Ref : CB2/BC/21/98

Members Present :

Hon Eric LI Ka-cheung, JP (Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, SBS, JP
Hon Cyd HO Sau-lan
Hon LEE Cheuk-yan
Hon LEE Kai-ming, SBS, JP
Hon CHAN Yuen-han
Hon Andrew CHENG Kar-foo

Members Absent :

Hon Albert HO Chun-yan
Hon CHAN Kwok-keung
Hon LAU Chin-shek, JP
Hon CHOY So-yuk

Public Officers Attending :

Mr Ivan K B LEE

Principal Assistant Secretary for Education and Manpower

Mr TSANG Kin-woo

Assistant Commissioner for Labour (Labour Relations)

Mr Alan WONG Kwok-lun

Senior Labour Officer (Wage Security), Labour Department

Mr Michael LAM

Acting Senior Government Counsel

Clerk in Attendance :

Mrs Constance LI

Chief Assistant Secretary (2) 2

Staff in Attendance :

Mr Arthur CHEUNG

Assistant Legal Adviser 5

Mr Stanley MA

Senior Assistant Secretary (2) 6

I. Confirmation of minutes of meeting
[LC Paper No. CB(2)2843/98-99]

The minutes of meeting held on 20 July 1999 were confirmed.

II. Meeting with the Administration
[Paper No. CB(2)2832/98-99(01)]

Statistics on wage reduction cases

2. At the Chairman's invitation, Principal Assistant Secretary for Education and Manpower (PAS/EM) briefed members on the Administration's paper on wage reduction statistics. Referring to Mr LAU Chin-shek's previous request, PAS/EM also provided the following supplementary information regarding applications for ex-gratia payment from the Protection on Insolvency Fund (the Fund) in the 1998-99 financial year -

1. 89.3% of the applicants for wages in arrears were paid in full;

2. 95.5% of the applicants for wages in lieu of notice were paid in full;

3. 63.3% of the applicants for severance payments received their full entitlement under the old maximum entitlement ($36,000 plus 50% of excess entitlement) before the new maximum entitlement came into effect on 5 February 1999; and

4. 79% of the applicants received their full entitlement under the revised maximum entitlement ($50,000 plus 50% of the excess entitlement) from 5 February 1999 to 31 March 1999.

3. Referring to paragraph 2 of the Administration's paper, the Chairman sought clarification on the number of cases where the employers had given written assurance for calculation of severance payments based on the pre-reduced wages. PAS/EM clarified that the statistics in paragraph 2 were based on the 45 wage reduction cases known to the Labour Relations Service (LRS) of Labour Department (LD) during January 1998 - 30 June 1999. Assistant Commissioner for Labour (AC for L) said that out of the 15 cases in which the employers had given assurance, written undertaking was given in 12 cases involving 4715 employees. PAS/EM pointed out that most employers in these 45 cases still remained in business and had not become insolvent.

4. PAS/EM said that there were 6051 applications for ex-gratia payments under the Fund during 1 October 1998 - 30 June 1999. According to employment records submitted by the applicants, 151 of these applicants had their wages reduced prior to the insolvency of their employers, and 12 of them had obtained written assurance from their employers that their severance payments would be based on the pre-reduced wages. He added that as there was no requirement at present for applicants to report whether an employer's undertaking was given, the actual number of written assurance cases might exceed 12.

Financial position of the Fund

5. Mr HO Sai-chu said that given the deficit of 185.3 million in 1998-99 and the current balance of $575.5 million, he was worried that the Fund might be exhausted in a few years. Mr James TIEN shared the concern that if the number of applications under the Fund continued to increase, it would adversely affect the financial position of the Fund. He emphasized that the Liberal Party would only support the Bill on the understanding that there would be no consequential increase on the levy on business registration. Mr Kenneth TING echoed Mr TIEN's views.

6. Senior Labour Officer (Wage Security) (SLO/WS) responded that there had been surpluses under the Fund since it came into operation in 1985 and a deficit was recorded for the first time in 1997-98. The Fund was expected to have an increase in income in the current year, with the recovery of $32 million by way of subrogation from the assets of Yaohan Department Store after its winding-up. In reply to Mr James TIEN, SLO /WS said that most of the accumulated funds was deposited in banks and some $60 million was entrusted with a fund manager.

