In Hong Kong, a severance payment is a statutory sum paid to an employee under the Employment Ordinance when their employment is terminated by reason of redundancy or lay-off (the employee’s position is genuinely no longer required due to business restructuring, cessation, or downsizing of certain operations).
No severance payment is due when an employer terminates an employment contract by giving the agreed termination notice (e.g., three months) without the employee’s position being eliminated.
Employees qualify for severance payment if employed for at least 24 months under a continuous contract and terminated due to redundancy.
Severance payment equals two-thirds of monthly wages per year of service, with caps.
Severance payment and long-term service payment are different concepts and are not cumulative.
In Hong Kong, severance payment is a crucial safeguard for employees facing redundancy or job termination. It ensures financial support during the transition to new employment opportunities.
Understanding Severance Payment in Hong Kong
Severance payment, commonly referred to as redundancy payment, is financial compensation provided to employees dismissed due to specific circumstances such as company restructuring, downsizing, or redundancy. Its purpose is to ease the financial burden on employees while acknowledging their contributions to the company.
In determining the amount of severance pay, various elements — the specific terms of the employment contract, the employee’s length of service, the latest salary and benefits, and the reasons behind the termination — are taken into account.
Generally speaking, Hong Kong is a very liberal market. It is known for its liberal market economy with minimal government intervention. This is reflected in relatively modest statutory severance payment requirements. This approach maintains business flexibility while offering basic compensation to employees upon termination.
Severance Payment and Contractual Termination
Severance payment is not the same as the payment due by an employer when terminating an employment contract by serving the agreed notice.
Severance payment is due upon redundancy, i.e., when the employee’s role is genuinely no longer required (e.g., business restructuring, cessation, or downsizing of certain operations). No severance payment is due upon “contractual termination,” i.e. when the employer ends the contract by giving the agreed notice (e.g., three months) without the employee’s position being eliminated; in this case, statutory severance pay normally does not apply.
Differences Between Severance Payment and Long-Service Payment
Severance payment and long-service payment are two different concepts:
| Aspect | Severance Payment | Long-Service Payment |
|---|---|---|
| Purpose | Provided in cases of redundancy or similar situations (including termination of the position). | Applies to employees with long-term service who meet specific conditions independently of termination circumstances. |
| Eligibility | Linked to the circumstances of termination and only for employees having worked for not less than 2 years under a continuous contract. | Linked to the employee’s length of service with the company only (continuous employment for at least 5 years). |
| Conditions | Triggered by redundancy or termination beyond the employee's control. | Triggered by specific conditions under Hong Kong's Employment Ordinance. |
| Exclusivity | Employees eligible for both payments can receive only the higher of severance or long-service payments (not both). | Employees can receive either severance or long-service payment, not both. |
Calculating Severance Payment
The Employment Ordinance sets out a formula for calculating severance payments to ensure consistency and fairness. Generally, employees are entitled to two-thirds of their monthly wages for each year of service, with specific caps in place. Employers must adhere to these guidelines to avoid disputes or penalties.
In Hong Kong, the statutory severance payment for an eligible employee (i.e., at least 24 months of continuous employment, dismissed by reason of redundancy or laid off) is calculated using the following formula:
Severance Payment = 2/3 × (Last Month’s Wages or Average Monthly Wages, capped at HK$22,500) × Years of Service
This amount is subject to a maximum of HK$390,000. “Last Month’s Wages” generally refers to either the employee’s final month’s wages or the average monthly wages over the 12 months prior to termination, whichever is higher.
The Labor Department offers an online severance payment calculator, enabling both employees and employers to estimate payments accurately. Engaging professional accounting services can further ensure compliance with legal requirements.
Eligibility Criteria
Employees qualify for severance payment if they have been employed under a continuous contract for at least 24 months and face termination due to redundancy.
However, exceptions apply, such as cases involving serious misconduct or valid termination reasons outlined in the Employment Ordinance.
Employers must follow statutory procedures for dismissal, including proper written notice and consultation with employees. Non-compliance can lead to legal repercussions and damage to the employer's reputation.
Payment Procedures and Timelines
The employer bears the responsibility of ensuring severance payments are processed smoothly and transparently. Once eligible, employees should receive their payment within seven days of contract termination. Delays or disputes over payment can result in fines or legal challenges.
Clear documentation, such as pay slips and receipts, is essential to streamline the process and help employees manage tax-related matters effectively.
Impact on Other Benefits
Receiving severance payments generally does not affect an employee’s eligibility for other statutory benefits such as annual leave, sick leave, or gratuity payments. However, employees must understand that they cannot simultaneously claim severance and long-service payments.
Employers should ensure clarity on how severance payment interacts with bonuses, retirement packages, or other entitlements to avoid disputes and maintain compliance with labor laws.
End of MPF Offsetting in 2025
In Hong Kong, employers and employees are both required to make mandatory contributions of 5 percent for each of the employee's relevant income into the employee's MPF (Mandatory Provident Fund) account, capped at HK$1,500. Employers and employees may choose to make voluntary contributions on top of their mandatory contributions.
Until 2025, the Employment Ordinance provided for an offsetting mechanism that allowed employers to offset the amount of statutory or long-service payment payable to an employee against the employer's contributions to MPF for that employee.
From 2025, employers shall no longer be entitled to offset. The abolition will be effective from a "transition Date" yet to be determined.
Last Words
Severance payment is more than just a financial obligation; it is a vital component of Hong Kong’s labor protections, ensuring employees have the support they need during uncertain times.
For employers, providing fair severance packages reflects a commitment to social responsibility and strengthens their reputation as an ethical workplace.
By understanding the nuances of severance payment, both employees and employers can deal with terminations with transparency and mutual respect, paving the way for smoother transitions and future opportunities.
