Long Service Payment (LSP) in Hong Kong is a statutory benefit designed to compensate employees who have served their employer for a significant period and are dismissed under specific circumstances. The LSP is calculated based on a formula that considers the employee’s last monthly salary and years of service, subject to a cap.
Historical Development of LSP in Hong Kong
The concept of LSP was introduced to provide financial security to employees with long tenure, ensuring they receive compensation upon termination under qualifying conditions. Historically, employers had the option to offset LSP obligations against the accrued benefits from their mandatory contributions to the Mandatory Provident Fund (MPF) scheme. This arrangement was intended to reduce the financial burden on employers when fulfilling LSP liabilities.
Abolition of the MPF Offsetting Mechanism
In response to concerns about the impact of offsetting on employees’ retirement savings, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on June 9, 2022. This legislation abolishes the use of accrued benefits from employers’ mandatory MPF contributions to offset LSP and severance payments, effective from May 1, 2025.
Impact of Abolition on Employers and Employees
- Employers: The abolition of the offsetting mechanism means that, from 2025 onwards, employers will no longer be able to use the accrued benefits from their MPF contributions to offset LSP liabilities. This change requires employers to adjust their financial provisions for LSP obligations and ensure compliance with the new legislative requirements. The Hong Kong government has pledged HK$33.2 billion to help employers bear part of their LSP costs after the effective date, by way of a subsidy derived from the employer’s contributions to the MPF scheme and the relevant Occupational Retirement Schemes Ordinance (ORSO) scheme, if any.
- Employees: The abolition enhances employee protection by ensuring that LSP payments are fully funded and not diminished by previous MPF contributions. Employees can expect to receive the full amount of LSP they are entitled to, without any deductions related to MPF offsets.
Key Takeaways
- The abolition of the MPF offsetting mechanism is a significant development in Hong Kong’s employment landscape, aiming to better protect employees’ long service benefits.
- Employers should prepare for this transition by reviewing their financial provisions for LSP liabilities and ensuring compliance with the new legislative requirements.
- Employees can anticipate receiving the full amount of LSP they are entitled to, without any deductions related to MPF offsets.
For more detailed information, refer to the Hong Kong Labour Department’s official announcement on the abolition of the MPF offsetting arrangement.