LC Paper No. CB(2)93/98-99(04)

INTRODUCTION

The Protection of Wages on Insolvency Ordinance ("the Ordinance") came into effect on 19 April 1985. Under the Ordinance, an employee may apply for an ex gratia payment from the Protection of Wages on Insolvency Fund ("the Fund") in respect of arrears of wages, wages in lieu of notice and severance payment due to him when his insolvent employer is unable to discharge debts. Having regard to various factors, the Hong Kong Confederation of Trade Unions ("CTU") proposes that the maximum limit of ex gratia payment for arrears of wages be increased from the existing level of $36,000 to $44,000, that for wages in lieu of notice be increased from the existing level of $22,500 to $25,000 and that for severance payment be increased from $36,000 and half of the entitlement in excess of $36,000 to $44,000 and half of the entitlement in excess of $44,000.

BACKGROUND AND ARGUMENT

Protection of Wages on Insolvency Fund

2. Under existing legislation, coverage of the Fund includes:

(1)	arrears of wages for services rendered not more than six months prior to the date of application, subject to a maximum limit of $36,000 or four months' wages, whichever is the less;
(2)	unpaid wages in lieu of notice, subject to a maximum limit of one month's wage or $22,550, whichever is the less; and
(3)	severance payment in arrears, subject to a maximum limit of $36,000, or an amount equivalent to the aggregate of $36,000 and half of the entitlement to severance payment under the Employment Ordinance in excess of $36,000.

Proposed Improvements

(1) Increasing the coverage of the Fund

3. The Asian financial turmoil has dealt a heavy blow to Hong Kong's economy, resulting in a significant increase in the number of firms that were wound up, which in turn has worsened the unemployment problem in the territory. The latest quarterly unemployment rate has hit 4.5%, with the number of unemployed workers reaching 144,000. Therefore, there is indeed a pressing need to offer better protection to unemployed workers. In view of the above situation, CTU proposes that the coverage of the Fund be increased so as to better safeguard the statutory rights of employees who have been dismissed with unpaid wages and alleviate the anxiety and hardship of unemployed workers.

4. It has been nearly two and a half years since the maximum coverage of ex gratia payments was revised in February 1996. So it is now appropriate time to review the coverage, in order to reflect wage and price movements during the period. The current maximum coverage was determined on the basis of the monthly median wage in 1995 (that is, $9,000 x 4 = $36,000). As the monthly median wage in 1998 is estimated at $11,000, the maximum coverage should be revised to $44,000 according to the same formula.

5. Moreover, the accumulated inflation rate for the period from February 1996 to May 1998 is 12%. As such, the maximum coverage for wages in lieu of notice should be increased accordingly from $22,550 to $25,000. In 1996-97, 226 persons applied for an amount of ex gratia payment in respect of wages in lieu of notice exceeding $22,500, accounting for one third of the total number of applicants. Therefore, it will be of benefit to employees as a whole to increase the coverage.

6. Based on current level of monthly median wages, the ex gratia payment in respect of severance payment should be realistically increased from the present level of $36,000 to $44,000. On the basis of the figures for 1996-97, over 30% of employees (992 employees in 1996-97) will benefit from such an increase.

Financial implications

7. The Protection of Wages on Insolvency Fund is financed by a levy of $250 per annum on each business registration certificate. Its accumulated surplus totalled $905 million at the end of March 1997. The Fund generated an income of nearly $240 million in 1996-97 while paying out $180 million in exgratia payment, which means that the net income during that period was about $47 million. Although the number of applicants under the Fund increased by twofold during the first half of 1998 and the amount of ex gratia payment totalled $160 million, almost doubling the previous figure, the Fund still has a surplus of $830 million. Assuming the number of applicants will increase significantly under the current highly unfavourable economic conditions, resulting in a possible annual deficit of up to $100 million for the Fund, the accumulated surplus of $800 million will be enough to support it for six more years before there is the need to raise the danger signal. If the proposal is endorsed, the amount of ex gratia payment for 1998-99 is estimated to increase by about $18.5 million¹, which will only reduce the amount of the accumulated surplus of the Fund, and will not result in additional expenses for both the Government and employers.

(2) Expanding the scope of the Fund

8. There is also a problem with the scope of the Protection of Wages on Insolvency Fund in that employees' statutory interests are not fully covered by the Fund. The Protection of Wages on Insolvency Ordinance should therefore be amended accordingly, so as to extend the scope of the Fund to cover all interests of employees under labour laws (with the exception of compensation for work injury), such as pro rata year-end gratuity and pro rata annual leave.

(3) Exempting legal aid applicants from the means test

9. Moreover, quite a number of workers have been forced to give up applying to the court for liquidation of the company simply because they fail the means test for legal aid, resulting in their not being able to receive the ex gratia payment from the Protection of Wages on Insolvency Fund. The CTU proposes to exempt this group of applicants from the means test, so that they can enjoy the full benefits of the protection of wages on insolvency.

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1 the proposed additional amount of ex-gratia payment is calculated as follows:

Item	The number* of applicants who have not been fully compensated in 1998-99	The proposed additional amount for each applicant on average ($)	The additional amount($ 000)
wages in arrears	424 x 2 = 848	(44,000-36,000)/2=4,000	3,392
wages in lieu of notice	127 x 2 = 254	(25,000-22,500)/2=1,250	318
severance payment	922 x 2 = 1,844	44,000-36,000=8,000	14,756
Total			18,466

Consultation

10. This proposal will be submitted to the LegCo Panel on Manpower on 28 July 1998 and the CTU will seek the views of employers' and employees' organizations in August.

The Hong Kong Confederation of Trade Unions

22 July 1998

*According to the latest statistics, the number of applicants in the first half of 1998 increased by nearly twofold over the corresponding period in 1997, while the number of applicants in 1997-98 was more or less the same as that in 1996-97. The above estimated number is arrived at by multiplying the number of applicants in 1996-97 by two.