FAQ

Even if no employees currently meet this criterion, the company must still be prepared to assess LSP for future employees who may reach this threshold. As employees continue to work for the company, it is likely that some will eventually reach the 5-year mark. The company must be ready to calculate and fulfill LSP obligations.

With the abolition of the MPF offset, LSP obligations may differ from what they were previously. Employers will no longer be able to use MPF contributions to offset their LSP liabilities for service rendered after May 1, 2025. This means that the total LSP obligations may increase, as employees will receive the full amount of their LSP without any deductions from their MPF contributions. The increase in LSP obligations can significantly affect the company's accounting statements. Companies will need to recognize these liabilities accurately in their financial reporting, which could lead to a material impact on both the Profit and Loss (P&L) statement and the balance sheet.

Compliance Issues: Organizations must comply with accounting standards that require the recognition of employee benefits, including LSP. Non-compliance can lead to regulatory scrutiny and potential penalties, including additional tax liabilities.

In specific cases, such as when an employee's salary significantly increases after the transition date or if they have a long tenure before the transition date, the long service payment/severance pay that the employee can receive after the cancellation of the 'offsetting' arrangement may be less than the amount under the current offsetting system. If this situation occurs, the government will make up the difference to ensure that the employee's entitled amount does not decrease!

The recognition criteria for the LSP (Long Service Payment) Subsidy as a receivable is generally met when the following conditions are satisfied:

Payment to Employee: The employer has either paid or is about to pay the LSP to the employee. This indicates that the obligation to provide the payment has been established.

Eligibility for Subsidy: The employer must be eligible to claim the related LSP Subsidy from the Hong Kong Special Administrative Region Government (HKSARG). This eligibility is crucial for recognizing the subsidy as a receivable.

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The Labour Department has repeatedly emphasized that if an employer dismisses current employees before May 1 of next year and then hires new ones, they cannot save on severance pay or long service payments; instead, they may incur additional expenses.

According to the Labour Department, after the “transition date” on May 1, employers can continue to use the accumulated MPF (Mandatory Provident Fund) contributions of current employees (whether mandatory or voluntary) to offset the severance pay or long service payments for the period before the restructuring. In contrast, the severance pay or long service payments for newly hired employees will be recalculated with a maximum limit of HKD 390,000, and none of this can be offset by the employer's accumulated MPF contributions.

Additionally, the severance pay or long service payments for the portion before the restructuring will be calculated based on the last month's salary before the “transition date.” Therefore, regardless of whether an employee's salary increases after the “transition date,” the amount for the severance pay or long service payments for the portion before restructuring will not increase. Moreover, retaining current employees allows the employer's MPF contributions to continue to grow, which can later be used to offset the severance pay or long service payments for the period before restructuring. Thus, in general, dismissing current employees before the “transition date” and then hiring new ones will likely result in higher severance pay or long service payment expenses compared to retaining the current employees.

If an employee commenced employment before May 1, 2025, their severance pay/long service payment will be divided into two parts based on the "transition date": the portion before the transition and the portion after. The portion before the transition will be calculated based on the salary and years of service at the time of the "transition date." Therefore, regardless of whether the employee's salary increases or their years of service continue to grow after the transition date, the amount for the severance pay or long service payment for the portion before transition is fixed and will not change.

Example 1: Assuming an employee has 4 years of service before the May 1 "transition date" and 3 years of service after, with a salary of HKD 15,000 in the last month before the transition date and HKD 18,000 in the last month before the termination of the employment contract. The calculation for their severance pay or long service payment is as follows:

Pre-transition portion: HKD 40,000 (15,000 x 2/3 x 4 years) Post-transition portion: HKD 36,000 (18,000 x 2/3 x 3 years) Total severance pay or long service payment: HKD 40,000 + HKD 36,000 = HKD 76,000 Example 2: Assuming an employee has 20 years of service before the May 1 "transition date" and 10 years of service after, with a salary of HKD 22,500 in the last month before the transition date and HKD 30,000 in the last month before the termination of the employment contract. The calculation for their severance pay or long service payment is as follows:

Pre-transition portion: HKD 300,000 (22,500 x 2/3 x 20 years) Post-transition portion: HKD 150,000 (22,500 x 2/3 x 10 years) Total severance pay or long service payment: HKD 390,000 (Since the pre-transition portion of HKD 300,000 plus the post-transition portion of HKD 150,000 equals HKD 450,000, and the maximum severance pay or long service payment is HKD 390,000.) It is important to note that after the cancellation of the "MPF offsetting," the total benefits received by the vast majority of employees, including those with long service, will be greater than what they would receive under the current "MPF offsetting" system. However, in special circumstances, such as if an employee's salary significantly increases after the "transition date," or if the employee has a longer period of service before the "transition date" but a shorter period after, the total benefits for employees who commenced employment before May 1, 2025, may be less than those received before the cancellation of the offset. Affected employees may apply to the government for a subsidy to cover the difference, and the government will announce details in due course.

If an employee commences employment on or after May 1, 2025, their severance pay/long service payment will be entirely based on the service years from the "transition date" onwards. The calculation method will remain the same as per the current Employment Ordinance, with no changes.