7. Responding to the Chairman, PAS/EM said that the current financial position of the Fund was healthy and that Government did not have plans to increase the levy in the near future. AC for L supplemented that the financial position of the Fund was being closely monitored by the Protection of Wages on Insolvency Fund Board (Fund Board) responsible for administering the Fund.

8. Responding to Mr HO Sai-chu, SLO/WS said that the annual levy income of the Fund was rather stable, ranging from $170 million to $180 million during the past few years. As regards the estimated expenditure from the Fund, SLO/WS said that the number of applications for ex-gratia payments under the Fund had stabilised in recent months following a record number of applications received in the first quarter of 1999.

Requirement for written undertaking by the employer

9. Mr LEE Kai-ming reiterated his objection to the mandatory requirement for a written undertaking by the employer as proposed in the Bill. He said that the Administration's statistics on wage reduction cases reflected that few employers gave written assurance to their employees. AC for L responded that according to the statistics, out of the 15 cases where the employers had given assurance to their employees, 12 (83%) were in the form of written undertakings.

10. Mr James TIEN pointed out that if verbal undertakings were to be accepted for calculation of severance payments based on the pre-reduced wages under the Fund, there was a possibility that some insolvent employers might abuse the scheme by collaborating with the employees. He expressed concern that verbal undertakings were difficult to verify especially when the insolvent employers could not be traced. This would be unfair to those responsible employers who paid the levy as well as their employees' severance payments. Mr LEE Cheuk-yan disagreed with Mr TIEN. He said that an employer could still collaborate with their employees by giving written undertakings. He expressed concern that the requirement would mean two different standards for cases to be dealt with by the Labour Tribunal and applications under the Fund. This would create inconsistencies and defeat the purpose of better protection for employees in insolvent cases. The Chairman commented that special treatment could be given to cases where the Labour Tribunal had adjudicated on the basis of employers' verbal undertakings.

11. Miss CHAN Yuen-han expressed strong objection to the requirement for a written undertaking. She said that based on her experience, most employers, particularly those in smaller business, were unwilling to give written undertakings on matters related to the protection of employees' benefits. There would be difficulties in implementing the proposed requirement. She considered that written undertakings were unnecessary as the present mechanism already required applicants to produce proof of wages for applications under the Fund. She was therefore strongly of the view that verbal undertakings should be recognized for calculation of ex-gratia severance payments under the Fund. Members belonging to the Federation of Trade Unions would propose Committee stage amendments to this effect.

12. Mr LEE Kai-ming stressed that few employers would give written undertakings; for example, very few employers put in writing the work arrangements and contingency plans for rainstorm black warnings. He said that the proposed transitional provisions in the Bill seeking written undertakings from employers would lead to more labour disputes. He emphasized that as verbal agreements were generally recognized under the existing legal framework, the proposed requirement of a written undertaking would set a bad precedent to other labour law. He suggested leaving it to the Labour Department to decide what proof would be required in these cases.

13. Mr HO Sai-chu recapitulated the purpose of the Bill. He said that the Labour Advisory Board (LAB) supported the legislative proposal to protect entitlements of those employees who had wage reductions prior to the insolvency of their employers. However, as the Fund was financed by levy from business registration, it would be necessary to safeguard disbursement of public funds by requiring clear-cut evidence for payments. He therefore supported the requirement for a written undertaking. Mr James TIEN echoed the same view, stressing the difficulties to verify a verbal agreement when the insolvent employer could not be traced.

14. Mr LEE Cheuk-yan suggested the Administration to consult the Labour Advisory Board again as to whether a written undertaking was absolutely necessary for payments under the Fund. PAS/EM noted the suggestion.	Adm

Clause-by-clause examination

15. The Chairman then invited members to examine the Bill clause by clause.

Clause 1 - Short title

16. Members had no comment on the clause.

Clause 2 -Payment

Period of application

17. Referring to the proposed subsection 2B(a) under section 16, Mr LEE Cheuk-yan asked why a period of 12 months, instead of 24 or 36 months, was set for application of the Bill. AC for L replied that it was necessary to set a cut-off period for practical reasons, and that both LAB and the Fund Board had agreed that 12 months would be reasonable.

