Recent legislative changes in Hong Kong, particularly the abolition of the MPF offsetting arrangement, have significant implications for employees’ severance payment and long service payment entitlements. With the changes now in effect from 1 May 2025, it’s crucial for employees to understand how these new rules may affect their finances upon termination of employment.
What is MPF Offsetting?
Historically, employers in Hong Kong were permitted to use the accrued benefits made by mandatory contributions by the employer to the employee’s Mandatory Provident Fund (MPF) scheme to offset an employee’s severance payment (SP) or long service payment (LSP). This practice, known as MPF offsetting, has been a long-standing feature of the employment landscape in Hong Kong.
The Abolition of MPF Offsetting: Key Changes from 1 May 2025
The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022, officially abolishing the MPF offsetting arrangement. With effect from the implementation date of 1 May 2025 (the “Transition Date”), employers can no longer use the accrued benefits derived from their mandatory MPF contributions to offset an employee’s SP/LSP.
However, to mitigate the risk of large-scale dismissals before the transition date, a “grandfathering” arrangement has been put in place for the pre-transition portion of SP/LSP for employees already in employment before 1 May 2025. The legislation does not cover employers’ voluntary MPF contributions, as well as gratuities based on length of service, which still can be used to offset SP/LSP.
Severance Payment and Long Service Payment in the Context of MPF Offsetting
Before delving into the specifics of how the abolition impacts your entitlements, let’s first clarify the eligibility for severance payment and long service payment in Hong Kong.
Severance Payment (SP)[2]
An employee is eligible for severance payment if they meet the following conditions:
- They have been employed under a continuous contract for not less than 24 months.
- They are dismissed by reason of redundancy.
- Their employment contract expires without being renewed by reason of redundancy.
- They are laid off (meaning they are not provided with work and wages for a specified period).
Long Service Payment (LSP)[2]
An employee is eligible for long service payment if they meet the following conditions:
- They have been employed under a continuous contract for not less than 5 years.
- They are dismissed (but not summarily dismissed due to serious misconduct, and not by reason of redundancy).
- Their employment contract expires without being renewed (not due to redundancy).
- They die.
- They resign on grounds of ill health.
- They resign at or above the age of 65.
How the Abolition Affects Your Entitlements: Before and After the Transition Date
The abolition of MPF offsetting is not retrospective. This means that the rules for offsetting differ depending on whether your employment period falls before or after the transition date of 1 May 2025.
For employees who are already in employment before the transition date, their SP/LSP will be divided into two portions:
- Pre-transition portion: This covers the employment period before 1 May 2025. It is calculated based on the monthly wages immediately preceding the transition date and the years of service before the transition date.
- Post-transition portion: This covers the employment period starting from 1 May 2025. It is calculated based on the last monthly wages before termination of employment and the years of service starting from the transition date.
Key Point: Employers can continue to use the accrued benefits derived from their MPF contributions (regardless of whether the contributions are made before, on, or after the transition date, and regardless of whether they are mandatory or voluntary) to offset the pre-transition portion of SP/LSP. However, they cannot use these contributions to offset the post-transition portion [1].
The maximum amount of SP/LSP (the sum of pre-transition and post-transition portions) remains capped at HK$390,000. If an employee’s total SP/LSP exceeds HK$390,000, the excess amount will be deducted from the post-transition portion [1].
Calculation of SP/LSP After Abolition
For a monthly-rated employee, the calculation of SP/LSP after the abolition of the MPF offsetting arrangement is as follows [1]:
- Employment period before the transition date: Employee’s last full month’s wages immediately preceding the transition date × 2/3 × years of service before the transition date
- Employment period starting from the transition date: Employee’s last full month’s wages before termination of employment × 2/3 × years of service starting from the transition date
The ceiling on the monthly wages for calculating SP/LSP is HK$22,500, and the maximum SP/LSP amount is HK$390,000. These ceilings remain unchanged [1].
Example Calculation
Let’s consider an example provided by the Labour Department to illustrate the calculation:
Scenario:
- Commencement of employment: 2 May 2016
- Termination of contract: 1 May 2025 (the effective date of the new legislation)
- Salary: HK$15,000 per month (never changed)
- LSP Calculation: (Monthly wages × 2/3) × years of services (with an incomplete year calculated on a pro-rata basis) (HK$15,000 × 2/3) × 9 complete years = HK$10,000 × 9 = HK$90,000.00
- Employer’s MPF Contributions: 5% of salary (employer’s mandatory contribution) = HK$750.00 per month – assuming payments made for 106 months (MPF for employee only needs to be registered within the first 60 calendar days) = HK$750.00 × 106 = HK$79,500.00
- Long Service Payment Due (after offsetting): HK$90,000.00 (Total LSP) – HK$79,500.00 (Employer’s MPF Contributions) = HK$10,500.00
This example demonstrates how the pre-transition MPF contributions can still be used to offset the LSP for the period before 1 May 2025.
Situations Where MPF Offsetting Does Not Apply
The abolition of the MPF offsetting arrangement primarily targets the MPF System. However, it is also applicable to other occupational retirement schemes that are granted exemption under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D), and overseas occupational retirement schemes joined by employees from outside Hong Kong which are exempted from the MPF System [1].
It is important to note that the abolition of MPF offsetting arrangement is not applicable to employees who are currently not covered by the MPF System or other statutory retirement schemes. This includes:
- Foreign and local domestic helpers
- Employees aged less than 18 or more than 65 or above
For these categories of employees, their SP/LSP, if applicable, will continue to be calculated on the basis of the last monthly wages or 12-month average wages before the termination of employment in accordance with the existing provisions of the Employment Ordinance [1].
Protect Your Rights: Contact Us Today
Understanding the intricacies of MPF offsetting and its impact on your severance and long service payments can be complex. At Titus.com.hk, we are dedicated to protecting the rights of employees in Hong Kong. If you have questions about your entitlements or need legal advice regarding your employment, contact us immediately for expert legal advice and support.
References: [1] Labour Department. (n.d.). Abolition of MPF Offsetting Arrangement. Retrieved from https://www.labour.gov.hk/eng/news/aoa.htm [2] Labour Department. (n.d.). Chapter 11: Severance Payment and Long Service Payment. Retrieved from https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/11.pdf