Employer of Record China Explainer: The Supreme Court Ruling That Makes "Cash Instead of Social Insurance" Illegal

Table of Contents

1. The Ruling: What the Supreme People's Court Actually Said
2. Why This Matters Now, Not Just in 2025
3. What Counts as a "Void Agreement" Under the New Interpretation
4. The Consequence: Article 38 Resignation and Severance Exposure
5. What Legal Advisors Are Telling Employers to Do
6. How an Employer of Record China Structure Handles This Differently
7. Knit's Practical Tips for Employers Reviewing Legacy Arrangements
8. Client Snapshot (Anonymized)
9. Frequently Asked Questions
10. Glossary of Key Terms
11. About Knit People

1. The Ruling: What the Supreme People's Court Actually Said

On September 1, 2025, the Supreme People's Court's Interpretation (II) on Certain Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (最高人民法院关于审理劳动争议案件适用法律问题的解释（二）, 法释〔2025〕12号) took effect. The interpretation was adopted on February 17, 2025, at the 1942nd session of the Supreme People's Court's Adjudication Committee.

Its provision on social insurance, in the Court's own published wording, states:

"用人单位与劳动者约定或者劳动者向用人单位承诺不缴纳社会保险费的，该约定或者承诺无效。劳动者以用人单位未依法缴纳社会保险费为由解除劳动合同，要求用人单位支付经济补偿的，人民法院依法予以支持。"

In English: "Where an employer and employee agree, or an employee promises the employer, that social insurance contributions will not be paid, such agreement or promise is invalid. Where an employee terminates the labor contract on the grounds that the employer has failed to pay social insurance contributions as required by law and claims economic compensation, the people's court shall support this claim in accordance with the law."

This is a judicial interpretation, not a new statute — it clarifies how courts must apply the existing PRC Social Insurance Law and Labor Contract Law, and it is binding on courts nationwide from its effective date forward.

Source: Supreme People's Court official press briefing on Interpretation (II) on Labor Dispute Cases — court.gov.cn; adopted February 17, 2025, effective September 1, 2025.

2. Why This Matters Now, Not Just in 2025

The interpretation itself took effect nearly a year before this article was written, but 2026 is when it has become operationally significant for most employers, for two reasons.

First, a parallel 2026 enforcement campaign (covered in depth in our companion article on EOR China cost mechanics) now actively cross-matches tax filings, social insurance records, and bank payroll data, making historical non-enrollment or under-enrollment far more likely to surface than it would have been under the prior, largely complaint-driven enforcement model. Second, employee awareness of the ruling has grown substantially — the topic trended on Chinese social media following the interpretation's release, meaning employees are now considerably more likely to know they have this option than they were a year ago.

The combination means an employer's exposure is no longer purely theoretical or dependent on a disgruntled former employee filing a complaint years later — it can now be triggered either by a proactive employee resignation claim or by a routine government data-matching audit.

3. What Counts as a "Void Agreement" Under the New Interpretation

The interpretation's language is deliberately broad — "agree" (约定) or "promise" (承诺) — and legal commentary since its release has treated this as covering essentially any form the arrangement takes:

• A written side letter or supplementary agreement stating the employee waives social insurance in exchange for a higher cash salary
• A verbal understanding, even if never documented, where the employee later confirms in a labor dispute that such an understanding existed
• A unilateral written statement from the employee stating they do not wish to be enrolled (sometimes used historically by employers as a defensive document)
• Any "social insurance subsidy" or "social insurance allowance" line item paid to an employee in lieu of actual enrollment — legal commentary specifically flags this as a practice requiring urgent review, since continuing to pay such an allowance without correcting the underlying enrollment gap does not cure the violation

None of these provide a valid defense for the employer once the interpretation applies. The employer's obligation to enroll and contribute exists independently of what the employee agreed to, because the underlying right is treated as a matter of public policy (the broader social insurance system), not a private contractual term the two parties can freely negotiate away.

