A Game-Changing Decision for Employees!

In a groundbreaking move, the Hong Kong government has announced that from May 1, 2025, employers will no longer be able to use mandatory Provident Fund (MPF) contributions to offset severance payments (SP) and long service payments (LSP). This shift aims to enhance employee rights and ensure fair compensation following termination.

The Legislative Journey: What You Need to Know

This monumental change follows the passing of the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022. Initially approved on June 9, 2022, and enacted later that month, the government has now set a transition date for implementation.

The Current State: What Was the MPF Offsetting Arrangement?

Previously, the MPF offsetting arrangement allowed employers to dip into the compulsory MPF contributions to cover severance and long service payments when an employee left their job. Critics argued that this led to unjust terminations, with employees often receiving little to no substantial compensation.

What Changes Are Coming?

Starting May 2025, employers must pay severance and long service payments in full, without offsetting them against MPF contributions. To help businesses manage this transition and soften the financial blow, the Hong Kong government is unveiling a substantial 25-year subsidy plan worth HKD 33.2 billion.

Eligibility: Who Gets What?

Employees will be eligible for severance payments if they have worked continuously for at least 24 months and face redundancy or termination. Similarly, long service payments will be available for those who have served for five years and meet other conditions. Importantly, employees can only claim one type of payment—either SP or LSP.

How Will Payments Be Calculated?

Payments will be calculated based on the employee's last full month's wages or the average wage of the past year, up to a maximum of HKD 390,000. This change will apply with clear divisions between pre-transition (before May 1, 2025) and post-transition (after May 1, 2025) calculations.

A 'Grandfathering' Arrangement to Protect Employees

To prevent mass layoffs before the new law takes effect, a 'grandfathering' provision will allow pre-transition payments to be offset by previous MPF contributions, safeguarding the rights of long-serving employees.

Employers Beware: Steps to Prepare!

Employers are urged to prepare for compliance by reviewing their compensation practices. From May 1, 2025, any severance or long service payment for employees hired before this date must adhere to the new rules, as offsets will only apply to the pre-transition portion.

Government Support: The Financial Safety Net

The government subsidy scheme will support micro, small, and medium-sized enterprises struggling with the financial implications of this change, helping them navigate the new landscape of employee compensation.

What's Next?

While a proposed Designated Savings Accounts scheme was on the table, it has since been shelved, simplifying compliance for employers. As these changes loom, both employers and employees must be ready to adapt to the new employment landscape in Hong Kong.