Introduction

The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022 to abolish the use of the employers’ mandatory contributions under the Mandatory Provident Fund Scheme (“MPF Scheme”) to offset severance payment and long service payment (“MPF Offsetting Arrangement”). The abolition of MPF Offsetting Arrangement will take effect on this year’s Labour Day, 1 May 2025. This article provides an overview of the MPF Scheme in Hong Kong and the abolition of MPF Offsetting Arrangement.

Background

Statutory entitlement to severance payment and long service payment

Parts VA and VB of the Employment Ordinance (Cap. 57) (“EO”) provide the statutory protection in the form of severance payments and long service payments to employees upon fulfilling certain conditions:

·           An employee is eligible for severance payment when the employee has been employed for not less than 24 months under a continuous contract but is dismissed by the employer for redundancy or laid off by the employer, or the employment contract of a fixed term expires without being renewed by reason of redundancy.

·           An employee is eligible for long service payment when the employee has been employed for not less than 5 years under a continuous contract but is dismissed by the employer for any reason other than redundancy or gross misconduct, passes away or resigns on the ground of ill health or reaches 65 years old.

An employee cannot be entitled to both severance payment and long service payment at the same time. The entitlement to severance payment and long service payment can be calculated by the same formula being 2/3 of last monthly wages before the termination (capped at HK$22,500) x years of service. If an employee’s last monthly wages exceed HK$22,500, his entitlement to severance payment or long service payment will be capped at HK$15,000 per year of service. Any entitlement to severance payment or long service payment for any incomplete year of service is calculated on a pro-rata basis. In any event, the maximum amount of severance payment or long service payment is capped at HK$390,000.

MPF Scheme

Employers and employees are both required to make mandatory contributions of 5% each of the employee’s monthly relevant income (i.e. all monetary payments paid or payable by an employer to an employee) into the employee’s MPF account, capped at HK$1,500 per month. Apart from the mandatory contributions, employers and employees may also choose to make voluntary contributions.

Existing MPF Offsetting Arrangement

Currently, sections 31I and 31Y of the EO provide for the MPF Offsetting Arrangement that allows an employer to offset the amount of long service payment or severance payment payable to an employee against the employer’s mandatory and voluntary contributions to an MPF Scheme. This means an employer can withdraw the employer’s MPF contributions made during the employment relationship to pay an employee’s long service payment or severance payment and does not need to pay the long service payment or severance payment out of his funds. However, if the employer’s MPF contributions are not sufficient to cover the long service payment or severance payment in full, then the employer has to pay the shortfall out of his funds.

There are two ways that employers can use the MPF Offsetting Arrangement:

1.      In the event that the employer has already paid the long service payment or severance payment to the employee, the employer can apply with the MPF trustees for a refund; or 

2.      In the event that the employer has not paid the long service payment or severance payment to the employee, the employer can apply with the MPF trustees for withdrawal of the employer’s MPF contributions directly.

Abolition of the MPF Offsetting Arrangement

Effect of abolition

After 1 May 2025, an employer can no longer offset the amount of long service payment or severance payment payable to an employee against the employer’s mandatory contributions to the MPF Scheme (“Abolition”). The Abolition will take effect from a “Transition Date” to be determined in 2025 at the earliest and has no retrospective effect.

After the Abolition, an employer can continue to offset the amount of long service payment or severance payment payable to employees with:

·           Employer’s voluntary MPF contributions; and

·           Employer’s voluntary contributions to an occupational retirement scheme (“ORS”) in excess of a “reference amount”, which is calculated with the following formula being the employee’s last monthly income before termination x the number of the employee’s years (and pro rata for an incomplete year) of service to which the employer-funded exempt ORS benefit is attributable x 5% x 12.

The Government’s supporting measures to employers

As a supporting measure to assist employers to adapt to such substantial policy change, the Hong Kong Government will launch a 25-year subsidy scheme totalling HK$33.2 billion to provide targeted assistance to employers at the same time with the Abolition. 

Takeaway

Employers should be aware of and ensure compliance with the Abolition. Employees are also encouraged to communicate proactively with their employers to avoid any unnecessary misunderstanding. As always, if in doubt, it is advisable to seek legal advice.