In China, it’s been a common practice for factories to withhold social insurance payments for migrant workers while contributing only for locally registered staff. This stems from the fact that China does not yet have a unified national social insurance system — when workers change provinces, they often cannot access or transfer the benefits they paid into. Many employees therefore resist participation, preferring to maximize take-home pay. As a result, non-compliance on social insurance is widespread — especially in manufacturing-heavy regions with large migrant labor populations.

Starting September 1, 2025, this workaround will no longer be legally tolerated.
The Supreme People's Court of China has issued a judicial interpretation:

💥 If an employer fails to pay mandatory social insurance, the labor contract is invalid.
Employees have the right to terminate the contract and claim compensation, even if they previously signed a “waiver.”

For factories, this marks a shift in legal accountability. For foreign buyers, it signals heightened exposure to reputational and operational risks through their supply chains.

Labor Contracts

👓 HR Interview: Insights from Sammi Xu, HR Manager at Scandic Sourcing

“We’ve observed a post-COVID sharp decline in compliance across many factories — especially where only long-tenured staff were covered by insurance, while new hires were not.

This new regulation reasserts the state’s stance on lawful employment obligations.”

“If employees file arbitration, companies will be required to pay compensation based on years of service. More seriously, if a supplier is flagged for violations, it may be added to a corporate blacklist, affecting its access to government tenders, financing, and brand partnerships.”

“Many factories also split wages — recording only the minimum base wage for insurance contributions while paying bonuses and allowances separately. This tactic has now been explicitly ruled invalid. Buyers need to be able to detect these hidden structural risks.”

Announcing such rules, it is common in China that the government use the: “kill the chicken to scare the monkey” tactic and we can expect many factories to be fined or closed down and will need to raise prices.

✅ Recommendations for Foreign Buyers Auditing Chinese Suppliers

Key red flags to screen for:

  • Are all employees (including probationary and new staff) covered by insurance?
  • Are contributions based on actual salary or only on the legal minimum?
  • Are any workers employed via outsourcing or labor dispatch without proper insurance?
  • Are there wage splits (e.g. base salary vs. bonuses/allowances) designed to lower the contribution base?

Suggested risk control steps:

  • Conduct targeted social insurance compliance audits for core suppliers
  • Embed full-contribution obligations in your Code of Conduct
  • Set a clear protocol for handling workers who resist contributing to insurance
  • Include compliance warranties and penalty clauses in supplier contracts

🛠️ Real Case: The Gap Between Paper and Practice

In one audit for a client, we discovered that a supplier had outsourced employment to a third-party HR company. However, this HR firm did not contribute any social insurance, including critical work injury coverage. After our intervention, the supplier purchased the required insurance. Such risk blind spots are still common in parts of China's supply chain — and must be proactively managed.

📌 Scandic Sourcing supports foreign clients with code of conduct audits, including social insurance audits, supplier risk assessments,  and ESG-aligned compliance solutions. We cover all of China including key sourcing regions e.g. Jiangsu, Zhejiang, Sichuan, and Guangdong.

📩 Reach out to us at: sourcing@scandicsourcing.com
🔗 Learn more: www.scandicsourcing.com

 

Next: When Sourcing in China Goes Wrong: 3 Real Stories from the Field