Legislative Council Panel on Manpower
Meeting on 28 July 1998

Background

Under the Protection of Wages on Insolvency Ordinance (Cap. 380), an employee who is owed wages, wages in lieu of notice and severance payment by his insolvent employer may apply for ex-gratia payment from the Protection of Wages on Insolvency Fund (the Fund). The Fund is administered by the Protection of Wages on Insolvency Fund Board and mainly financed by an annual levy of $250 on each business registration certificate. At present, the maximum coverage of the Fund is:

1. wages on an employee for services rendered during the four-month period prior to the last day of service up to $36,000;
   
   
2. wages in lieu of notice up to one month's wages or $22,500, whichever is the less; and
   
   
3. severance payment up to $36,000, plus 50% of that part of the employee's entitlement to severance payment in excess of $36,000.
   
   

Proposal 1: Increasing the payment limit of the Fund

2. We are prepared to review the present level of payouts covered by the Fund, given that the last revision was in February 1996. We will consult the Protection of Wages on Insolvency Fund Board and the Labour Advisory Board on this. We will also consult the Legislative Council Panel on Manpower in the process. However, we keep an open mind at this juncture on the appropriate levels of increase, if any, in the various payments. In examining the matter, the following factors are relevant:

• The coverage of the Fund was increased very substantially in February 1996: Arrears of wages (AW) has been doubled from up to $18,000 to up to $36,000; wages in lieu of notice (WILON) from up to $6,000 to up to $22,500; and severance payment (SP) from up to $24,000 plus 50% of any excess in entitlement to up to $36,000 plus 50% of any excess in entitlement. The maximum amount of ex-gratia payment an applicant can now receive from the Fund is $211,500.
  
  
• In 1997, 94%, 98% and 75% of the applicants were able to recover their entitlements in full in respect of AW, WILON and SP respectively. Thus, the vast majority of the applicants to the Fund are able to receive a very high proportion of their entitlements if not in full.
  
  
• The Fund Board takes the view that ex-gratia payments are meant to provide a kind of prompt relief and not full compensation to workers who are owed wages by their insolvent employers.
  
  
• Hon LEE Cheuk-yan has proposed that the payment limits of the Fund be increased as follows:
  
  

  AW -	from $36,000 to $44,000
  WILON -	from $22,500 to $25,000
  SP -	from $36,000 plus 50% of any excess in entitlement to $44,000 plus 50% of any excess in entitlement.

  
  The proposal, if implemented, would incur additional payment from the Fund of about $18.5 million - or about 10% of the Fund's levy income in 1997-98 ($181 million).
  
  
• The Fund has been depleting very quickly since the end of 1997. Within a short period of nine months, the total accumulated fund has been reduced from its peak of $931 million in October 1997 to $831 million in June 1998. In addition, the Fund has started to operate at a deficit as a result of a significant increase in applications. In 1997-98, the Fund registered a deficit of $25 million. The deficit is expected to increase further to $90 million in 1998-99, by the end of which the estimated total accumulated fund would fall to about $763 million. Given the current economic situation, this falling trend is likely to continue.
  
  
• The Fund should be managed prudently to cope with all contingencies. Having regard to the recent downturn in the economy, we expect that the number of applications will remain high for quite some time to come. For the first six months of 1998, the total payouts from the Fund have been doubled to about $164 million as compared with the same period last year. This, coupled with fewer company registrations, would put severe pressure on the Fund's resources.
  
  
• It should be stressed that one single big insolvency case such as Yaohan Department Store could involve payment from the Fund to the tune of $67 million. A reasonable level of reserve is therefore essential if there was a heavy drain on the Fund as a result of a further worsening of the economy.
  
  
• The Law Reform Commission has recently made recommendations concerning corporate rescue and the abolition of preferential payments for companies in insolvency cases. If adopted, these recommendations would have an impact on the Fund.
  
  
• The Fund is financed by a levy of $250 per annum on each business registration certificate and branch registration certificate.
  
  

Proposal 2: Extending the scope of coverage of the Fund

3.At present, an applicant's claim for wages, including end-of-year payment and paid leave under the Employment Ordinance, is already covered by the Fund provided that the service rendered is within four months prior to his last day of service. Thus there is no need to widen the scope of protection further in this respect.

Proposal 3: Abolition of the means test in applying for legal aid

4.According to the Legal Aid Department, in a group of employees seeking legal aid to apply to the Court to wind up a company, usually an eligible employee could be found. If he has passed the means test, he would be granted legal aid for the purpose of filing a petition to wind up the company. The action would indirectly benefit other co-employees some of whom may not be eligible for legal aid. The present limit on the financial resources of an individual applicant seeking legal aid is $169,700.

5.Regarding the suggestion of exempting these employees from means test in their legal aid application, the current provisions in the Legal Aid Ordinance do not empower the Director of Legal Aid to grant exemption to any type of applicants. A recent review of the legal aid policy also recommends that there should be no change to this policy.


Education and Manpower Bureau
July 1998