The article with the title: “Enterprises worry over social insurance costs” written by Lawyer Nguyen Van Quynh & Cao Thi Hoang Oanh – Partner of Phuoc & Partners is published in Saigon Economic Times dated 17/05/2016.
It has been over two months since the Law on Social Insurance 2014 came into force to require enterprises to pay social insurance contributions determined by salary and salary allowances while a large number of enterprises are still hoping and doing anything necessary to reduce the social insurance liability without violating any legal provisions.
Social insurance costs increase under the law
The contribution rate payable by enterprises under the 2014 Law on Social Insurance is 18%, which remains unchanged in comparison with the one stipulated by the 2006 Law on Social Insurance. However, there is no doubt that enterprises are expected to pay more for compulsory social insurance contributions for their employees, especially those hiring many employees. The reason is that there is a change in the provisions on “monthly salary as the base for paying social insurance”. Accordingly, if employees pay social insurance contributions under the salary regime decided by their employers, the monthly salary as the base for paying social insurance contributions for the period of from 01 January 2016 to 31 December 2017 shall include salary and salary allowance provided in the labour contract in accordance with the labour law. Since 01 January 2018, apart from the two aforesaid ones, the monthly salary as the base for paying social insurance contributions will include other additional payments provided in the labour contract as prescribed by the labour law.
Enterprises in general and those hiring many employees in particular certainly face up to the cost problem every single month, as they must spend 18% of the allowances and 18% of other additional amounts to pay for compulsory social insurance contributions. If enterprises want to cut down on all of the allowances and other additional amounts they paid to their employees before, they are required to
agree on amending and supplementing the labour contracts with their employees in accordance with the labour law. Obviously, not many employees agree on reducing their employment earnings. Moreover, assuming that enterprises do not ensure the increase in employees’ income from time to time but they only focus on minimizing other amounts apart from salary, they may take the risk of losing their labour force very early. With the loss of a large quantity of employees in a frequent way, it is high likely that manufacturing enterprises will have huge problems of operating their production plants and maintaining the progress and quality of purchase orders. To balance costs and human resources management really poses a challenge for enterprises so we can easily understand why the debate over monthly salary as the base for paying social insurance contributions becomes hotter and hotter on various forums on human resources, finance, and mass media for the last six months of 2015.
How enterprises apply the law?
To release some of the costs of compulsory social insurance contributions for employees under the new provisions, many enterprises are now using the following two methods in practice:
Structuring the current salary allowances into bonuses
Because monthly salary for compulsory social insurance contributions does not include bonuses as stipulated in Article 103 of the Labour Code, (it is noted that other amounts like mid-shift meal allowance, transportation allowance, telephone allowance, etc. are only some examples of “other additional amounts having the nature of benefits and welfare”), enterprises may agree with employees to amend and supplement the signed labour contract so that salary allowances are renamed as bonuses. Employees may easily agree on this proposal because their income derived from salaries keeps unchanged and both parties can benefit from it. Enterprises will not have to spend an additional 18% of salary allowances and 8% of salary allowances will not be withheld by their employers to pay for social insurance contributions (in case employees receive gross salary).
In the legal terminology, bonuses are obviously not salary allowances under Circular 47 and will not be added to monthly salary as the base for compulsory social insurance contributions. However, the so-called bonuses seem not to reflect that kind of nature under the law and under the general term. Basically, bonus means an additional payment received to encourage employees and help them make further contributions to enterprises and those employees should have met the requirements of receiving bonuses to prove they are more deserved for those than the other ones. Under Article 103 of the Labour Code, bonus is construed as a sum of money granted to employees based on annual business results and the level of work performance of those employees. It seems ridiculous that at the end of a calendar year, all employees are expected to receive monthly-fixed bonuses throughout the next employment year while that enterprise itself has no idea about how its business results will be in the future. We cannot imagine that enterprises can turn salary into a lower amount than the sum of monthly bonus. These enterprises can argue that it is based on the results of production and business and the level of work performance in the last year. Instead of paying a lump sum once at the end of the year, they make periodical payments throughout the next employment year.
It is important to note that enterprises are required to publicize bonus policy at the workplace after consulting the Executive Committee of the Grassroots Trade Union. Failure to perform these steps will lead to non-compliance with the law and thus monthly bonuses will not be accepted as legal when determining the monthly salary as the base for paying the compulsory social insurance contributions. Simultaneously, enterprises are recommended to pay attention to the provisions on corporate income tax (“CIT”) to ensure that bonuses paid to employees are recognized as deductible expenses. As for monthly bonuses, if, for a particular reason, its conditions for entitlement and entitlement rate are not specified in one of the legal instruments such as labour contract or collective labour agreement, these expenses may be derecognized by tax authorities. If it is the case, CIT (i.e. tax rate of 20%) that enterprises must pay to State authorities may be higher than the social insurance contributions payable by enterprises.
To date, there have been no official written rulings of the social insurance agency and the Ministry of Labour, War Invalids and Social Affairs on the same while thousands of enterprises are experimenting the aforesaid way to lower the costs of compulsory social insurance for employees while the Government has developed a long-term roadmap to increase the obligation which enterprises are bound to pay social insurance contributions for employees.
