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What protection do employees have if employers become insolvent in Hong Kong?

Success can be short-lived in today’s business environment, with much depending on how well a company is able to adapt and respond to change. And whether it is large or small, the failure of a firm will impact upon many of its stakeholders. 

Employees are particularly vulnerable; their financial security following an insolvency may be affected both by loss of employment and unpaid wages. Hong Kong law recognises the special status of employees when insolvency occurs and provides three principal mechanisms to protect their interests. Let’s examine each of these laws in turn.

Payroll obligations

Under Hong Kong law, employers are required to pay an employee’s wages no later than seven days after the end of the relevant wage period or (where relevant) the last day of employment. Failure to do so is an offence and, on conviction, the employer (and potentially its directors and managers) may be subject to both fines and imprisonment. 

Additionally, employees have a right to be paid interest on unpaid wages and, if wages are not paid within one month of the date they fall due, the employee may terminate the employment with immediate effect. Such a termination will be deemed to be a dismissal by the employer, and the employee will be entitled to certain amounts not normally payable upon a resignation, such as payment in lieu of notice and, possibly, severance or long service pay. 

These provisions provide a strong incentive for employers to ensure that payroll obligations are promptly met at all times, regardless of the company’s financial health.

The Protection of Wages on Insolvency Fund

The Protection of Wages on Insolvency Fund exists to provide a safety net for employees who are owed money by an insolvent employer. Such parties can seek compensation from the fund, within limits. 

Businesses registered in Hong Kong contribute to the fund through an annual levy (currently HK$250 per year), which is collected by the Inland Revenue Department. Originally, payments to employees could only cover unpaid wages (up to HK$36,000 over the preceding four months), wages in lieu of notice (up to HK$22,500) and severance payments (up to HK$50,000 plus an amount equal to 50 per cent of any excess entitlement). 

In 2012, the scope of protected payments was extended to include accrued, but unused, statutory annual leave and statutory holidays — up to a combined total of HK$10,500. Applications to the fund must generally be made within six months of the termination of employment. 

The number of applications to the fund has fallen sharply since the global financial crisis. 
In the 2013-14 financial year, the fund approved 1,771 applications for payments in respect of unpaid entitlements, resulting in approximately HK$47.6 million being paid out to employees. In comparison, during 2008-09, the fund approved 6,071 applications and paid out a total of HK$129.5 million to employees. 
If the amount recoverable from the fund is less than that owed to an employee, they must seek payment of the shortfall out of the company assets that are available for distribution when a firm is being wound up, by filing a proof of debt with the Official Receiver’s Office.

The Winding Up and Miscellaneous Provisions Ordinance

In the winding up of any business in Hong Kong, the debts of the business are prioritised according to the category of creditor. Creditors whose debts are secured will be paid first, while unsecured creditors will be left to share in whatever assets are available after all secured debts have been paid. 

Importantly for employees, the Companies (Winding Up and Miscellaneous Provisions) Ordinance gives preference to any amounts due to them over the debts of other unsecured creditors. If the assets available for distribution to unsecured creditors are insufficient to meet all employees’ claims, they will receive a percentage of the amounts due in preference to other unsecured creditors. 

This article appeared in the Classified Post print edition as The law protects staff when a firm goes bust.