Legislative Council

LC Paper No. CB(2)2843/98-99
(These minutes have been
seen by the Administration)

Ref : CB2/BC/21/98

Bills Committee on
Protection of Wages on Insolvency (Amendment) Bill 1999

Minutes of Meeting
held on Tuesday, 20 July 1999 at 4:30 pm
in the Chamber of the Legislative Council Building

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 LEE Kai-ming, SBS, JP
Hon LAU Chin-shek, JP
Hon CHOY So-yuk

Members Absent :

Hon Cyd HO Sau-lan
Hon Albert HO Chun-yan
Hon LEE Cheuk-yan
Hon CHAN Kwok-keung
Hon CHAN Yuen-han
Hon Andrew CHENG Kar-foo

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 Sunny CHAN
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. Election of Chairman

Mr Kenneth TING Woo-shou, Member of the highest precedence, presided the meeting for the election of Chairman of the Bills Committee. The Presiding Member called for nominations for the Chairman. Mr James TIEN nominated Mr Eric LI, and the nomination was seconded by Miss CHOY So-yuk. Mr Eric LI accepted the nomination. There being no other nomination, the Presiding Member declared Mr Eric LI elected as Chairman of the Bills Committee.

2. Mr Eric LI then took over the chair of the meeting.

II. Meeting with the Administration
[Legislative Council Brief (EMB CR7/3051/82 XVIII), LC Paper Nos. CB(3)1478/98-99, CB(2)941/98-99(01) and CB(2)941/98-99(01)]

3. The Chairman invited representatives of the Administration to brief members on the Bill. Principal Assistant Secretary for Education and Manpower (PAS(EM)) highlighted the crucial points in the Legislative Council Brief on the Bill -

  1. The primary purpose of the Bill was to improve protection to employees who had their wages reduced and were owed severance payments by their insolvent employers. The Bill proposed that ex-gratia payments for severance payments from the Protection of Wages on Insolvency Fund (the Fund) should be calculated according to the wage level before wage reduction, if the employer had given written undertaking to that effect. This would apply to wage reductions within 12 months immediately before the termination of employment.

  2. The Bill also provided a transitional arrangement for employers who had given a verbal undertaking before the Bill came into operation to confirm such undertaking in writing, within two months after commencement of the Amendment Ordinance.

Requirement for an employer's written undertaking

4. Mr LEE Kai-ming expressed grave concern about the requirement for a written undertaking by employer. As the Employment Ordinance recognized both verbal and written agreements between employers and employees, Mr LEE queried why a verbal undertaking by the employer could not be accepted for ex-gratia payments under the Bill. He was concerned that the statutory requirement for a written undertaking would have adverse implications on similar cases to be dealt with by the Labour Tribunal.

5. PAS(EM) responded that the validity of employers' verbal undertakings for severance payments based on pre-reduced wages under the Employment Ordinance would not be affected by the Bill. For ex-gratia payments to be made from the Fund, it was proposed that a written undertaking by the employer would be required. It was because there could be practical difficulties to locate the insolvent employers to verify whether a verbal undertaking had indeed been given.

6. Mr LEE Kai-ming said that the Bill should aim at providing more protection to employees who were owed severance payments by their insolvent employers after agreeing to wage reduction. As the Labour Tribunal had previously adjudicated without much difficulties on cases involving only verbal undertakings, he strongly objected to making the written undertaking a mandatory requirement for the purpose of severance payments under the Fund.

7. Assistant Commissioner for Labour (Labour Relations) (AC for L(LR)) responded that written undertakings would give more protection to employees because this could reduce disputes, especially when the insolvent employers could not be located for verification of the verbal undertakings. He pointed out that the proposed calculation of ex-gratia payments for severance payments under the Bill was more favourable than that provided in the Employment Ordinance. As payments from the Fund were public monies, it would be necessary to avoid abuses by requiring written undertakings from employers. AC for L(LR) stressed that the issues had been discussed in detail by Labour Advisory Board (LAB) which had eventually agreed to the proposal as contained in the Bill.

