China: Employee Entitled to Severance Despite Voluntary Social Insurance Waiver
Typical case: Mr Zhu signed a statement voluntarily requesting that his employer not enrol him in social insurance and that the corresponding social insurance contributions instead be paid to him as an allowance. As the employer failed to make social insurance contributions, Mr Zhu terminated his employment contract and claimed statutory severance pay on the grounds of constructive dismissal. The court held that the waiver of social insurance contributions was invalid, and that the situation constituted constructive dismissal, entitling Mr Zhu to statutory severance.
Under the Labour Law of the People’s Republic of China and the Labour Contract Law of the People’s Republic of China, employers and employees must participate in social insurance and pay social insurance contributions in accordance with the law. Any agreement between an employer and an employee, or any undertaking by an employee, that purports to relieve the employer of its obligation to make social insurance contributions is deemed invalid. In this case, Mr Zhu signed a statement agreeing that the employer would not make social insurance contributions for him and that the corresponding amount would instead be paid as an allowance. As the employer failed to make social insurance contributions in accordance with the law, Mr Zhu was entitled to terminate the employment contract and claim statutory severance on the grounds of constructive dismissal.
Mr Zhu joined a Beijing security services company as a security guard on 28 July 2022. The parties signed a statement under which Mr Zhu voluntarily requested that the company not enrol him in Beijing social insurance and that the corresponding social insurance contributions instead be paid to him as an allowance. During his employment, the company did not make social insurance contributions for Mr Zhu.
On 29 August 2022, Mr Zhu resigned on the grounds that the company had failed to make social insurance contributions for him. After leaving the company, Mr Zhu applied for labour arbitration, requesting payment of salary, overtime salary and statutory severance payment for termination of the employment contract. The arbitration commission ordered the company to pay Mr Zhu RMB 3,862 in salary and rejected his other claims. Mr Zhu subsequently brought the case before the court. The court of first instance still dismissed Mr Zhu’s claim for severance payment, whereas the court of second instance reversed that decision on appeal.
The court held that, under the Labour Law of the People’s Republic of China and the Labour Contract Law of the People’s Republic of China, employers and employees must participate in social insurance and pay social insurance contributions in accordance with the law. Where an employer and an employee agree that the employer is not required to make social insurance contributions, such agreement exempts the employer from its statutory obligation and excludes the employee’s statutory right to participate in social insurance. It violates mandatory provisions of law and is therefore invalid. The court further noted that, when entering into an employment contract, employees may be in a weaker bargaining position with respect to matters such as salary and social insurance contributions due to their individual circumstances and limited bargaining power. A waiver of social insurance may therefore not always reflect an employee’s genuine and voluntary intention, but may instead be a reluctant choice made in order to secure the job. Accordingly, regardless of whether there is any agreement or undertaking to waive social insurance, where the employer fails to make social insurance contributions for the employee in accordance with the law, the employee is entitled to terminate the employment contract and claim statutory severance payment.
In this case, Mr Zhu signed the statement agreeing that the company would not make social insurance contributions for him and that the corresponding amount would instead be paid as an allowance. The statement was invalid because it violated the mandatory laws requiring employers and employees to participate in social insurance and pay social insurance contributions. As the company failed to make social insurance contributions for Mr Zhu in accordance with the law, Mr Zhu was entitled to terminate the employment contract, and the company should therefore pay statutory severance.
Key Action Points
This case concerns a typical dispute where an employee agreed that the employer would not make social insurance contributions and that the corresponding amount would instead be paid directly to the employee as an allowance. The issue is whether such an agreement or undertaking is valid and whether the employee may terminate the employment contract and claim severance where the employer fails to make social insurance contributions.
The ruling in this case clarifies the mandatory nature of employers’ statutory obligations to participate in social insurance and pay social insurance contributions. An employer cannot be exempted from such obligations by an agreement with an employee or by an employee’s unilateral undertaking to waive social insurance. Even where the employee has expressly agreed not to participate in social insurance, if the employer fails to make social insurance contributions in accordance with the law, the employee may terminate the employment contract and claim statutory severance. Employers should therefore avoid arrangements under which social insurance contributions are replaced by allowances or other payments and should ensure that employees are enrolled in social insurance in accordance with applicable law.