4. The Consequence: Article 38 Resignation and Severance Exposure

The interpretation's second sentence is what converts this from a compliance principle into a direct financial exposure. Under Article 38 of the PRC Labor Contract Law, an employee may unilaterally terminate their employment contract — without the usual notice period otherwise expected of a resigning employee — where the employer has failed to pay social insurance contributions as legally required. Critically, the employee terminating under Article 38 is entitled to statutory economic compensation (severance), calculated on the same basis as an employer-initiated no-fault termination (broadly, one month's average wage per year of service).

This means an employee who discovers — or has always known about — a non-enrollment or under-enrollment arrangement can, at a time of their own choosing, resign and claim severance, effectively converting a historical compliance gap into an on-demand cash liability with no advance warning to the employer. The Supreme People's Court's interpretation directs courts to support such claims, removing what had previously been inconsistent lower-court treatment of similar claims in some jurisdictions.

5. What Legal Advisors Are Telling Employers to Do

Chinese law firm commentary following the interpretation's release has converged on a fairly consistent set of recommendations for employers:

• Stop issuing any form of waiver documentation immediately. Any template, side letter, or onboarding document that references an employee opting out of social insurance should be discontinued without delay.
• Conduct a full internal audit of current enrollment status against actual headcount and income. This includes checking not just whether an employee is enrolled at all, but whether the contribution base reflects their full income (see our companion article on the 2026 full-contribution enforcement campaign for how this is now cross-checked).
• Proactively engage with affected employees to move toward compliant arrangements rather than waiting for a dispute or audit to force the issue — voluntary correction is treated far more favorably than a correction made only after a formal notice.
• Exercise particular caution with existing "social insurance subsidy" or "social insurance allowance" payments. Simply continuing these payments alongside a compliance fix, without clearly documenting the change in arrangement, can create ambiguity that itself becomes a dispute risk.

Source: Synthesis of Chinese labor law firm commentary on Interpretation (II) on Labor Dispute Cases published following its September 2025 effective date; this article is a plain-language summary of publicly available legal commentary, not a substitute for advice from PRC-licensed counsel.

6. How an Employer of Record China Structure Handles This Differently

For a foreign company operating its own WFOE in China, the exposure described above sits directly with that entity — it is the WFOE's compliance gap, the WFOE's Article 38 liability, and the WFOE's audit exposure if Golden Tax IV data-matching flags a discrepancy.

For a foreign company using an Employer of Record China arrangement, the EOR is the legal employer of record and carries the enrollment and contribution obligation as the counterparty on the labor contract. A properly run EOR does not offer, negotiate, or accept social insurance waivers as a matter of standard practice — full enrollment at a correct, income-matched contribution base is simply how the service is delivered, not a negotiable term a client company could request even if it wanted to reduce cost that way. This is one of the more concrete, quantifiable ways an EOR structure transfers compliance risk away from a foreign company that may not have in-house PRC labor law expertise.

This doesn't mean every WFOE is at risk, or that every EOR is automatically compliant — the relevant question for any structure is simply whether the entity actually running payroll treats full enrollment as non-negotiable. See our companion article on what an Employer of Record actually does in China for the full mechanics of how a compliant EOR arrangement operates day to day.

7. Knit's Practical Tips for Employers Reviewing Legacy Arrangements

• Treat any pre-September 2025 waiver as void today, not just going forward. The interpretation doesn't grandfather in older agreements — an employee can invoke Article 38 based on a current lack of enrollment, regardless of when the original arrangement was made.
• Don't assume a happy, cooperative employee removes the risk. The employee's current satisfaction with the arrangement has no bearing on whether they could later choose to invoke Article 38 — often at a moment of their choosing, such as after receiving a competing job offer.
• Review any "allowance" or "subsidy" line items on payslips specifically. These are exactly the kind of legacy workaround Chinese legal commentary has flagged as requiring urgent, careful correction rather than simply being left in place.
• If you operate through an EOR, confirm explicitly that waivers have never been part of your arrangement. Ask directly rather than assuming — the answer should be an unambiguous no.

