Long Service Payment and
Severance Payment in Hong
Kong - Abolishment of
Offsetting Arrangement
Rossana Chu / Jacky Chan
16 June 2022
The Government passed the Employment and Retirement Schemes
Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June
2022 to abolish the use of the accrued benefits of employers' mandatory
contributions under the Mandatory Provident Fund (“MPF”) System to
offset severance payment (“SP”) and long service payment (“LSP”).
W
hile this development is welcome by dies
employees, certain preparation
should be made by Hong Kong if the employment contract is of a fixed
employers especially for those whose term and expires, but is not renewed by
workforce experiences low turnover. the employer
That essentially means, if a Hong Kong
LSP and SP employer sets a retirement age of say 62 and
the employee (having been employed for 5
It is important for each Hong Kong employer
years or longer before the retirement) is
to first understand the application of LSP and
required to retire, it is very unlikely that the
SP to its workforce.
employee will resign. Then, the employer has
to end the employment contract which
LSP is payable to an employee who has been
technically constitutes a dismissal, and
employed continuously for at least 5 years
therefore must pay the LSP to the retired
and fulfils one of the following conditions:
employee.
is dismissed but not due to redundancy or
The definition of SP is more straight-forward.
serious misconduct
SP is required to be made to an employee who
resigns on ground of ill health has been employed continuously for at least
24 months but is dismissed due to
resigns at the age of 65 or above redundancy or laid off.
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The calculation of the LSP and SP is subject After the Effective Date, an employer can no
to the statutory formula: last full month longer use any part of its mandatory
wages X 2/3 (capped at HK$22,500 X 2/3) X contributions to MPF or contributions to an
years of service. The overall maximum ORSO scheme to reduce the LSP/SP payable
amount of either LSP or SP is HK$390,000 to an eligible employee. However, the
(i.e. US$50,000). The new law will have an employer still reduce the LSP/SP by:
implication on the reference to “last full
month wages” as explained below. i. its voluntary contributions to MPF,
ii. its contributions to an ORSO scheme that
Current offsetting arrangement
is greater than a reference amount
An employer is required by law to make a calculated at final average monthly
monthly contribution to a MPF scheme of 5% income (currently capped at HK$30,000)
of each employee’s monthly income, capped × years of service (pro rata for incomplete
at HK$1,500 (i.e. US$193) per month. The year) to which the MPF-exempted ORSO
employer may also make additional scheme benefits are attributable × 5% ×
contributions, on a voluntary basis, for the 12, and
benefit of the employees.
iii. any contractual gratuity paid to an
employee.
Currently under the Employment Ordinance,
when the employer is required to make
Different treatments before and after
LSP/SP, it may reduce the payable amount by
the value of benefits paid to an employee the Effective Date
derived from the employer's contributions to
Not only the offsetting arrangement, the
an MPF scheme (both mandatory and
“last full month wages” is also different
voluntary contributions) and an occupational
before and after the Effective Date.
retirement scheme (“ORSO”).
The portion of LSP/SP prior to the Effective
Removal of the offsetting arrangement Date is to be calculated on the basis of the
monthly wages immediately preceding the
The new law abolishing the offsetting will
Effective Date and the years of service before
come into effect in 2025 on an exact date to
the Effective Date. The portion of LSP/SP
be announced by the Hong Kong Government
after the Effective Date is to be calculated on
(“Effective Date”).
the basis of the last monthly wages
immediately before the termination of
The removal of the offsetting arrangement
employment and the years of service at that
will not have retrospective effect. Where the
time.
employment commenced before the
Effective Date, an employer can continue to
For example, if the employee started the
offset the LSP/SP earned before Effective
employment in 2020 and becomes entitled to
Date.
LSP in 2027, and her monthly wages
immediately preceding the Effective Date is
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collaboration with other law firm members.
HK$21,000 and her monthly wages Nevertheless, the Government will make law
immediately before the employment to require employers to set up designated
termination in 2027 is HK$23,000, then: savings accounts for their future LSP/SSP
obligations.
• The portion of LSP before the Effective
Date = HK$21,000 X 2/3 X 5 years = Key Takeaway
HK$70,000, which can be offset by the
value of benefits paid to the employee With the removal of the offsetting
derived from the employer's contributions arrangement, Hong Kong has taken a great
to the MPF scheme and the relevant ORSO step forward towards better employee
scheme (if any). protection. Employees’ benefits in their
MPF/ORSO schemes will not decrease after
• The portion of LSP after the Effective the Effective Date even if they are dismissed
Date = HK$22,500 X 2/3 X 2 years = or laid off.
HK$30,000, which may not be offset by
the value of benefits paid to the employee While the removal will take effect in 2025,
derived from the employer's mandatory employers are encouraged to avoid large-
contributions to the MPF scheme and the scale dismissals of employees (especially
relevant ORSO scheme. those who are eligible to receive LSP) before
the Effective Date in 2025, because
The aggregate amount of LSP/SP earned employers will be partially subsidized by the
before and after the Effective Date remains Government in respect of LSP/SP payable
capped at HK$390,000. after the Effective Date.
Government support for employers In any event, Hong Kong employers should
familiarize themselves of their contingent
The Hong Kong Government has pledged obligations to make LSP/SP, specifically
HK$33.2 billion (i.e. US$4.26 billion) to help when they have long-serving employees or
employers bear part of their LSP/SP costs have mandatory retirement policies. It is also
after the Effective Date, by way of a subsidy essential to keep track of developments in
scheme over a period of 25 years. Details of terms of the Effective Date, the forthcoming
the subsidiary scheme will be announced by statutory designated account requirement
the Government. and the Government subsidy scheme.
LC Lawyers LLP is an independent law firm, and the Hong Kong law firm member of the EY global network, in
collaboration with other law firm members.
KEY CONTACTS
Rossana Chu Jacky Chan
Managing partner Associate
[Link]@[Link] [Link]@[Link]
+852 2629 1768 +852 2675 2167
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This material has been prepared for general informational purposes only and is not intended to be relied upon as
professional advice. Please contact us for specific advice.
LC Lawyers LLP is an independent law firm, and the Hong Kong law firm member of the EY global network, in
collaboration with other law firm members.