The Mandatory Provident Fund(MPF) offset mechanism will officially be canceled by 2025 after members of the Legislative Council voted in favor of the proposal. As soon as the bill takes effect, employers will no longer be able to offset employees’ severance payments or long-service payments against the MPF derived from the employer’s voluntary and mandatory contributions.
The bill that is set to take effect in 2025 has no retrospective effect, meaning that the bill will not have an effect on employment contracts commenced before the transition date. If an employee is in a contract before 2025, but was laid off after the bill has taken effect, employers can still apply their contributions to the employee’s MPF funds to reduce the amount of severance/long service leave payable. This clause is thought of as a protective measure implemented by the government to reduce the chance of mass dismissals of employees to avoid being affected by the bill.
The result of the reading has drawn supporting voices from an overwhelming majority of the working population, as they believe that the cancellation can better safeguard employees’ retirement savings. Statistics have shown that the mechanism has an increasingly negative effect on the working population, as they saw HK$6.6 billion in their severance and long service payment being offset in 2021, compared to HK$5.5 billion in 2020.
The contents of the bill also introduces a 25 year subsidy scheme totalling at HK$33 billion to lessen the financial burden on small and medium enterprises. As long as all payments owed to workers do not exceed HK$500,000 in a calendar year, companies will only be required to pay each employee HK$3,000 in the three years after the bill has taken effect, while the rest is subsidized by the government.
However, the bill has received criticism from the public, mainly the retail sector. A lawmaker that represents the sector has expressed that the bill should also reduce the upper limit for severance and long service payments to reduce the operating expenses for businesses with payments owed to employees exceeding HK$500,000. He also said that the longer service payment should be eliminated from legislation as it is now a redundancy since employees will get the full sum of their MPF payments. The passing of the bill is a second blow as businesses in the retail sector will be in the midst of making a recovery from the pandemic, he said.
For businesses that do not qualify for government subsidies, the bill will inevitably lead to an increase in operating costs. With the new changes, your HR department will need to adjust their budgeting decisions to cater to the increased expenses. With the development of technology, this process can be digitized to produce budgeting reports that reflect companies’ financial position in a more accurate and timely manner. For example, using a HR management system to generate a long service or severance provision report which allows managers to see all the employees eligible for these payments and the total amounts payable. This could help companies accurately forecast business expenses incurred if employees who qualify for such payments are dismissed and make adjustments to prepare for this scenario.
Another way to manage operational expenses in response to the new bill is by limiting the number of workers that qualify for the 418 scheme. The scheme suggests that any employees(including part-time) who have worked at least 18 hours for 4 consecutive weeks at the same company are eligible for benefits such as paid annual leave, long service payment and severance payment. Managers can track employees’ hours worked in a week and set maximum hours for each employee. Alerts can be set to check attendance data and automatically alert managers whenever part time employees are close to working 18 hours for 4 consecutive weeks, thus helping companies avoid such expenses for part time employees.
If you are interested in knowing more about how HR systems can help your business operations, feel free to contact us.