[Hong Kong] Bill to abolish severance and long service payment offsetting arrangements

On June 8, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (“Amendment Bill”). Lexology addresses some frequently asked questions below to help gain a better understanding of the abolishment of the existing offsetting arrangement (“Offsetting Arrangement”):

1. What has the Amendment Bill changed?

Before the Amendment Bill was passed, an employer was generally permitted to offset an employer’s obligation for severance payment (SP) or long severance payment (LSP) by clawing back the amount contributed by the employer from the employee’s MPF funds. In effect, this means that the employer will not be out-of-pocket (provided there are sufficient funds available for clawback), but the employee will be able to access a certain portion of his/her MPF funds now (instead of waiting until retirement). The Amendment Bill has now passed and will prohibit employers from adopting the offsetting arrangement, starting from the Transition Date (see below).

2. When will the offsetting arrangement be abolished?

A date will be appointed (the “Transition Date”) and the Offsetting Arrangement will be abolished thereafter. The Government expects that the offsetting arrangement could be formally abolished in 2025.

3. How are severance/long service payments calculated?

• For monthly paid employee: (last full month's wages* x 2/3) # x (reckonable years of service). 
• For daily-paid employees: (any 18 days' wages* chosen by the employee out of the last 30 normal working days worked by the employee)# x (reckonable years of service)

*An employee may choose to use his average wages in the 12 months immediately preceding the termination of the employment contract. # The sum is capped at two-thirds of HK$22,500 (i.e. HK$15,000)

4. Is there a cap on severance/long service payments? 

The amount of severance payment and/or long service payment that an employee can receive is capped at HK$390,000, and an employee is only entitled to receive either severance or long service payments, but not both.

5. Does the Amendment Bill have a retroactive effect?

No. If an employee's employment commenced before the Transition Date, the employer can continue to use the accrued benefits of the MPF contributions (irrespective of whether the contributions are made before, on or after the Transition Date, and regardless of whether the contributions are mandatory or voluntary) to offset the employee’s SP/LSP in respect of the employment before the Transition Date (the pre-transition portion of SP/LSP).

For employment periods on or after the Transition Date, Lexology’s experts say employers will no longer be permitted to offset SP and LSP against employees’ MPF benefits derived from employers’ mandatory MPF contributions. However, employers can still offset SP and LSP against employers’ voluntary MPF contributions.

On June 8, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (“Amendment Bill”). Lexology addresses some frequently asked questions below to help gain a better understanding of the abolishment of the existing offsetting arrangement (“Offsetting Arrangement”):

1. What has the Amendment Bill changed?

Before the Amendment Bill was passed, an employer was generally permitted to offset an employer’s obligation for severance payment (SP) or long severance payment (LSP) by clawing back the amount contributed by the employer from the employee’s MPF funds. In effect, this means that the employer will not be out-of-pocket (provided there are sufficient funds available for clawback), but the employee will be able to access a certain portion of his/her MPF funds now (instead of waiting until retirement). The Amendment Bill has now passed and will prohibit employers from adopting the offsetting arrangement, starting from the Transition Date (see below).

2. When will the offsetting arrangement be abolished?

A date will be appointed (the “Transition Date”) and the Offsetting Arrangement will be abolished thereafter. The Government expects that the offsetting arrangement could be formally abolished in 2025.

3. How are severance/long service payments calculated?

• For monthly paid employee: (last full month's wages* x 2/3) # x (reckonable years of service). 
• For daily-paid employees: (any 18 days' wages* chosen by the employee out of the last 30 normal working days worked by the employee)# x (reckonable years of service)

*An employee may choose to use his average wages in the 12 months immediately preceding the termination of the employment contract. # The sum is capped at two-thirds of HK$22,500 (i.e. HK$15,000)

4. Is there a cap on severance/long service payments? 

The amount of severance payment and/or long service payment that an employee can receive is capped at HK$390,000, and an employee is only entitled to receive either severance or long service payments, but not both.

5. Does the Amendment Bill have a retroactive effect?

No. If an employee's employment commenced before the Transition Date, the employer can continue to use the accrued benefits of the MPF contributions (irrespective of whether the contributions are made before, on or after the Transition Date, and regardless of whether the contributions are mandatory or voluntary) to offset the employee’s SP/LSP in respect of the employment before the Transition Date (the pre-transition portion of SP/LSP).

For employment periods on or after the Transition Date, Lexology’s experts say employers will no longer be permitted to offset SP and LSP against employees’ MPF benefits derived from employers’ mandatory MPF contributions. However, employers can still offset SP and LSP against employers’ voluntary MPF contributions.