Background

In his 2017 policy address, the Chief Executive proposed to progressively abolish the amount an employer’s Mandatory Provident Fund (“MPF”) contribution that can be used to offset long service payment or severance payment due to an employee.  This proposal has sparked controversies. This article explores the proposals put forward by the Chief Executive and employers’ representatives, and examines how they could affect an employee’s entitlements.

Current MPF offsetting mechanism

Under the current MPF scheme, employers and employees are each required to contribute 5% of the employee’s salary to the MPF account (subject to a cap of HK$1,500).  Under the Employment Ordinance (Cap. 57), a retiring or departing employee is entitled to long service or severance payments.  However, the current MPF set-off mechanism allows the employer to use his MPF contribution to offset the amount of long service payment or severance payment payable to the employee.[1]   

Summary of proposals

The Chief Executive proposed to progressively reduce the proportion of employer’s contributions that can be used to offset long service or severance payments over a period of 10 years (“Proposal A”) by setting up a HK$6 billion fund to cushion the effect of the proposed abolition to employers. Alternatively, he proposed that the government would contribute HK$15 billion to a fund, and the employers would contribute HK$100 to 200 for each employee.

The proposals were followed by a public consultation which ended on 18 April 2017.  A final plan is due to be announced before the end of the current government’s term.

In May, the 5 major business chambers argued for keeping the offsetting mechanism in place and proposed to increase employer’s MPF contribution to 6%, with the government contributing to a further 1% (“Proposal B”).

What are the effects of these proposals
when compared with the current scheme?

Example – Current Scheme

Say, for example, an employee, with a monthly salary of HK$15,000, has recently been dismissed by his employer (by reason other than summary dismissal or redundancy) after 5 years of employment. The employee is entitled to long service payment of HK$50,000 (i.e. HK$15,000 x 2/3 x 5 years). If the employer started making MPF contribution from the first month of his employment, the amount contributed by the employer in the employee’s MPF account will be HK$45,000 (i.e. HK$15,000 x 5% x 12 months x 5 years).  Since the employer is entitled to offset long service payment with his MPF contribution, if the employer has paid long service payment to the employee in full (HK$50,000), he may then apply to MPF trustee to withdraw the relevant amount (HK$45,000) from the employee’s accrued benefits derived from the employer’s contributions.

	Monthly Salary (HK$)	Applicable percentage	Years	Total Amount (HK$)
Long service payment	15,000	2/3	5	50,000
MPF (employer’s contribution)	15,000	5%	5*12 months	45,000

Proposal A

Under the government’s proposal, the set-off mechanism will eventually be abolished.  Using the above example, the employee is entitled to long service payment of HK$50,000 and the employer is not entitled to offset long service payment with his MPF contribution.

Proposal B

Under the proposal by the business chambers, the employer and the government would be respectively making 6% and extra 1% contribution towards the employee’s MPF account. Thus, the end of the 5-year employment, the employer and the government would have contributed HK$54,000 (i.e. HK$15,000 x 6% x 12 months x 5 years) and HK$9,000 (i.e. HK$15,000 x 1% x 12 months x 5 years) respectively.[2]   The employee is still entitled to the same long service payment of HK$50,000 when his employment is terminated after 5 years. If the employer has paid long service payment to the employee in full (HK$50,000), he can apply to the MPF trustee for repayment of HK$50,000, leaving HK$4,000 of the employer’s portion in the MPF account.  The extra accrued benefits (government’s portion) would also stay in the MPF account.

	Monthly Salary (HK$)	Applicable percentage	Years	Total Amount (HK$)
Long service payment	15,000	2/3	5	50,000
MPF (employer’s contribution)	15,000	6%	5*12 months	54,000
MPF (government’s contribution)	15,000	1%	5*12 months	9,000

Evaluation

Naturally, employees would be better off under the government’s proposal. The abolition of the offset mechanism will place a heavy financial burden on the employers. The proposed HK$6 billion or HK$15 billion funding by the government is designed to lessen the effect. The impact on employers is yet to be explored. We shall revisit this topic once the final proposal by the government is released in the end of June.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: employment@onc.hk                               T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017