An employer should pay a severance payment in case an employed under continuous contract for not less than 24 months is dismissed due to redundancy or is laid-off. (Note: However, a set of contracts for employment for less than 24 months which have a duration shorter than 24 months may still be regarded as one contract. In this article, you will learn about.
Content Outline
What is Redundancy and Severance Payment
An employee is deemed to have been dismissed due to redundancy if the dismissal is the result of:
- the employer wants to close or has the intention to close the business.
- either the employer has ceased or intends to cease business at the location where the employee was employed.
- the business that requires employees to perform specific work or the work that the employee was hired for, is expected to cease or diminish.
Severance payment, also known as severance pay or termination pay, is compensation provided by an employer to an employee upon termination of their employment. It is typically offered as a financial cushion to help the employee transition to new employment or cover expenses during the period of unemployment.
The amount of severance pay can vary based on factors such as length of employment, position within the company, company policy, and local labor laws. Severance pay is often calculated based on the employee’s salary or wages and may be given as a lump sum or distributed over a period of time.
In Hong Kong, severance payments are regulated under the Employment Ordinance (Cap. 57). According to Hong Kong’s employment laws, employers are required to provide severance payments to eligible employees under specific circumstances, primarily related to redundancy or layoff.
What is Lay-off
An employee’s pay often depends on the work provided. If work or wage payment is absent for a specific period, the employee is considered laid off. This period is typically if they don’t work or get paid:
- for 2 normal working days in a 4-week cycle; or
- for a third of the total normal working days in 26 consecutive working weeks.
Non-work days like days off, annual leave, and public holidays don’t count.
To claim for severance payment, employees should submit written notice within 3 months after the dismissal or lay off takes effect. The deadline can be extended with approval from the Commissioner for Labour. Employers must pay the severance payment within 2 months after receiving the notice.
What Are The Amount of Payment
The formula provided is applicable for both severance payments and long service payments.
| Monthly-paid employee | (Last month of wages x ⅔)^ x Reckonable years of service |
| Daily-rated or Piece-rated employee | Any 18 days’ wages^ chosen by the employee out of the last 30 normal working days x Reckonable years of service |
Service should be reckoned on a pro-rata basis for an incomplete year.
^The total should be less than ⅔ of $22,500. Employees may also choose to use the average wages from the last 12 months for the calculation.
MPF Offsetting
The Mandatory Provident Fund (MPF) offsetting arrangement allows employers to use their contributions to offset Long Service Payment (LSP) and Severance Payment (SP) under the Employment Ordinance. This arrangement was designed to help employers manage their financial obligations while ensuring employees still receive their retirement benefits.
Abolition of MPF Offsetting Arrangement
The abolition of the MPF offsetting arrangement takes effect on 1 May 2025, applicable to employees who cease employment on or after the transition date.
Key changes include:
- Employers can no longer use MPF from mandatory contributions to offset LSP/SP for service after 1 May 2025.
- MPF from voluntary contributions can still be used to offset LSP/SP, regardless of whether the service is before or after the transition date.
- Employees who started employment before the transition date but leave on or after it can still have MPF from employer contributions offset LSP/SP for years of service before 1 May 2025.
- Employees who cease employment before 1 May 2025 remain under the old offsetting rules.
The abolition has no retrospective effect, meaning past employment periods are not affected.
Arrangements for Offsetting LSP and SP
Under the Employment Ordinance, employees may be entitled to LSP/SP depending on their years of service. Employers can offset LSP/SP using MPF derived from employer contributions.
If LSP/SP has been paid by employers:
- Employers may submit an application with supporting documents to their MPF trustees to withdraw the MPF from employees’ accounts.
- The amount withdrawn must not exceed the MPF that can be used to offset LSP/SP under the Employment Ordinance.
- Employers may request that employees acknowledge receipt of the payment in writing to facilitate the trustee application.
If LSP/SP has not been paid by employers:
- Employees may apply directly to trustees to withdraw MPF derived from employer contributions.
- If the MPF is insufficient to cover the full LSP/SP amount, employees are entitled to recover the shortfall from their employer.
- Employees must provide supporting documents proving their eligibility for LSP/SP and confirming that the employer has not already paid any offsettable amount.
MPF Tips for Employees:
Employees should take proactive steps to ensure a smooth MPF offsetting process. One important step is obtaining a confirmation letter from their employer stating that LSP/SP has not been paid.
The letter should include:
- The employer’s authorized signature
- The company chop
This confirmation is essential for applications to trustees and helps prevent disputes regarding the offsetting of MPF against LSP/SP.
Reckonable Years of Services
All manual workers and non-manual workers which average monthly earning below $15,000 for 12 months preceding 8 June 1990, follow Table 1 for reckoned years of service calculations. If the years of service exceed the full reckonable years of service, half of the years of service should be reckoned.
Non-manual workers with average monthly earning above $15,000 for 12 months preceding 8 June 1990, they can have their years of service calculated from 1980.
Table 1
| Relevant Date of Termination of Employment | Fully Reckonable Years of Service | Maximum Amount |
|---|---|---|
| 20 Jan 1995 to 30 Sep 1995 | 25 | $210,000 |
| 1 Oct 1995 to 30 Sep 1996 | 27 | $230,000 |
| 1 Oct 1996 to 30 Sep 1997 | 29 | $250,000 |
| 1 Oct 1997 to 30 Sep 1998 | 31 | $270,000 |
| 1 Oct 1998 to 30 Sep 1999 | 33 | $290,000 |
| 1 Oct 1999 to 30 Sep 2000 | 35 | $310,000 |
| 1 Oct 2000 to 30 Sep 2001 | 37 | $330,000 |
| 1 Oct 2001 to 30 Sep 2002 | 39 | $350,000 |
| 1 Oct 2002 to 30 Sep 2003 | 41 | $370,000 |
| 1 Oct 2003 to 30 Sep 2004 | 43 | $390,000 |
| 1 Oct 2004 and after | All | $390,000 |
Example:
The date of dismissal was October 1st, 2002, and the employee’s monthly wages before dismissal were $15,000. The employee had 43 years of service.
Amount of Severance Payment / Long Service Payment :
$15,000 x ⅔ x [41 +( 43 – 41)/2 )]^ = $420,000 (=$370,000)@
^ In case of the employee dismissed on 1st of October 2002, the remuneration payable for the reckonable years of service is 41 years plus 50% of the exceeding years of service.
@ Since the limit of severance payment or long service payment for an employee to be dismissed on 1 October 2002 is $370,000, the subject employee can only have $370,000.
NOTE : The employee is not entitled to receive both long service payment and severance payment at a time.
To find more about the calculation, please check out the Labour Department’s webpage or call the Labour Department’s hotline at 27171771.
What are the Offences and Penalties
Employers who fail to pay severance payment to their employees would be prosecuted and upon conviction, will be fined $50,000.
Many Hong Kong industries adopted a method to avoid severance payments by making sure of contracts of employment running less than 24 months. An employee must go for a short break before having a new contract. An example can be found in a Court of Appeal case.
Referencing the judgment of the case taken as reference, if the employer has said or done anything that would show that the parties viewed the relationship as continuing despite the termination of the contract, then several contracts of less than “24 months” can be seen as the one contract. However, only expectation that the employee would return to his previous position after a short period is insufficient. There must be a record of a mutual agreement between the employer and the employee. This will involve sophisticated legal arguments and it suggested to seek legal expert opinion.
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