Abolition of the MPF offset to Severance Payment and Long Service Payments! Information employers need to know
kanriThe “MPF Offsetting” mechanism has long been in use since the Mandatory Provident Fund Schemes (MPF) scheme was implemented in 2000. “Offsetting” means that it is legally permissible for a Hong Kong employer to pay Severance Payment or Long Service Payments to employees by using the company’s share of the MPF’s Accrued Benefit.
According to the Issue of the Mandatory Provident Fund Schemes Statistical Digest report published by the MPFA, the total amount of MPF funds allocated for Severance Payment and Long Service Payments was HK$6.6 billion (approximately USD 840 million) in FY2021 alone.
Since the MPF offsetting mechanism was implemented, it has been criticized as an exploitation of employees, but no agreement has been reached between the employee and employer sides. Last year in its 22nd year of implementation, the Hong Kong Legislative Council passed a bill on 9 June 2022 on the abolition of MPF set-off.
The abolition of the MPF set-off is expected to increase the burden on employers, and this blog provides information that employers and companies should be aware of for future fund management adjustments.
What is Severance Payment and Long Service Payments?
According to the Hong Kong Employment Ordinance, an employee is entitled to either Severance Payment or Long Service Payments if the following conditions are met.
Severance Payment:
Employed on a continuous contract of employment※ for a period of at least 24 months and meets one of the following conditions:
・The employee was dismissed on the grounds of redundancy.
・The contract was not renewed for redundancy reasons after the expiry of the contractual period of employment.
・The employee was dismissed on the grounds of redundancy after the expiry of the contractual period of employment.
Long Service Payments:
Employed under a continuous contract of employment※ for a period of at least five years and meets one of the following conditions:
・The employee was dismissed for reasons other than gross misconduct or redundancy.
・The employee’s contract of employment was not renewed after the expiry of its term.
・The death of an employee during his or her period of service.
・The employee presents a certificate (LD 424(S)) that the registered doctor or herbalist is permanently incapable of performing his or her contractual duties, and thus the employee resigns for health reasons.
・Employees aged 65 years or above who retired for personal reasons due to old age.
※For the definition of continuous contract of employment, please refer to this page.
Also, please be noted that if the employer offers in writing to “renew the employment contract” or “rehire the employee on a new employment contract” more than seven days before the termination date (only in the case of Severance Payment), or more than seven days before the expiry of the stipulated employment period, in the case of the employee refuses without any reasonable reasons, the employee loses the right to receive Severance Payment and Long Service Payments.
Calculation of Severance Payment and Long Service Payments
The calculation of Severance Payment and Long Service Payments is as follows:
In the case of monthly wage:
（Wage of the final month of employment（＃1）×2/3）（＃2）×calculable years of service
In the case of daily wages and piece-rate pay:
Total wages for 18 regular working days chosen by the employee in the last 30 days（＃1・＃2）×calculable years of service
＊The maximum amount of Severance Payment and Long Service Payments is 390,000 HKD.
＊If the number of calculable years of service is less than a full year, it will be calculated on a pro rata basis.
＃1：Employees can choose the average monthly wage for the 12 months immediately preceding the termination of the employment contract for the calculation of this amount. In the case of termination of employment contract by termination notice pay, the employee may select the monthly average wage for the 12 months immediately preceding the last date included in the calculation of the termination notice pay.
＃2：The maximum amount concerned is two-thirds of 22,500 HKD (= 15,000 HKD)
Current “MPF offsetting” mechanism
Even though the proposal to abolish the MPF offsetting has been passed, the current mechanism must continue to be used until it is implemented. The current mechanism is as follows.
Under the “set-off” mechanism, a Hong Kong employer can apply to an MPF company to receive the employer’s portion of the Severance Payment/Long Service Payments to the employee under Accrued Benefit, which is a monthly payment by the employer of 5% of the employee’s gross basic salary, allowances and other benefits (up to a maximum of 1,500 HKD) of the employee’s monthly gross basic salary, allowances and other benefits deposited into the MPF account by the employer, which is dependent on the investment management of the MPF company. It is difficult to calculate in advance, as investment returns can be negative in some cases depending on the investment situation.
If the employer’s share of Accrued Benefit is more than the Severance Payment and Long Service Payments, the Severance Payment and Long Service Payments will be offset and the employer will not have to make any additional payments. Conversely, if the employer’s share of the Accrued Benefit is less, the employer has to turn away the difference.
Let’s look at two examples below:
1. If the employer’s share of Accrued Benefit is more than the Severance Payment and Long Service Payments:
Amount of Severance Payment and Long Service Payments 30,000 HKD
Amount of Accrued Benefit for employer’s share 50,000 HKD
Amounts available for MPF offset 30,000 HKD
Difference to be paid additionally by the employer 0 HKD
Amount remaining in MPF account after offsetting 20,000 HKD
2. If the employer’s share of Accrued Benefit is less than the Severance Payment and Long Service Payments:
Amount of Severance Payment and Long Service Payments 30,000 HKD
Amount of Accrued Benefit for employer’s share 20,000 HKD
Amounts available for MPF offset 20,000 HKD
Difference to be paid additionally by the employer 10,000 HKD
Amount remaining in MPF account after offsetting 0 HKD
After the MPF offset has been abolished
From the implementation date (in year 2025, but exact date is currently undetermined) of the abolition of the MPF set-off, it will no longer be possible to use the MPF employer’s share of the Accrued Benefit to fund Severance Payment and Long Service Payments, but as the implementation cannot be backdated, the portion before the implementation date can be calculated using the current MPF set-off mechanism.
For example, if Employee A, with a final monthly wage of HK$15,000 and five years of service, is dismissed for redundancy one year after the implementation date of the abolition of the MPF offset, the calculation of his Severance Payment and MPF will be divided into two parts:
For the first four years:
Amount of Severance Payment 40,000 HKD
Amount of Accrued Benefit to be paid by employer 36,000 HKD (fully offset)
Difference to be additionally paid by the employer 4,000 HKD
Amount remaining in MPF account after set-off 0 HKD
For the last year:
Amount of Severance Payment 10,000 HKD
Amount of Accrued Benefit paid by employer 9,000 HKD
Amount paid by employer 10,000 HKD (^)
Amount remaining in MPF account after set-off 9,000 HKD
＾The Hong Kong Government will provide 32.9 billion HKD to subsidize a portion of the amount of Severance Payment and Long Service Payments over a 25-year subsidy period, and the amount to be paid by companies can be found on page 19 of the Legislative Council documents below:
https://www.legco.gov.hk/yr2022/english/panels/mp/papers/mp20220204cb2-39-1-e.pdf
Please be noted that if the employer has a voluntary additional contribution of MPF or a Gratuity based on the employee’s length of service, it is not affected by the proposed abolition of the offset and can continue to be used for Severance Payment and Long Service Payments.
At present, the implementation of the abolition of the MPF offsetting is scheduled for 2025 at the earliest, and a new specialized account needs to be established to prepare companies for the payment of termination compensation and long-term service payments, but details have not yet been announced. We will keep you updated as soon as the latest information is released.
MAY Planning offers a variety of services, including support related to labor management necessary for operating a Hong Kong company and consulting on MPF set-off abolition proposals tailored to your company’s case. Please feel free to contact us if you require any assistance.
