Starting tomorrow, May 1, the cancellation of the Mandatory Provident Fund (MPF) "offsetting" arrangement will take effect. Employers can no longer use their mandatory MPF contributions to offset severance payment (SP) and long service payment (LSP) for employees.
Going forward, calculations for these payments will be divided into two parts based on the transition date of May 1. Contributions before this date can still be used for offsetting, while those after must be paid in full by the employer without utilizing MPF funds.
The MPF "offsetting" system has allowed employers to offset severance or long service payments with their employees' MPF contributions since the MPF system was implemented in 2000. This practice has been criticized for effectively reducing compensation for workers facing layoffs or company closures.
Payment Structure After Cancellation
After the cancellation on May 1, severance pay and long service payments for employees hired before this date will be calculated in two parts:
- Pre-Transition Portion: This can still be offset using MPF contributions.
- Post-Transition Portion: This amount must be paid in full by the employer without using MPF funds.
Calculation Method
Under the current Employment Ordinance, severance pay or long service payments for monthly salaried employees are calculated as two-thirds of the last month's salary for each year of service, with a salary cap of HK$22,500. For employees hired before the transition date, the calculations are as follows:
- Pre-Transition Portion: Last month's salary before the transition date × 2/3 × years of service before the transition date
- Post-Transition Portion: Last month's salary before termination × 2/3 × years of service after the transition date
Example
For an employee with 4 years of service before the transition date and a last month's salary of HK$15,000, and 3 years of service after the transition date with a last month's salary of HK$18,000, the calculations would be:
- Pre-Transition Payment:HK$40,000 (15,000 x 2/3 x 4)
- Post-Transition Payment:HK$36,000 (18,000 x 2/3 x 3)
Total Compensation: HK$76,000
Employer Contributions and Total Benefits
During the 7 years of employment, if the employee received a salary increase on the transition date, the employer's mandatory contributions would total HK$68,400. The employer can use this amount to offset the pre-transition payment of HK$40,000.
The remaining employer contributions in the employee's MPF account would amount to HK$28,400, plus the post-transition payment of HK$36,000, bringing the total benefits to HK$104,400.
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