8. Mr LAU Chin-shek expressed concern that the employees' interests were jeopardized in those cases where the employees had agreed to wage reduction in good faith but the employer subsequently became bankrupt and disappeared. He stressed that employees should be paid for what they were entitled and there should not be additional barriers, such as the statutory requirement for written undertaking by the employer before wage reduction. Mr LAU considered the proposed arrangement unfair to employees and to those responsible employers who paid all severance payments. It appeared to him that Government was encouraging employers to propose wage reductions which could also reduce the employers' commitment to severance payments. In this connection, he requested the Administration to provide information on the actual number of cases where employees got their entitled severance payments in full since November 1998.Adm

9. AC for L(LR) responded that the requirement for a written undertaking by employer would help the employees concerned to obtain assurance from their employer that the severance payments would be calculated on the basis of pre-reduced wages. If the employer did not agree to give such undertaking, the severance payments would be based on the average wages of the preceding 12 months before termination of employment, as provided in the Employment Ordinance. The requirement of a written undertaking would help employees beware of the implications on severance payments before agreeing to wage reduction. In response to Mr LAU Chin-shek, AC for L(LR) stressed that the Administration did not encourage wage reduction, and the intention was only to encourage agreement in the form of written undertaking between employers and employees regarding wage reduction.

10. Mr LEE Kai-ming held a strong view that the employees should receive their entitled severance payments and their rights should be protected in the Bill. He considered that the employer's proposal of wage reduction was tantamount to termination of the original employment contract and the employees could demand for severance payments based on their pre-reduced wages immediately. As most employers did not have the practice of giving written undertakings, Mr LEE urged the Administration to continue to accept verbal undertakings for the purpose of ex-gratia payments under the Fund. He said that while he supported and encouraged written undertakings by the employers, it would be wrong to deny employees from getting their entitlements where only verbal undertakings had been given.

11. AC for L(LR) responded that the Bill had addressed this concern and provided for a transitional arrangement. Employers who had previously given a verbal undertaking to pay severance payments on the basis of pre-reduced wages could confirm such undertaking in writing within two months after commencement of the Amendment Bill. Such written undertakings would be deemed to take effect before the wage-reduction for the purpose of the Bill. Mr LEE Kai-ming expressed doubt on the effectiveness of the provision, since non-compliance by the employer was not made an offence in the Bill. In this connection, he said that there was only limited achievement of the efforts made by Labour Department in promoting written employment contracts in past years. AC for L(LR) said that the Labour Department had widely publicised the sample written employment contract since its promulgation in early 1999 and that many organizations had already adopted the sample employment contract.

12. Mr HO Sai-chu, who was also member of LAB, briefed the Bills Committee on the background and deliberations of LAB on the legislative proposal. He said that LAB shared the concern about employees not receiving their entitled severance payments from the insolvent employers, and that LAB had agreed that such payments should be made from the Fund. However, the present balance of the Fund could only cater for about 3000 claims based on the maximum amount of ex-gratia payments ($228,500) provided in the Protection of Wages in Insolvency Ordinance (the Ordinance). To safeguard the Fund from possible abuses, it was agreed that a written undertaking by the employer would be necessary for making severance payments from the Fund. He pointed out that the present mechanism also required proof of the employees' previous wages.

13. Mr LAU Chin-shek reiterated his disagreement with the requirement for a written undertaking by employer. He said that he would consider moving a Committee Stage amendment to give recognition of verbal agreement for the purpose of the Ordinance.

Financial position of the Fund

14. Mr James TIEN noted that the balance of the Fund had decreased from $777 million as at 30 November 1998 to $692.2 million on 28 February 1999. In view of the increased cases of company bankruptcy, Mr James TIEN was concerned that the funds might run out shortly. He therefore inquired about the financial position of the Fund and whether Government would increase the annual levy of $250 for each business registration or inject funds to meet the increased demand for ex-gratia payments under the Ordinance.

