Severance payment (SP) is a statutory entitlement under Hong Kong's Employment Ordinance (Cap. 57). Employees who are dismissed by reason of redundancy or laid off after at least 24 months of continuous employment are entitled to receive it. This is not a discretionary payment. It is a legal obligation.
This guide covers who qualifies, how to calculate the amount, how SP differs from Long Service Payment, the May 2025 MPF offsetting change, payment deadlines, and the tax treatment. For the full annual compliance picture, see our annual requirements guide.
Highlights of this article
- Employees qualify for severance payment after 24 months of continuous employment, dismissed by reason of redundancy or laid off.
- The formula is 2/3 × last month's wages × years of service, capped at HKD 22,500 per month of wages and HKD 390,000 total.
- From 1 May 2025, employers can no longer use mandatory MPF contributions made on or after that date to offset severance or long service payment obligations.
- Employees must file a written claim within 3 months of dismissal. Employers must pay within 2 months of receiving the claim.
- Statutory severance payment is not subject to Salaries Tax. Amounts above the statutory formula are taxable.
Who qualifies for severance payment
An employee is entitled to severance payment if they meet all 3 conditions:
- They have been continuously employed by the same employer for at least 24 months
- They are dismissed by reason of redundancy: that is, the employer has ceased or intends to cease the business, or the work for which the employee was employed has ceased or diminished
- Or they are laid off: not provided with work for 4 or more consecutive weeks, or for 4 weeks out of 26 consecutive weeks, or for more than a specified number of days
Employees dismissed for misconduct, or who resign voluntarily, are not entitled to severance payment. Employees who unreasonably refuse an offer of re-engagement under comparable terms also forfeit the right.
How to calculate severance payment
Formula for monthly-paid employees:
SP = 2/3 × last month's wages × years of continuous service
Wage cap: HKD 22,500 per month (if actual wages are higher, the calculation uses HKD 22,500)
Maximum payment: HKD 390,000 regardless of years of service
For daily-rated employees: 18 days' wages out of the last 30 normal working days, multiplied by years of service
Example: An employee earning HKD 25,000/month dismissed after 8 years of service:
- Wages capped at HKD 22,500
- SP = 2/3 × HKD 22,500 × 8 = HKD 120,000
Fractions of a year are counted proportionately. If the employee has worked 8 years and 4 months, the 4 months count as 4/12 of a year.
Severance payment vs long service payment
SP and Long Service Payment (LSP) are related but triggered by different events. An employee can only receive one, whichever applies:
| Severance Payment | Long Service Payment | |
|---|---|---|
| Trigger | Dismissal by reason of redundancy or lay-off | Dismissal for reasons other than serious misconduct, death, incapacity, or prolonged illness |
| Minimum service | 24 months | 5 years |
| Formula | 2/3 × monthly wages × years | 2/3 × monthly wages × years |
| Wage cap | HKD 22,500/month | HKD 22,500/month |
| Maximum | HKD 390,000 | HKD 390,000 |
| Mutually exclusive? | Yes. Either SP or LSP, not both. | Yes |
For the full guide on long service payment, see our long service payment guide.
The 2025 MPF offsetting abolition
From 1 May 2025, employers can no longer use mandatory MPF contributions made on or after that date to offset their severance payment or long service payment obligations. For contribution deadlines and remittance procedures, see our MPF payments guide.
Before 1 May 2025: Employers could reduce their SP/LSP liability by the amount of mandatory MPF contributions already made into the employee's account.
From 1 May 2025: That offset is abolished for the post-transition portion. Mandatory contributions made after 1 May 2025 cannot reduce the SP/LSP payable.
Transitional provisions: Mandatory contributions made before 1 May 2025 can still be used to offset the pre-transition accrued benefit portion, subject to specific calculation rules. Pre-May 2025 accrued employer mandatory contributions are preserved in a separate "offsettable" account by the trustee. This account captures the employer's mandatory contributions made up to 30 April 2025, plus any investment returns attributable to those contributions. The offsettable amount can reduce the severance payment attributable to the employee's service before 1 May 2025 only. The employer cannot use any contributions made from 1 May 2025 onwards for offset purposes, regardless of how long the employee continues to work.
