Will the new judicial ruling in China bankrupt small businesses?
China Translated - Briefing #56
Social security is one of those dry topics among the least-watched issues when it comes to China-watching. So understandably, when a huge controversy flared up this week about it, not many people outside paid much attention.
What happened?
China’s Supreme People’s Court (SPC) issued a judicial interpretation that unequivocally invalidates any agreements between employers and employees where workers "voluntarily" waive their social insurance contributions in exchange for higher immediate pay.
This clarifies that paying social insurance is a legal obligation that cannot be exempted by contract. The interpretation targets a common but problematic practice where companies avoid mandatory contributions by giving workers equivalent compensation instead.
This interpretation has stirred a new round of heated debates about China’s problematic social security system. Many people are afraid that it will force many small and micro-sized businesses, such as owners of mom-and-pop shops and small restaurants, to go bankrupt due to stricter enforcement, dealing yet another blow to weak business and consumer sentiments.
Is the SPC’s judicial interpretation anything new?
No. It is nothing new in itself.
The Chinese law on social security is quite clear. It’s mandatory to contribute to social security. Even if employees sign contracts with businesses to waive this obligation, those contracts are not legal in the first place.
So why did the SPC issue a judicial interpretation now?
In practice, non-compliance with social security obligations is commonplace. In some small cities, there were even cases of lower court rulings against this law. SPC is merely coming out to standardise decisions for lower courts.
However, the pressure for reforming social security is so great and the current situation so unsustainable that public opinion has found an easy spark in SPC’s decision to ignite.
What are the immediate implications?
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