18. Responding to Miss CHAN Yuen-han, SLO(WS) explained that the phrase "whichever results in a lesser amount" in subsection 2B(a)(ii)(B) was to provide certainty that entitlements to severance payments would not exceed those immediately before the wage reduction. This was to prevent employers collaborating with employees by giving written undertakings on entitlements higher than that before the wage reduction. Miss CHAN expressed concern that the phrase might give rise to disputes in unforeseen circumstances and suggested that calculations could be based on proof of actual wages before the reduction. In response to the Chairman, SLO(WS) said that apart from the written undertaking, the Board would also examine the wage records of applicants before and after the wage reduction. For an employee whose wages had been reduced from, say, $10,000 to $9,000, the Commissioner for Labour would not approve an ex-gratia payment based on a wage higher than $10,000. Mr James TIEN indicated support of the Administration's proposal.

Multiple wage adjustments within 12 months

19. On subsection 2B(d)(ii), Mr LEE Cheuk-yan asked how the entitlements would be calculated where there was more than one wage reduction within 12 months immediately before the date of termination of employment. He cited an example that an employee might have two wage reductions and a wage increase subsequently within a 12-month period before dismissal. PAS/EM responded that if several wage adjustments had occurred during the preceding 12 months, the most recent wage reduction (and written undertaking) would be taken for calculation of the employee's severance payment, in line with the principle that a new contract should supersede the previous one. AC for L said that the provision was to cater for the rare occasions where there was more than one wage adjustment in 12 months preceding the termination of employment. Alternatively, an employee could opt for calculation based on his last month's wages before termination of service, or the average wage over the preceding 12-month period in accordance with the Employment Ordinance.

20. Mr LEE Cheuk-yan pointed out that the terms and conditions for each wage reduction could vary. The Bill should therefore allow some flexibility in the calculation of entitlements. He suggested an amendment be introduced so that the highest wage specified in any undertaking would be adopted for calculation of ex-gratia payment in cases where wage adjustment had occurred more than once within 12 months before termination of employment. Miss CHAN Yuen-han agreed to the suggestion, pointing out that a slight adjustment could mean a substantial reduction of severance payment to those long service employees. Miss Cyd HO and Mr LEE Kai-ming expressed support of Mr LEE Cheuk-yan's suggestion. Mr James TIEN opined that while the example quoted by Mr LEE Cheuk-yan in paragraph 19 rarely happened, he would agree to using the highest wage specified in any undertaking during the 12-month period before dismissal for calculation of entitlements under the Fund.

21. The Chairman requested the Administration to consider members' suggestion of amending the relevant provisions of the Bill to ensure fair calculation of ex-gratia payment for cases involving multiple adjustments in 12 months. He stressed that such amendment should base on the understanding that it would not lead to abuse. PAS/EM undertook to consult LAB and the Fund Board.	Adm

Clause 3 - Transitional

22. In response to Miss CHAN Yuen-han, PAS/EM explained that the transitional arrangement in clause 3(1)(a) was to allow two months for employers to confirm in writing their previous verbal undertakings to pay severance payments on the basis of pre-reduced wages. Responding to Miss CHAN's reservation about the adequacy of a two-month period, AC for L said that the proposal had been thoroughly discussed by LAB which considered that two months would be sufficient for making the arrangement. He added that after enactment of the Bill, the Government would launch a series of publicity programmes to encourage employees to obtain written undertaking from their employers. Mr HO Sai-chu confirmed that LAB supported the two-month period. He said that a longer period might not be in the interest of employees as the legislative intent was to seek better protection of their entitlements as early as possible. If employers declared insolvent before giving written confirmation, disputes over severance payments would arise.

23. Mr LEE Cheuk-yan said that if verbal undertaking was accepted for ex-gratia payment from the Fund, it would not be necessary to provide a transitional arrangement. PAS/EM reiterated that after thorough discussion with LAB and concerned parties, a written undertaking was considered to be the best means to give protection to employees' entitlements in case of insolvency. It could also reduce unnecessary disputes and save the employees' time and efforts in proving his entitlement for applications of ex-gratia payment.

The way forward

24. In concluding the discussion, the Chairman said that members had divided views over the requirement of written undertakings. It was however the consensus view of the meeting that the Administration should consider an amendment to clause 2 to provide, where wage adjustment occurred more than once in 12 months, for calculation to be based on the highest wage specified in any undertaking during the 12 months immediately before the employee was dismissed or laid off.

25. The Chairman advised the Administration to provide a written response and draft CSAs to address members' concern in about three weeks. The Bills Committee would then decide whether another meeting would be held to discuss the draft CSAs.	Adm

26. There being no other business, the meeting ended at 12:30 pm.

Legislative Council Secretariat
29 October 1999