Under the Employment Ordinance (EO) of Hong Kong, an employee who is made redundant after two or more years of service may be entitled to the severance payment (SP) calculated at two-thirds of his or her monthly wages (capped at HK$15,000) for each year of service. An employee who has five or more years of service and is dismissed for reasons other than redundancy and summary dismissal due to serious misconduct may be entitled to the long-service payment (LSP) calculated in the same way as SP.

The current laws allow an employer to use the accrued benefits derived from their contributions to a Mandatory Provident Fund (MPF) scheme for the employees to offset the SP or LSP payable to them under the EO, with the result that the employees’ entitlements on termination will be substantially reduced.

The majority of employees are frustrated with such offsetting arrangements, which deprive them of retirement protection. However, the business sector argues that abolishing the arrangement will impose a heavy financial burden on employers, in particular the small and medium enterprises (SMEs) which account for more than 98 per cent of total businesses.

To strike a balance between the two sides, the SAR Government proposed to gradually abolish the offsetting mechanism, but with a subsidy of HK$7.9 billion for employers – particularly SMEs – to pay the SP/LSP in the 10 years after the abolition. The maximum amount of SP/LSP would, however, be capped at a level less than the present HK$390,000, probably down to HK$200,000.

Union leaders were disappointed that the SP/LSP would be reduced. The business community strongly opposed, arguing that the employers would themselves bear the costs of SP/LSP after the 10 years’ transitional period.

Many SMEs might replace permanent employees with contractual workers and part-timers after the Government’s financial support ended. Some SMEs might even terminate some employees early to avoid their SP/LSP obligations. And it now remains unclear how exactly the Government will abolish the offsetting arrangement.

The current Chief Secretary for Administration, Matthew Cheung Kin-Chung, acknowledged that despite the Government’s subsidy, SMEs might not be able to afford the substantial amount of SP/LSP after the 10 years’ period.

The chair of the Human Capital Management Society, Peter Leung, supported cancellation of the offsetting mechanism for LSP, which amounts to retirement protection for employees in Hong Kong where no retirement pension is provided by the Government. He said the Government’s subsidy in the transitional period could help employers create a better financial situation to fully shoulder the LSP after the subsidy ceased to be provided.

Leung also supported scrapping the SP offsetting, but argued that employers should not be allowed to enjoy the Government’s subsidy in paying the SP during the transitional period, as closing down the business is the decision of an employer who should bear the full costs of SP.

The HR director of BDO Limited, Dr Angela Wong, suggested that only the SP offsetting mechanism should be scrapped, since employees would have no control over the redundant cases. Keeping such an offsetting mechanism would be unfair to the redundant employees who had lost their jobs. But she argued that offsetting for LSP should be preserved, otherwise employers would ‘pay twice’ for employees’ retirement protection.

Dr Alex Wong is a Chartered Fellow of the CIPD

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