Under the current mandatory provident fund scheme (“MPF scheme”), an employer who is liable to pay an employee severance payments or long service payments under the Employment Ordinance (CAP 57) is allowed to offset these payments with the accrued retirement funds of the employee derived from the employer’s contributions made to MPF scheme. This claw-back mechanism is seen to be against the public interest and therefore has been the subject of controversy over the years. To honor the election campaign promises, the Chief Executive of Hong Kong, Mr. Leung Chun-ying, announced a proposed progressive abolition of the offsetting mechanism on 18 January 2017.
Currently, an employee who has not less than 5 years of service is entitled to a long service payment (or a severance payment if the employee has not less than 24 months of service) equal to two-thirds of the monthly wages for each year of service, up to HK$15,000 each year (or a maximum of HK$390,000). After the proposed reform, although the employee will be able to keep the employer’s contribution to their MPF scheme, the long service payment or severance payment may be calculated on a less favorable basis (decreased from twothirds of the monthly wages to half of that).
The proposed reform has been attacked by several business groups as totally unjustified as the abolition would impose heavy financial burden on businesses especially SMEs and cripple entrepreneurism. To pacify the business groups and to lessen the effect on employers, the government proposed to progressively reduce the proportion of employer’s contributions to the MPF scheme that can be used for offsetting over a 10-year period. During the 10-year transition period, the government would bear part of the costs; the government proposed to set aside HK$6 billion to partially subsidize the long service and severance payments on a sliding scale for up to 10 years. The proposed amendment will not have retrospective effect.
The proposal is now undergoing a three-month consultation period. A final plan will be submitted to the Executive Council for approval in June 2017.