Looking Ahead 2024: China
Authors: Carol Zhu and Lynsey Liu
A. Legislative Developments
As we step into the year 2024, several legislative developments have either come into effect or are set to take effect in China.
1. Amendment to the Company Law
The recent amendment to the Company Law of the People’s Republic of China, which was passed on 29 December 2023, and will be implemented on 1 July 2024, introduces several significant changes that foreign employers who operate in China should pay attention to. These changes include, but are not limited to, the following points:
Firstly, the new Company Law stipulates that the contribution period for shareholders of limited liability companies shall not exceed five years. In accordance with the opinions of the State Administration for Market Regulation, companies that were registered and established before the implementation of the new law, with a contribution period exceeding the newly prescribed limit, are granted a transitional period to gradually adjust their contribution period to comply with the new requirements.
Secondly, the new Company Law imposes responsibilities on the board of directors to urge shareholders to fulfill their obligations. It enhances the provisions on the fiduciary duty and diligence obligation of directors, supervisors, and senior executives. In line with this, to mitigate the risks faced by directors in performing their duties, the new Company Law also allows companies to purchase liability insurance to cover the compensation liability of directors arising from the performance of their corporate duties.
Lastly, the new Company Law introduces employee directors. It states that “the board of directors of a limited liability company shall consist of three or more members, among whom there may be employee representatives. For limited liability companies with more than three hundred employees, in addition to establishing a supervisory board and having employee representatives, the board of directors should also include employee representatives.”
These amendments aim to enhance corporate governance, strengthen the protection of shareholders’ rights, and promote employee participation in decision-making processes. Foreign employers operating in China should familiarize themselves with these changes to ensure compliance with the revised Company Law.
2. Social Insurance Contribution Reporting to Tax Authorities
Starting 1 December 2023, several cities have announced a change in the process for social insurance contribution reporting and payment by employers. Previously, employers were required to report and pay social insurance contributions to the human resources and social security departments and medical insurance departments before making the payments of withdrawn individual income tax to the tax authorities. However, the updated procedure now requires employers to directly report and pay social insurance contributions to the tax authorities themselves.
This adjustment in the reporting and payment process not only affects the surface-level procedure but also signifies a shift in regulatory oversight. Compared to the human resources and social security departments, tax authorities possess stronger regulatory capabilities to ensure consistency between social insurance contribution bases and taxable wages. This change suggests a tighter supervision of social insurance contributions in China in the future.
3. Amendment to the Administrative Reconsideration Law
The newly revised Administrative Reconsideration Law of the People’s Republic of China, which came into effect on 1 January 2024, includes work-related injury determination within the scope of administrative reconsideration cases. This amendment clarifies that individuals can seek reconsideration of work-related injury determinations through the administrative reconsideration process.
4. National Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalog (2023 Edition)
Starting 1 January 2024, the National Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalog (2023 Edition) will be implemented. This adjustment includes the addition of 126 new drugs to the medical insurance catalog, including 105 exclusive drugs and 21 non-exclusive drugs. The number of negotiated drugs is the highest in recent years, covering areas such as anti-tumor, rare diseases, chronic diseases, and antiviral medications. This update aims to further alleviate the financial burden of medication for patients.
5. Measures for the Evaluation of Professional Titles for Human Resources Management Professionals (Trial Implementation)
The Measures for the Evaluation of Professional Titles for Human Resources Management Professionals (Trial Implementation) will be implemented on 1 January 2024. According to these measures, the professional titles of human resources management professionals will be categorized under the economic professional titles’ series. As a result, human resources management professionals will be able to participate in professional title evaluations, similar to other economic professionals. This change provides recognition and opportunities for career advancement for individuals in the human resources management field.
