18 April 2018

Is employer obliged to pay economic compensation if it fails to fully pay social insurance resulting in resignation of employee?

By Yin Juquan and Zhang Yuanhao

It is a legal obligation that an employer shall fully pay social insurance for its employees according to the express terms of Social Insurance Law and Labor Contract Law. Article 38 and Article 46 of the Social Contract Law stipulates that an employee shall have the right to resign and require the employee to pay economic compensation as one of the legal consequences if the employer fails to perform such legal obligation. Generally, employers will establish insurance accounts for employees according to the law, but in practice, it is a common occurrence that employers may fail to fully pay social insurance. There is no express law stipulating whether failure to fully pay social insurance belongs to the aforesaid situation where the employer shall pay economic compensation. In fact, different regions have different rules in this respect. An employer is still likely to suffer a risk of paying economic compensation required by its employees.

Type One: Economic Compensation Will Not Be Upheld If Social Insurance Account has Been Opened with Complete Types of Insurances Paid but Unfully Paid.

This view was typically held in Beijing. Article 31 of ”Summary of the Seminar of Beijing Municipal High People’s Court on The Application of Law in Labor Dispute Cases” issued by Beijing Municipal High People’s Court on 17th August 2009 clearly affirmed this view. Paragraph 2 article 24 of ” Interpretation of Beijing Municipal High People’s Court and Beijing Employment Dispute Arbitration Commission on the Application of Law to the Hearing of Employment Dispute Cases” issued on 24th April 2017 reconfirmed that ‘If employers have established social security accounts for employees and paid the complete types of insurance, but there are some issues like insufficient payment period or low payment base, the social security interests of the employees can be realized by means of the employers' compensation of payment or compulsory collection by social security administrative departments. In such cases, employees' proposal to terminate labor contracts and claim for economic compensation shall generally not be supported. ’

Type Two: Economic Compensation Will Be Upheld If Employees notified for Supplementary Payment One Month in Advance and Employer Did Not Make up Payment.

This view is typically held in Shenzhen. In fact, article 24 of ”Instructions of Guangdong Province High People’s Court and Guangdong Province Employment Dispute Arbitration Commission on The Several Issues of Application of Labor Dispute Mediation and Arbitration Law and Labor Contract Law” issued on 23th June 2008 shared the same view with Beijing. However, Article 15 of ”Rules of Shenzhen Special Economic Zone on Harmonious Labor Relations Promotion” stipulated that ‘where the employer did not pay social insurance for its employees according to the law, the employees shall have the right to ask the employer to pay; if the employer failed to pay according to the regulation within one month, the employees shall have the right to terminate labor contract and the employer shall pay economic compensation according to the law’. This rule includes the case where the employer failed to fully pay social insurance. However, employees must notify the employer to pay the social insurance a month in advance.

For example, in a labor disputes between Zhang and Company A,[1] Company A failed to fully pay social insurance based on Zhang’s actual salary. On 14th June 2015, Zhang mailed a ”notification of supplementary payment on social insurance” to Company A and required that the company make up for the payment on social insurance within one month; when Company A failed to make such payment, Zhang terminated the labor contract and asked for payment of economic compensation by written notice on 15th July 2015 on the ground that Company A failed to pay the due amount for him. The claim of Zhang was supported by the court of first instance, second instance and Guangdong Province High People’s Court.

Type Three: Whether the Claim of Economic Compensation Will Be Upheld Will Be Decided Case by Case According to Principle of Good Faith

This view is typically held in Shanghai. Article 9 of ‘Opinions of Shanghai High People’s Court on Several Issues Concerning the Application of the Labor Contract Law” stipulated that ‘if the delay and insufficiency of labor payment or failure to pay social insurance was because of the employer’s subjective malice, it could be sufficient for the employee to terminate labor contract. However, in case where the delay and insufficiency of labor payment or failure to pay social insurance is because of objective cause which leads to the unclear and controversial calculation standard, that shall not be the basis for the employee to terminate labor contract’. In fact, this opinion authorized certain discretion to the judiciary.

For example, in a labor dispute between Zhang and Company B[2], the court held that the payment base of social insurance paid by Company B for Zhang is obviously lower than it should be. Company B argued that the company and Zhang have reached an agreement on the payment base for social insurance and that failure to pay according to the law is because of B Company’s misunderstanding on payment base instead of out of malice. However, the company failed to submit relevant evidences to prove its arguments. Consequently, the court supported the claim of Zhang in respect of economic compensation.

In another case,[3] the labor contract between Yu and Company C expressly stipulated that the employer shall pay the social insurance according to the lowest payment base the locality of the company. The court held that Yu should have known and had accepted the fact that Company C shall pay social insurance according to the lowest payment base. As a result, it is dishonest for Yu to terminate labor contract and claim for economic compensation on these grounds. The court did not support the claim.

In conclusion, different regions have different regulations on the legal consequence of failure to fully pay social insurance. Employers should evaluate the legal risks in the process of employment according to the legal practice of different regions. All in all, the best way to prevent such legal risks is to pay social insurance fully for the employee according to law.


[1]No.7190 (2016) civil, retrial, Guangdong.

[2]No.579 (2016) 5th civil tribunal (civil), first instance, Xuhui.

[3]No.4954 (2016) 1st intermediate court, second instance, Shanghai.

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