15. Regarding the estimated financial position of the Fund in the coming three years, the Chairman referred members to the Administration's reply to his question at the Council meeting on 3 February 1999. Hansard of the question and the Administration's reply was tabled at the meeting and subsequently issued to members vide Paper No. CB(2)2619/98-99(01).

16. On the up-to-date balance of the Fund, Senior Labour Officer (Wage Security) advised that the accumulated funds were about $600 million at the end of June 1999. PAS(EM) assured members that the financial position of the Fund was healthy and no levy increase was envisaged at the present stage. He said that as a collective insurance scheme, the Fund was financed by levy from the business sector and that Government would not inject funds to the scheme.

17. Mr James TIEN said that it was unfair for good employers to subsidize irresponsible employers who disappeared after insolvency. Mr Kenneth TING held a similar view. He asked how the Administration could ensure that the Fund would maintain its healthy financial conditions. PAS(EM) responded that the Bill did not propose a fundamental change to the operation of the Fund, and he saw no reason why the Fund would be exhausted in a short time given its healthy operation since 1985.

18. Responding to Mr James TIEN, AC for L(LR) said that about 90% of the insolvent employers of small companies could not be located, and ex-gratia payments were made to the employees affected based on documentary proof such as wage and other employment records produced by applicants.

19. Referring to some members' concerns about additional financial burden on employers who remained in business, Mr LEE Kai-ming made the following points -

  1. The Fund would bring benefits to employers including those responsible employers who faced short-term financial difficulties. The existence of the fund had instilled confidence among workers who would be more willing to delay making a bankrupt petition against their employers regarding the latter's failure to pay wages seven days after the due dates. The Fund had therefore contributed to good labour relations and the good image of Hong Kong as an ILO country.

  2. The Fund started operation with a capital of only $40 million, and the highest accumulated balance once stood at about $1,000 million. The ex-gratia payments made by the Fund would be recovered from the assets of the insolvent employers. The Fund had a sound financial record and there should not be worries about its financial position.

20. Mr James TIEN asked whether other ILO countries had imposed levy on companies for the operation of a Fund to make ex-gratia payments on behalf of insolvent employers. AC for L(LR) responded that some countries had adopted different models for employment-related compensation or operated a social insurance/security system. He said that the primary purpose of the Fund was to provide prompt relief in the form of ex-gratia payment to employees whose employers had become insolvent and that it had a significant role in maintaining social stability and harmonious labour relations.

21. The Chairman informed members that the Hong Kong Society of Accountants had previously made a submission on the Consultation Paper on Corporate Rescue and the Fund in which options for payment of workers' entitlements were discussed. He requested the Clerk to circulate the paper to members of the Bills Committee for reference.

(Post-meeting note : The submission of the Hong Kong Society of Accountants on the subject was circulated to members vide Paper No. CB(2)2619/98-99(02).)

Increasing the limit of severance payments to a maximum of $50,000

22. In response to Mr James TIEN, PAS(EM) confirmed that a resolution had been passed by the Legislative Council on 3 February 1999 to increase the limit of severance payments under the Fund to $50,000, plus 50% of the excess entitlement. The new limit came into effect on 5 February 1999.

Further information from the Administration

23. In view of members' concern about the number of cases where verbal undertakings had been accepted for application of ex-gratia payments, the Chairman advised that the Administration should provide statistics and analysis on the following -Adm

  1. the actual number of insolvency cases, categorized by severance payments which were paid on the basis of pre-reduced wages or reduced wages in the past nine months; and

  2. any further information which might help address members' concerns.

III. Way forward and date of next meeting

24. Members considered that as the legislative proposal had been thoroughly discussed by LAB and the Panel on Manpower, it would not be necessary to invite deputations to repeat their views to the Bills Committee.

25. Members agreed to hold the next meeting on 20 September 1999.

26. There being no other business, the meeting ended at 5:35 pm.

Legislative Council Secretariat
18 September 1999