Legal Update: Proposed amendments to abolish MPF offsetting arrangement relating to statutory severance and long service payments

On 11 February 2022, the Government of the HKSAR published the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Amendment Bill”) in the Gazette. The Amendment Bill was given the First Reading at the Legislative Council on 23 February 2022. 

Currently, employers may elect to offset any statutory severance payment (“SSP”) and statutory long service payment (“SLSP”) by deducting the total accrued value of any MPF employer contributions made to the relevant employee’s MPF scheme for the same period (the “Offsetting Arrangement”).  The Amendment Bill proposes an abolition of the Offsetting Arrangement. 

Proposed amendments under the Amendment Bill 

Under the Amendment Bill, the Offsetting Arrangement will be abolished starting from a date to be appointed after the enactment of the Amendment Bill (the “Transition Date”). Employers will no longer be able to apply the Offsetting Arrangement for any SSP or SLSP in respect of an employee’s employment period starting from the Transition Date.  However, for an employee whose employment begins before the Transition Date and is terminated on or after the Transition Date, their SSP/SLSP would be divided into the following two portions: 

1. Pre-transition portion (i.e. the SSP/SLSP entitlements that accrued in respect of the period of employment before the Transition Date) – Employers may continue to apply the Offsetting Arrangement with the MPF employer contributions made before, on or after the Transition Date, including mandatory employer MPF contributions.
    
2. Post-transition portion (i.e. the SSL/SLSP entitlements accruing in respect of the period of employment from the Transition Date) – Employers cannot apply the Offsetting Arrangement for their mandatory MPF contributions to this portion.   

However, employers are still allowed to offset against the amount of SSP/SLSP that accrues pre-transition and post-transition with the following:  

1. the total accrued value of any voluntary MPF employer contributions made to the relevant employee’s MPF scheme for the same period; and/or
    
2. contractual gratuities based on the length of service.

For MPF-exempted occupational retirement schemes under the Occupational Retirement Schemes Ordinance (Cap. 426), the Offsetting Arrangement will also be abolished in respect of a portion of “non-offsettable benefits”. 

The calculation of SSP/SLSP will remain unchanged, being 2/3 x (HK$22,500 or the last full month’s wages, whichever is the lesser) multiplied by the years of service, subject to a cap of HK$390,000.  The pre-transition portion will generally be calculated on the basis of the monthly wages immediately preceding the Transition Date.  To facilitate calculation of the pre-transition portion, employers will be required to keep wage and employment records covering the 12 months preceding the Transition Date (or a shorter period where the employee’s employment period is less than 12 months before the Transition Date). 

Government’s supporting measures  

To assist employers to adapt to the policy change, the Government of the HKSAR will introduce the following measures: 

1. a 25-year subsidy scheme, which has been refined to provide targeted assistance to employers, especially micro, small and medium-sized enterprises; and
    
2. a Designated Savings Accounts Scheme under which employers will be mandated to save and provide for the amounts needed to meet their potential future SSP/SLSP liabilities after the abolition of the Offsetting Arrangement. A new bill will need to be introduced to implement this Scheme. 

Implications for employers 

Employers are advised to get familiar with the changes introduced under the Amendment Bill and seek legal advice if necessary.  

The abolition of the Offsetting Arrangement will also give increasing practical and financial significance to situations in which employees are found to have been “unreasonably dismissed” under the Employment Ordinance.  In cases of unreasonable dismissal, i.e. without a “valid reason” under section 32K, the court or Labour Tribunal may order the employer to pay to the employee “terminal payments”, which include a pro rata of any SLSP even if the employee has not met the required 5 years of service.

In such cases and notwithstanding that the employee has not attained the qualifying length of service required for the relevant statutory entitlements, the court or Labour Tribunal may make an award for terminal payments reckoned according to the actual length of time that the employee has been employed under his/her contract of employment.  For example, if an employee, who has been employed under a continuous contract for 3 years (i.e. less than the 5 years needed to qualify for SLSP as of right), is dismissed for reason other than redundancy, generally SSP/SLSP will not be payable. However, if the employee is found to have been “unreasonably dismissed”, the court or Labour Tribunal may make an award for SSP/SLSP according to his/her actual years of service, i.e., 3 years in the example.  At present even if an equivalent to a pro-rated SLSP is awarded by way of terminal payment, after the Offsetting Arrangement that is likely zero.  With the abolition of the Offsetting Arrangement, an employer who is ordered by the court or Labour Tribunal to pay SSP/SLSP to an employee who has been unreasonably dismissed will be unable to apply the Offsetting Arrangement for its mandatory contributions to the period after the Transition Date to reduce its liability. For these reasons, after this change in the law employers should be more cautious when deciding whether to dismiss an employee, taking into account the reason for the dismissal, in particular for employees who have over 2 years of service (and qualify for “unreasonable dismissal” protection) and less than 5 years of service (at which point they qualify for SLSP as of right, even if a termination is not an “unreasonable dismissal”). 

The Amendment Bill is available at:  https://www.legco.gov.hk/yr2022/english/bills/b202202111.pdf

Russell Bennett and Agnes Lau 

For more information on employment matters, please contact:

Russell Bennett
Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.