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Hong Kong Employment Law Update: Mandatory Provident Fund offsetting mechanism to be abolished after decade-long debate and campaigning

24 June 2022. Published by Andrea Randall, Partner and Lillian Wong, Associate

Following on from our brief update published on 9 June 2022, this article provides a detailed overview of the amendments put forward by the long-awaited Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the "Bill"), which was finally passed by the Legislative Council on 9 June 2022.  The main feature of the Bill is the abolishment of the offsetting mechanism of the Mandatory Provident Fund ("MPF").  

Background – The Current Law in Hong Kong 

Under current laws, employers and employees are required to each contribute 5% of the employee's monthly salary, up to a combined maximum of HK$3,000, as MPF.  Upon termination of employment, employers may deduct their portion of MPF contributions from the severance and long-service payments payable under the present MPF offsetting mechanism.  This mechanism was introduced to the business sector in exchange for its support for the MPF scheme when it launched in 2000.  Since then, it has been the subject of controversy as it essentially diminishes employees' retirement protection with labour unions campaigning for its abolishment.

The Bill 

According to the Bill, the offsetting mechanism will be abolished as early as 2025 and on a date to be appointed ("Transition Date") following the full implementation of the eMPF Platform which is being developed by the Mandatory Provident Fund Schemes Authority.

The highlights of the Bill are: 

  1. For employees who commence employment on or after the Transition Date, employers will no longer be allowed to use the portion of their accrued mandatory MPF contributions to offset the severance and long-service payments payable.

  2. The Bill will have no retrospective effect. For employees employed before the Transition Date whose employment ends thereafter, the severance and long-service payments payable will be determined as follows:

    (i) In respect of the severance and long-service payments payable for the period up to the day immediately before the Transition Date ("Pre-Transition SP/LSP"), the Amendment Bill will not be applicable.  This means that employers may still deduct its mandatory contributions made before, on or after the Transition Date from Pre-Transition SP/LSP.

    (ii) In respect of the severance and long-service payments payable for the period after the Transition Date ("Post-Transition SP/LSP"), the MPF offsetting mechanism will no longer apply, and employers may no longer make any deductions from Post-Transition SP/LSP.The said rationale for this arrangement is to reduce the risk of large-scale dismissals before the Transition Date.

  3. The aggregate severance and long-service payments will remain capped at HK$390,000.  However, the formulae for calculating Pre-Transition SP/LSP and Post-Transition SP/LSP will be amended as follows:

    (i) Pre-Transition SP/LSP = Employee's monthly wages immediately before the Transition Date (capped at HK$22,500) x 2/3 x years of service preceding the Transition Date

    (ii) Post-Transition SP/LSP = Employee's monthly wages immediately before the Transition Date (capped at HK$22,500) x 2/3 x years of service from Transition Date to the termination of employment.

  4. Employers can continue to use their voluntary contributions (i.e. contributions made in excess of the mandatory requirement), the returns derived therefrom, as well as gratuities based on length of service, to offset severance and long-service payments before or after the Transition Date.

  5. The offsetting mechanism will also be abolished for occupational retirement schemes under the Occupational Retirement Schemes Ordinance ("ORSO"). 

The government's supporting measures 

It is anticipated that the abolition of the offsetting mechanism may cause financial difficulties to some employers.  As such, the Hong Kong government has pledged to put in place supporting measures to facilitate the transition, especially for micro, small and medium-sized enterprises ("MSMEs").

First and foremost, the government will implement a 25-year subsidy scheme totaling HK$33.2 billion to support employers, which has been refined to provide targeted assistance to MSMEs in the initial years after the abolition of the offsetting mechanism. 

Additionally, the government will aim to enact a new bill, the Designated Savings Accounts for Severance Payment and Long Service Payment Bill, in Q2 2022 to implement a Designated Savings Accounts Scheme ("DSA Scheme").  Under the DSA Scheme, employers will be mandated to save up in order to meet their future severance and long-service payment liabilities and cope with future financial needs.  

Other amendments proposed by the Bill 

Other miscellaneous amendments under the Bill include:

  • Amending the Inland Revenue Ordinance to make clear it clear that statutory severance and long-service payments payable will not be subject to salaries tax.  Any payments made to an employee in excess of statutory severance and long-service payments remain income and taxable as salaries tax;

  • In addition to the existing requirement under Section 49A of the Employment Ordinance ("EO") to keep records of wages and employment during the preceding 12 months, amending the EO to also require keeping records of wages and employment for the 12 months preceding the Transition Date, or, if the employee has been employed for less than 12 months preceding the Transition Date, for the entire employment period; and 

  • Corresponding amendments to the ORSO, the Mandatory Provident Fund Schemes Ordinance and the Protection of Wages on Insolvency Ordinance to align with the changes to the offsetting mechanism.

Conclusion

There is no doubt that the amendments put forward by the Bill will be difficult to follow.  Whilst there is still some time before the abolition will take place, employers are encouraged to familiarize themselves with this new regime, stay tuned for legal developments in this area and seek legal advice where necessary to ensure proper compliance with the law.

Our team at RPC are widely recognized as leading employment lawyers in Hong Kong. We are one of the few specialist employment law practices in Hong Kong and we act for both employers and employees on contentious and non-contentious matters.

Please do not hesitate to contact our Partner and Head of the Employment Practice in Hong Kong, Andrea Randall (andrea.randall@rpc.com.hk / +852 2216 7208) for any queries regarding the issues raised in this article or any employment law related queries you may have. 

All material contained in this article is provided for general information purposes only and should not be construed as legal, accounting, financial or tax advice, or as opinion to any person or specific case. RPC accepts no responsibility for any loss or damage arising directly or indirectly from action taken, or not taken, which may arise from reliance on information contained in this article. You are urged to seek legal advice concerning your own situation and any specific legal question that you may have.