Legal update: MPF Offset Mechanism

Under the current offset mechanism, an employer who is liable to pay an employee statutory severance pay (“SP”) or long service pay (“LSP”) is allowed to offset against the SP or LSP due to an employee,  the accrued value of benefits derived from:

1. the employer’s contributions to an MPF scheme, or ORSO scheme and/or
2. Contractual end of contract gratuities and benefits

In particular the employer’s right to offset the value of the employer’s MPF contributions has been the subject of much debate in recent years.

In the case of a monthly rated employee, the calculation of both SP and LSP is two-thirds of the employee’s last full month’s wages or two-thirds of HK$22,500 whichever is higher, multiplied by his reckonable years of service.  The maximum amount of SP or LSP is currently HK$390,000. The employer has a choice to do either of the following:

1. After actually paying to an employee SP or LSP in accordance with the Employment Ordinance, an employer can apply to the MPF trustee with supporting evidence for re-payment of the relevant amount from the employee’s accrued benefits derived from the employer’s contributions, or
2. The employer can set off the accrued value of benefits from the employer’s contributions (as ascertained from the MPF trustee) against the calculation of SP and LSP and pay to the employee only the net balance of the SP or LSP (if any).

Proposal to Scrap the MPF Offsetting Mechanism

Earlier this year, the Hong Kong government in its Policy Address proposed to progressively abolish the MPF offset mechanism.  In other words, employers will need to bear the costs of paying eligible employees’ SP or LSP and employees will be able to keep the employer’s contribution to their MPF accounts in full.  To ease the resistance from the business sector and to reduce the financial burden on employers after the offset mechanism is scrapped, the government proposed to:-

• Reduce the maximum for SP and LSP from HK$390,000 to around HK$200,000.
• Provide a partial financial subsidy on a sliding scale in the first 10 years after the abolition is implemented, which could total HK$7.9 billion in public funds.
• Amend the calculations of SP and LSP.

It was also proposed that the abolition will have no retrospective effect.  In other words, MPF contributions made prior to the implementation date may still be used to offset SP and LSP relating to those same prior periods.

At this stage, both the labour and business sectors are unable to agree on many crucial aspects of this controversial plan.  In light of oppositions from both sectors, it is unclear if, when and by what means the MPF offset mechanism will be scrapped.  The government is aiming to publish an updated version of the plan by the end of the year..

It is anticipated that the plan will likely have significant impact and repercussion on small and medium-sized enterprises in Hong Kong and also to employee’s rights and entitlements upon termination.

Russell Bennett / Ken Ng

For more information on the MPF Offset Mechanism and its implications for you or your business, 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.