Global Employer Services News May 2022

Will COVID-19 affect the anticipated changes to the legal limit for claiming unpaid wages when an employer goes bankrupt?

At the time of writing, thousands of local cases of the Omicron coronavirus variant have been identified everyday, prompting that Hong Kong is facing its fifth wave of COVID-19 infections. Given the drastic deterioration of the epidemic situation in Hong Kong, to stem the spread of the Omicron variant, the government further strengthened the social distancing rules from 24 February 2022, with these measures to be in place till at least in Mid-April. The further tightening of social distancing rules is certain to have a detrimental effect on those businesses in the sectors that have been hardest hit by the pandemic, such as restaurants and bars, hotels, travel and entertainment, and health and fitness, especially as this has lasted for months and the fifth wave of COVID-19 is still in uncertainty. The leading companies in these sectors have predicted that the business losses could exceed HK$11 billion. The worst-case scenario would involve a surge of closures of restaurants, bars, fitness centres, barber shops, hair salons and beauty salons gradually. This would inevitably jack up the unemployment rate and the number of claims for unpaid wages made to the Protection of Wages on Insolvency Fund (PWIF) by workers whose employers have gone bankrupt.

Ever since early 2020, Hong Kong has been dealing with a challenging economic downturn resulting from the heavy blows dealt by the COVID-19 pandemic. With this new round of stringent anti-pandemic measures taking place during what is normally the Lunar New Year ‘golden period’ for businesses employers who are already facing a gloomy business outlook and problems with liquidity might consider winding up their businesses, and some may not be able to pay their employees before they become insolvent or go bankrupt.

When an employer has failed to pay employees’ entitlements due to insolvency or bankruptcy, the employees may present a winding-up or bankruptcy petition to recover debts owed by an insolvent employer under the provisions of Protection of Wages on Insolvency Ordinance. At the same time, the employees may also apply for an ex-gratia payment (including unpaid wages, pay for outstanding annual leave and statutory leave, wages in lieu of notice, and severance payments) from the PWIF. The PWIF is financed by an annual charge of HK$250 on each business registration certificate issued.

Under the provisions of The Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), when a company is wound up, certain debts relating to employee entitlements must be paid out of the company’s assets before settling any debts owed to other unsecured creditors. The CWUMPO also gives priority to employees over other creditors in respect of payments made from the PWIF.

According to the Protection of Wages on Insolvency Ordinance, the ex- gratia payment that may be made from the PWIF covers the following:

In general, a claim for payment from the PWIF must be made within six months of the last day of employment.

The headline statistics on the PWIF published by the Labour Department revealed the latest position of the fund. The following table outlines the number of claims for exgratia payments processed and approved, and the accumulated surplus of the PWIF from January 2017 to June 2021:

According to the above statistics, there was a significant increase in the number of claims for ex-gratia payments in the first six months of 2021. The number of claims approved and the total amount paid to claimants increased by more than one-third compared with the same period in 2020.

The ongoing COVID-19 pandemic has had a catastrophic effect on businesses throughout the region, but some sectors have been harder hit than others. With the social distancing rules being tightened up again, some business leaders have warned that more companies will face insolvency or bankruptcy and have to close. This would lead to more people losing their jobs, and more claims for ex-gratia payments. However, the current limits that apply to claims are based on average earnings that have not been updated for decades. For example, the current ceiling of HK$36,000 is equivalent to four months on an average monthly salary of HK$8,000, which has not been updated since 1996. With the prospect of more companies closing, the government urgently needs to consider amending the Protection of Wages on Insolvency Ordinance by increasing the caps on the four ex-gratia payment items that can be claimed from the PWIF. This would ensure that employees whose earnings exceed the current limit are protected.

On several occasions over the past two decades, representatives from the labour unions, accounting professions, the Legislative Council and various other stakeholders have voiced their concerns to the government about the cap on wages in arrears, arguing that it should be increased to align it with the latest median monthly pay. In July 2021, the labour unions reiterated that a review of the current ceiling on wages in arrears was imminent in view of the current unemployment situation. The statistics for 2020 show that the average claim for wages in arrears that year was HK$41,482. Because the cap is set at HK$36,000, this means that claimants were facing an average loss of HK$5,482. The labour unions therefore urged the government to increase the upper limit to HK$76,000 (equivalent to four times the adjusted monthly median pay of HK$19,000 for the fourth quarter of 2019) as soon as possible so that people are able to receive fair compensation for what they are owed by their former employers.

In December 2021, the Commissioner of Labour responded to questions from the media about the above request by confirming that the Board of the PWIF was investigating increasing the upper limits for ex-gratia payment items and considering appropriate adjustments for each item.

The government’s proposal to abolish the offsetting of severance payments and long service payments with employers’ mandatory contributions under the Mandatory Provident Fund (MPF) system (the ‘abolition arrangements’) would have a significant impact on the ex-gratia payments for severance pay that the PWIF would have to make – and, in turn, on the fund’s financial position. Therefore, the Board of the PWIF is reviewing the details of the abolition arrangements that have almost been concluded and will present their review and proposals to the Labour Advisory Board in early 2022. The Board is expected to report on its proposed amendments to the Protection of Wages on Insolvency Ordinance to the Legislative Council Panel on Manpower during the first half of 2022 and will also introduce the proposed amendments to the Legislative Council in 2022.

On a separate note, we are aware that most employers in Hong Kong are small or medium– sized enterprises that would be unable to afford a substantial rise in the annual business registration certificate fee (currently, HK$250 per certificate) to cover the proposed significant increase to the upper limits attached to the ex-gratia payment items covered by the PWIF, especially during the current economic downturn. In general, therefore, the business sector is unlikely to support the proposals mentioned in this article. In view of the complexity of this topic and the controversy surrounding it, in addition to the potential impacts on Hong Kong’s entrepreneurs, labour market, economy and wider community, it will be difficult for the employment and business sectors to reach a consensus on the proposed amendments and pass them to the Legislative Council for approval in 2022. However, we will continue to keep you informed as this matter continues to develop.

Joseph Hong