B. Local Regulations
Several local regulations also came into effect on 1 January 2024 in China. These regulations address various labour and social security issues. Here are some notable developments:
1. Shanghai Municipality:
The Opinions of the Shanghai Municipal Human Resources and Social Security Bureau on Regulating Several Issues Regarding Labour Dispatch came into effect on 1 January 2024. It stipulates that if an employer fails to implement the principle of equal pay for equal work regarding labour dispatch, they will be ordered to rectify the situation within a specified time frame. Failure to comply may result in penalties.
2. Tianjin Municipality:
To streamline the process of determining the payment years for basic medical insurance for employees, the Tianjin Medical Insurance Bureau issued the Notice on Improving the Method of Determining the Payment Years for Employee Basic Medical Insurance. This notice came into effect on 1 January 2024, and will be valid for five years, or until 31 December 2028.
3. Zhejiang Province:
Effective 1 January 2024, the Administrative Discretionary Standards in the Field of Human Resources and Social Security in Zhejiang Province (2023 Edition) issued by the Zhejiang Provincial Department of Human Resources and Social Security has been implemented. This revised standard covers the relevant laws, regulations, departmental rules, and local regulations in the field of human resources and social security. It specifies 97 illegal activities that require administrative penalties, providing clear guidelines on the circumstances, legal basis, types and levels of penalties, discretionary procedures, and specific criteria.
4. Sichuan Province:
On 10 November 2023, the People’s Government of Sichuan Province issued the Opinions of the General Office of the People’s Government of Sichuan Province on Promoting Provincial-level Integration of Basic Medical Insurance. This document officially promotes provincial-level integration of medical insurance in Sichuan Province, starting 1 January 2024.
C. Legislative Drafts
In addition to the aforementioned legislative updates and local regulations, there are also draft consultation papers that were released in 2023. Although they have not been finalized, employers can keep an eye on the following issues in 2024.
1. New Judicial Interpretations Regarding Labour Disputes
On 12 December 2023, the Supreme People’s Court published the draft Interpretation (II) on the Application of Laws in the Trial of Labour Dispute Cases (the “Interpretation (II)”) for public consultation.
If the Interpretation (II) officially takes effect in 2024, it may have an impact on employers in various aspects, including but not limited to the following issues: whether disputes arising from equity incentives fall under labour disputes, the statute of limitations for employees to claim unpaid annual leave wages during their employment, and the legal basis for employers and employees to agree on non-compete clauses during employment.
The Interpretation (II) also clearly stipulates that if there are circumstances where foreign nationals or stateless individuals continue to work for an employer beyond the validity period of their employment documents, or if their residence permits have been canceled by Chinese public security organs due to violations of Chinese laws, or if they have changed their employer, job location, or occupation without legally changing or renewing their employment documents, it shall not be considered as establishing a labour relationship between the enterprise and the foreign national or stateless individual.
2. Cross-border Data Flow
On 28 September 2023, the Cyberspace Administration of China released the draft Provisions on Regulating and Promoting Cross-border Data Flow (the “Provisions”).
If the Provisions are officially implemented in 2024, employers who provide internal employee personal information to overseas entities for the purpose of implementing human resource management in accordance with legally formulated labour rules and collective agreements will not be required to undergo data export security assessments, establish standard contracts for personal information export, or obtain personal information protection certification.
3. Personal Information Protection
On 3 August 2023, the Cyberspace Administration of China issued the draft Administrative Measures for the Compliance Audit of Personal Information Protection and Key Points of Reference for Compliance Audit of Personal Information Protection (the “Measures”).
According to the Measures, a personal information processor that processes the personal information of more than 1 million individuals should conduct a compliance audit of personal information protection at least once a year. Other personal information processors should conduct the compliance audit at least once every two years. Processors can either conduct the compliance audit internally through an internal body within the organization or engage a specialized agency based on the actual conditions. The same specialized agency should not conduct more than three consecutive compliance audits of personal information protection for the same processor.
Given the legislative developments that have been confirmed or are yet to be determined in China in 2024, we will continue to assist employers in staying updated on the latest legislation in China and help them adapt their practices to ensure compliance with the evolving legislative landscape in the country.