Background

At its first meeting held on 20 July 1999, the Bills Committee requested the Administration to provide statistics on wage reduction cases as well as information on the expenditure and up-to-date balance of the Protection of Wages on Insolvency Fund ("the Fund"). This paper sets out the requested information to facilitate Members' consideration of the Protection of Wages on Insolvency (Amendment) Bill 1999 ("the Bill").

Wage reduction cases known to the Labour Relations Service (LRS) of the Labour Department

2. When a case of wage reduction comes to the knowledge of the LRS, its staff will contact the employer to offer advice and render assistance if necessary. Based on cases known to the LRS during the period from 1 January 1998 to 30 June 1999, there were 45 cases of wage reduction involving 14 652 employees. In 15 of those cases, employers gave assurance to their employees (totalling 5 675) that severance payment (SP) would be calculated at the employee's wage level before wage reduction.

3. On 29 October 1998, the Labour Department issued a set of Guidelines on what to do if wage reductions and retrenchments are unavoidable ("the Guidelines") for employers and employees. It can be seen from the following table that after the issue of the Guidelines, more employers have assured their employees that SP will be calculated at the pre-reduction wage rate in the event of redundancy:

Table to show the number of wage reduction cases known to the LRS

		Before Guidelines were issued (1.1.98-28.10.98)	After Guidelines were issued (29.10.98-30.6.99)	Total (1.1.98-30.6.99)
(a)	No. of wage reduction cases	20	25	45
	No. of employees involved	8 059	6 593	14 652
(b)	No. of cases in (a) with assurance on calculation of SP	3 [15%]	12 [48%]	15 [33%]
	No. of employees involved	2 130 [26%]	3 545 [54%]	5 675 [39%]
Written assurance		3 (2 130 employees)	9 (2 585 employees)	12 (4 715 employees)
Verbal assurance		0 (0 employees )	3 (960 employees)	3 (960 employees)

Wage reduction cases known to the Wage Security Unit (WSU) of the Labour Department

4. All applications for ex gratia payment from the Fund are verified by staff of the WSU. During the period from 1 October 1998 to 30 June 1999, the WSU received 6 051 applications for ex gratia payment for SP. Based on wage records submitted to WSU, 151 (or 2.5%) of these applicants had their wages reduced prior to the insolvency of their employers. As far as we know, 12 applicants (see note below) had written assurances from their employers that the wage rate before reduction would be used in the calculation of SP in the event of redundancies. It is estimated that for those cases with written assurance, the total ex gratia payment for SP calculated on the basis of the pre-reduction wage would be $10,176 more than that calculated on the basis of the reduced wage.

[Note : For four of these applications, there would be no difference in the amount of ex gratia payment whether SP is calculated on the basis of the wage rate before or after wage reduction since the wages of the employees concerned after wage reduction were still higher than $22,500, which is the upper limit for the calculation of SP under the Employment Ordinance.]

5. It should be noted that the number of applications with written assurances in paragraph 4 may be on the low side. This is because in the course of verifying applications, there is no operational need for WSU staff to specifically ask for information on whether the employer has given an assurance to his employees as such information is not relevant to the determination of the amount of SP under existing provisions. For the same reason, the WSU does not have information on the applicants who have verbal assurances from their employers.

Financial position of the Fund

6. The accumulated balance of the Fund stood at $575.5 million as at 31 July 1999. In 1998/99, the Fund recorded an increase in applications by 35% over that of the previous year and had a deficit of $185.3 million. A breakdown of the income and expenditure of the Fund for 1998/99 is given at the Appendix.


Labour Department
September 1999

Appendix

	($ million)
INCOME
Levy Subrogation Income, Interest & Investment	172.8 81.5 254.3
EXPENDITURE
Payment of Claims
- Arrears of Wages - Wages in lieu of Notice - Severance Payment	158.1 79.5 186.6 424.2
Supervision Fee Miscellaneous expenses	14.6 0.8
Excess/(Deficit) of Income over Expenditure	(185.3)