a new tax system is approved, importance should be placed on how to levy the tax practically. However, since this Special Deduction plan was submitted to the State Council in March, little administrative progress has been made. Some registration systems of income as equity registration have not yet been completed, which will have a negative impact on the new system of individual income tax levy.

Treaty on protection of social security rights signed in Beijing

On 31st October, China and France signed a social insurance agreement that will exempt company employees assigned to work in each other's countries from the mandatory social insurance contributions.

Without the agreement, French citizens working in China would have to participate in five insurance programs -- pension, medical, work-related injury, unemployment and maternity insurance, and both the employee and employer must contribute to the social insurance premiums. The insurance premiums account for nearly 40 percent of a foreign employee's wage, but employees cannot receive pensions until they have paid premiums for a total of 15 years.

The main focus of the agreement is to protect the social security rights and interests of workers. In accordance with the agreement, the dispatched staff, crew, air hostess, diplomatic personnel, civil servants and governmental employees from both of the countries are exempt from paying social security fees in the other country. It will alleviate the social security burden of those foreign workers and also encourage business and commerce between China and France.

In addition to France, China has signed similar bilateral social insurance agreements with Germany, the Republic of Korea, Denmark, Finland, Canada, Switzerland and the Netherlands.