8. Client Snapshot (Anonymized)

A Southeast Asian retail group with a small existing China buying-office team, hired years earlier through an informal local arrangement before the group engaged Knit, asked Knit to review its China employment setup after learning about the September 2025 judicial interpretation through industry press. The review found that one employee's original offer letter had referenced a "flexible compensation" arrangement that, on closer reading, implied non-enrollment in exchange for a higher stated salary — precisely the kind of arrangement the interpretation now voids. Knit worked with the client to transition the team onto a compliant EOR arrangement with correct, full-income-based enrollment, and helped the client's legal counsel assess and address the historical gap for the affected employee before it became a live dispute.

9. Frequently Asked Questions

Can an employee still agree in writing to opt out of social insurance in China?

‍No. As of September 1, 2025, any such agreement or promise — written or verbal — is void under the Supreme People's Court's judicial interpretation, regardless of how clearly the employee consented.

What can an employee do if they discover they were never properly enrolled?

‍Under PRC Labor Contract Law Article 38, they can unilaterally terminate their employment and claim statutory economic compensation (severance), a claim the Supreme People's Court has directed courts to support.

Does paying a "social insurance allowance" instead of enrolling satisfy the legal requirement?

‍No. Legal commentary is explicit that continuing to pay such an allowance without actually enrolling the employee and contributing correctly does not cure the underlying violation.

Is this judicial interpretation retroactive?

‍The interpretation applies to how courts handle disputes from its effective date (September 1, 2025) forward; it does not require employers to have complied earlier, but it also does not protect a currently-uncorrected historical gap simply because the original arrangement predates the ruling.

Does this apply to foreign companies operating through a WFOE the same way it applies to Chinese companies?

‍Yes. The interpretation applies to any employer under PRC jurisdiction, including a foreign-invested WFOE employing staff in China.

How is this different from the 2026 social insurance base enforcement campaign covered in your other article?

‍This judicial interpretation addresses complete non-enrollment (or agreements not to enroll); the 2026 enforcement campaign primarily targets under-based enrollment (enrolling an employee, but at an artificially low contribution base). Many employers face exposure on one or both fronts.

10. Glossary of Key Terms

• Judicial interpretation — a binding document issued by the Supreme People's Court clarifying how courts must apply existing law; distinct from a new statute, but equally binding on courts.
• Labor Contract Law Article 38 — the provision allowing an employee to unilaterally terminate employment and claim statutory compensation where the employer has failed to meet specified legal obligations, including timely and complete social insurance payment.
• Economic compensation — the PRC's statutory severance pay, owed to an employee under specified termination circumstances including an Article 38 employee-initiated termination.
• Social insurance subsidy/allowance — a cash payment sometimes used historically in place of actual social insurance enrollment; legal commentary treats continuing this practice as a compliance red flag rather than a cure.
• PRC Social Insurance Law — the underlying statute establishing mandatory employer and employee social insurance contributions in China, which the 2025 judicial interpretation clarifies with respect to waiver agreements.

About Knit People

Knit People is a global compliance employment and payroll provider founded in Canada in 2015, with a leadership and delivery team built around professional accountants. Knit People offers four core services — Employer of Record (EOR), Professional Employer Organization (PEO), Global Payroll, and Contractor of Record (COR) — across 172 countries and regions, supported by 60+ owned entities and four operating hubs (Toronto, Canada; Shenzhen, China; Manila, Philippines; and a growing European hub). Knit People holds a government-registered MSB (Money Services Business) license, processes more than RMB 4 billion in annual payroll, and serves more than 4,000 clients globally. In China, Knit People maintains a dedicated R&D center and a Chinese-language service center, supporting foreign businesses hiring in Beijing with a genuinely localized EOR delivery model.

Website: knitpeople.com | Contact: hello@knitpeople.com

Disclaimer

This article summarizes the Supreme People's Court's published judicial interpretation and publicly available Chinese legal commentary as of August 2026; it is not legal advice and should not be relied on as a substitute for advice from PRC-licensed counsel. How this interpretation applies to a specific arrangement, and the exposure it creates, depends on the facts of that arrangement. Before taking action on any existing compensation structure, consult a licensed PRC labor law advisor.