Hong Kong: Offsetting Mechanism Against Severance Payment Scrapped

​On June 9, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 ("Bill"). The long-awaited abolition of employers' statutory right to offset long service payment (LSP) or severance payment (SP) payable to employees against the employers' contributions to the mandatory provident fund (MPF) scheme will take effect in 2025 at the earliest. This article highlights the main provisions in the Bill and their effects that are worth noting for both employers and employees.

Amendments to the Employment Ordinance

MPF offsetting mechanism

Employers and employees are both required to make mandatory contributions of 5 percent for each of the employee's relevant income (i.e. all monetary payments paid or payable by an employer to an employee) into the employee's MPF account, capped at HK$1,500 (approximately US$191). Employers and employees may choose to make voluntary contributions on top of their mandatory contributions.

Currently, sections 31I and 31Y of the Employment Ordinance (Cap. 57) (EO) provide for an offsetting mechanism that allows employers to offset the amount of LSP or SP payable to an employee against the employer's contributions, mandatory or voluntary, to an MPF scheme.

Abolition of the MPF offsetting mechanism

After the Bill is passed, employers can no longer offset the amount of LSP or SP payable to an employee against the employer's mandatory contributions to the MPF scheme ("Abolition"). The Abolition will take effect from a "Transition Date" to be determined in 2025 at the earliest and has no retroactive effect. In other words, if an employee's employment is commenced before the Transition Date, the employer may still offset the employee's LSP or SP in respect of the period of employment between the commencement date of his employment and the Transition Date against the employer's MPF contributions, whether mandatory or voluntary.

Employer's contributions against which LSP/SP can be offset

After the Abolition, employers can continue to offset the amount of LSP or SP payable to employees with:

1. Employer's voluntary contributions to MPF; and

2. Employer's voluntary contributions to an occupational retirement scheme (ORS) in excess of a "reference amount", which is calculated with the following formula:

A = B × C × 5 percent × 12

Where—

"A" means the reference amount.

"B" means the employee's final average monthly relevant income.

"C" means the number of the employee's years (and pro rata for an incomplete year) of service to which the employer-funded exempt ORS benefit is attributable.

Calculation of LSP/SP

LSP or SP for monthly-rated employees will be calculated as follows:

• Pre-transition portion of LSP/SP

The portion of LSP/SP earned before the Transition Date will be calculated on the basis of the employee's monthly wages immediately preceding the Transition Date and years of service before the Transition Date.

This may be summarized by the following formula:

2/3 x monthly wages immediately preceding the Transition Date (max. HK$22,500 [approximately US$2,866]) x years of service before the Transition Date

• Post-transition portion of LSP/SP

The portion of LSP/SP earned on or after the Transition Date would be calculated on the basis of the employee's last monthly wages before the termination of employment and the years of service after the Transition Date.

This may be summarized by the following formula:

2/3 x last monthly wages before the termination (max. HK$22,500) x years of service before the Transition Date

Employers' obligations to keep records

The Bill introduces an obligation for employers to keep and maintain a record setting out the wages paid to the employee in respect of each wage period and the employee's wage period for each "specified employee" covering the "specified period" at all times.

"Specified employee" is defined as an employee who satisfies the following requirements:

1. The employee's employment under the continuous contract commenced before the Transition Date.

2. The relevant date for the termination of the employment falls on or after the Transition Date.

3. Contributions are payable by the employer to an Occupational Retirement Schemes Ordinance (Cap. 426) (ORSO) scheme under the employment contract or to a mandatory MPF scheme under the Mandatory Provident Fund Schemes Ordinance (Cap. 485).

"Specified period" in relation to a monthly-rated specified employee is defined as:

1. If the employee's pre-transition employment period is not less than 12 months—the period of 12 months immediately preceding the Transition Date; or

2. If the employee's pre-transition employment period is less than 12 months—

• If the employee's pre-transition employment period covers not less than a month—that employment period; or
• If the employee's pre-transition employment period covers less than a month—the first month of the employee's whole employment period.

Amendments to Other Ordinances and Subsidiary Legislations

Apart from the EO, the Bill also amends the Inland Revenue Ordinance (Cap. 112) to clarify that LSP or SP paid in accordance with the EO is not chargeable to salaries tax.

Consequential technical amendments have also been made to the Protection of Wages on Insolvency Ordinance (Cap. 380).

The Abolition is also applicable to ORSO schemes, the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D), and overseas ORS of employees from outside Hong Kong that are exempted from the MPF System.

Takeaway

Employers should pay heed to the amount of LSP or SP payable, which now consists of a pre-transition portion and post-transition portion with different methods of calculation.

As a supporting measure to assist employers to adapt to such substantial policy change, the Hong Kong government will introduce a 25-year subsidy scheme totaling HK$33.2 billion [approximately US$4.23 billion] to provide targeted assistance to employers in the initial years after the Abolition. The government also anticipates the introduction of a Designated Savings Accounts Scheme, to be implemented by a new piece of legislation, under which employers will be mandated to save up for meeting their future LSP or SP liabilities after the Abolition.

Michael Szeto is an attorney with ONC Lawyers in Hong Kong. © 2022 ONC Lawyers. All rights reserved. Reposted with permission of Lexology.