Degrading salary in the labour contract and paying overtime salary
The popular way that enterprises have been following in recent days is to apply the provisions of Article 21 of Decree 05 and Article 3.2 of Circular 23. Accordingly, the salary specified in the labour contract concluded by enterprises and employees will include base salary, salary allowances and other additional payments and base salary excludes additional payments received when employees work overtime or at night. Enterprises are likely to apply these provisions to explain and persuade their employees to sign addendums to amend and supplement the signed labour contract or sign a new labour contract whereby base salary will be lower than the one in the signed labour contract but it is not smaller than area minimum wage. Both parties will then agree that the difference is still paid in full to employees but it is called as overtime pay. As such, enterprises only have to pay compulsory social insurance for employees based on the monthly base salary equal to or slightly higher than the area minimum wage in lieu of the whole salary received. Enterprises specialized in production and processing feel more interested in this option than those in the service sector due to the particulars of every business line. Indeed, salary paid to employees in the service sector often relates to neither overtime nor nighttime work. We are not sure what social insurance agencies may think about whether or not the salary as the base for paying compulsory social insurance contributions includes overtime wage but it is pretty sure that enterprises will have certain difficulties in structuring the salary calculation system and relevant administrative work.
Employees may feel very satisfied with it. They understand than anybody else that the higher salary paid for night-time work and overtime than the salary paid for day-time during normal working hours is exempt from personal income tax (“PIT”) so they will benefit from it instead of paying PIT based on the entire package of salary under the labour contract. However, this does not exclude the case where some employees may fear for labor disputes in the future and disagree with enterprises on this way since they do not have strong evidence to prove the actual salary under the labour contract.
Even if employees coordinate with enterprises to do so, enterprises must also pay proper attention to their internal account and filling system given the fact that they themselves must well prepare for a detailed description of night-time work, overtime work, related extra payments paid to employees, which must be restored in the headquarters and submitted per the request of the tax authorities. Any actual payment for the difference like this must legally and coherently match with that detailed description.
In general, it is getting hard to structure the payroll, salary payment and overtime pay for all employees working for the enterprises, particularly those employing thousands of employees. It becomes harder if all the employees have overtime work every single month and enterprises are likely to require for overtime work exceeding the limitation rate of 200 hours per year or 300 hours per year in some specific cases given by the Government. Such failure means a violation of Article 106.2 of the Labour Code and the employer may be fined up to VND100 million. In the worst scenario, separating the overtime pay to reduce related PIT may be considered an act of tax evasion or fraud. The corresponding legal consequences may double or become more serious than the amount payable for compulsory social insurance.
Integrating the said two approaches
No matter how many potential risks and obstacles of the related salary system and accounting may be put on the enterprises if they implement or take the latter option for consideration, they prefer to integrate it to the first one in a flexible way. That is to convert salary allowances into bonuses. This may be a little help for enterprises to overcome the disadvantages of the latter as mentioned above and it proves to be more reasonable when employees receive overtime pay in the preceding month and then they are entitled to bonuses for their previous good performance in the following month. However, it is undoubtful that enterprises must be well equipped with the system of salary and staff accounting with full legal records and documents to demonstrate its legality and validity.
Whatever employees will benefit from the change in the law on social insurance in the future in line with the expectations of our lawmakers, enterprises will carry greater financial burden and employees will have the same problem because their salary is withheld more than for the purpose of paying social insurance contributions. Like any other economies, Vietnamese enterprises must think and find reasonable and legitimate ways or solutions to cut costs as much as possible, including the costs of the compulsory social insurance contributions for employees for survival on the market. They are taking advantage of the grey area of the law but we cannot conclude if they are right or wrong for the same. Our suggestion is that legal instruments need to be more systematic and coherent and the competent State authorities should issue their guidelines for consistent application to make them feel assured.
 Law on Social Insurance No. 58/2014/QH13 was passed by the National Assembly on 20 November 2014 and takes effect from 01 January 2016 a and part of this Law takes effect from 01 January 2018 (“2014 Social Insurance Law“).
 Article 89.2 of the 2014 Law on Social Insurance
 Law on Social Insurance No. 71/2006/QH11 was passed by the National Assembly on 29 June 2006 and takes effect from 01 January 2007 and part of this Law takes effect from 01 January 2008 and part of this Law takes effect since 01 January 2009 (“2016 Law on Social Insurance”)
 Article 89.2 of the 2014 Law on Social Insurance and Articles 17.1 and 17.2 of Decree No. 115/2015/ND-CP dated 11 November 2015 of the Government detailing a number of articles of the 2014 Law on Social Insurance on statutory social insurance (“Decree115”)
 Article 30.3 of Circular No. 59/2015/TT-BLDTBHXH dated 29 December 2015 of the Ministry of Labour, War Invalids and Social Affairs detailing and guiding the implementation of some articles of the Law on Social Insurance on compulsory social insurance
Article 4 of Circular No.47/2015/TT- BLDTBXH dated 16 November 2015of the Ministry of Labour, WarInvalidsand Social Affairsguiding the implementation of some articles of the labour contract, labour discipline, material responsibility ofDecree No.05/2015/ND-CP dated12January2015of the Government detailing and guiding the implementation of some of the contents of the Labour Code
 Article 103 of the Labour Code
 Decree No. 05/2015/ND-CP dated 12 January 2015 of the Government detailing and guiding the implementation of some provisions of the Labour Code
 Circular No. 23/2015/TT-BLDTBXH dated June 23, 2015, by the Ministry of Labour, War Invalids and Social Affairs guiding the implementation of a number of articles of Decree 05 on salary
 Article 3.(i) of Circular No. 111/2013/TT-BTC dated 15 August 2013 guiding the implementation of the Law on PIT, the Law on Amending and Supplementing a number of articles of the Law on PIT and Decree No. 65/2013/ND-CP of the Government detailing a number of articles of the Law on PIT, the Law on Amending and Supplementing a number of articles of the Law on PIT (“Circular 111”)
 Article 3.(i) of Circular 111
 Article 3.1 of Decree No. 88/2015/ND-CP dated 07 October 2015 of the Government on amending and supplementing a number of articles of Decree 95/2013/ND-CP dated 22 August 2013 of the Government imposing penalties on administrative violations in the area of labour, social insurance, sending Vietnamese employees working overseas under the contract