In practical terms, an employee with 10 years of service dismissed in 2030 will have approximately 5 years of pre-transition service and 5 years of post-transition service. The employer can offset the pre-transition accrued MPF balance against the pre-transition portion of the severance payment. The post-transition portion must be paid in full with no MPF offset available.
This change significantly increases the effective cost of redundancies for employers who previously relied on MPF accruals to meet most or all of their SP/LSP obligations.
How an employee makes a severance payment claim
Step 1: Give written notice to the employer
The employee must submit a written claim for severance payment to the employer. Verbal requests are not sufficient. The written claim should state the employee's name, the date of dismissal or lay-off, the reason the employee believes they qualify (redundancy or lay-off), and the amount claimed if known. The claim must be made within 3 months of the date of dismissal or lay-off. Missing this deadline forfeits the entitlement entirely and cannot be waived.
Step 2: Employer acknowledges the claim
After receiving the written claim, the employer has 2 months to respond. The employer should acknowledge receipt in writing and begin the calculation process. If the employer accepts the claim, they proceed to calculate the amount due. If the employer intends to dispute the claim, they must notify the employee in writing within the same 2-month window, stating the specific grounds for the dispute. Silence or inaction does not suspend the deadline.
Step 3: Calculate the amount due
Use the formula: 2/3 × last month's wages (capped at HKD 22,500) × years of continuous service. Count fractions of a year proportionately. If the employee's last month's wages exceed HKD 22,500, substitute HKD 22,500 in the calculation. Apply the overall cap of HKD 390,000 if the result exceeds it. For daily-rated employees, use 18 days' wages from the last 30 normal working days, multiplied by years of service.
Step 4: Employer pays within 2 months
The employer must make the payment within 2 months of receiving the employee's written claim. Payment should be made in full. Partial payment without the employee's agreement does not satisfy the obligation. Failure to pay within 2 months is an offence under the Employment Ordinance and can result in prosecution and fines.
Step 5: Disputed claims go to the Labour Tribunal
If the employer disputes the claim and the parties cannot reach agreement, the employee can bring the dispute to the Labour Tribunal. The Labour Tribunal handles employment claims up to HKD 500,000 and is designed to be accessible without legal representation. Filing fees are minimal. The Tribunal will hear evidence from both sides and issue a binding order. Employers who lose at the Tribunal must pay the amount ordered plus any costs awarded.
Worked example: 5 years of service
An employee earns HKD 25,000 per month. They are made redundant after 5 years of continuous service.
Step 1: Apply the wage cap. The employee's last month's wages (HKD 25,000) exceed the cap of HKD 22,500. The calculation uses HKD 22,500.
Step 2: Apply the formula. SP = 2/3 × HKD 22,500 × 5 years = HKD 15,000 × 5 = HKD 75,000
Step 3: Check the maximum. HKD 75,000 is below the HKD 390,000 cap. The full HKD 75,000 is payable.
Note on the cap mechanics: Without the wage cap, the calculation would be 2/3 × HKD 25,000 × 5 = HKD 83,333. The cap (substituting HKD 22,500 for HKD 25,000) reduces this to HKD 75,000. The difference of HKD 8,333 is the effect of the cap in this case.
If this dismissal occurs after 1 May 2025 and the employer made MPF contributions throughout the 5 years, the employer cannot offset any post-transition MPF contributions against the HKD 75,000. Only pre-May 2025 mandatory contributions held in the offsettable account can reduce the pre-transition portion of the liability.
Payment procedure and deadlines
Employee's obligations
- An employee must submit a written claim for severance payment to the employer
- The claim must be made within 3 months of the date of dismissal or lay-off
- Failure to claim within 3 months forfeits the entitlement
Employer's obligations
- The employer must pay the severance payment within 2 months of receiving the written claim
- If the employer disputes the claim, they must notify the employee in writing within 2 months and state the grounds for dispute
For Long Service Payment specifically, payment is due within 7 days of the trigger event.
Tax treatment of severance payment
Statutory severance payment calculated under the Employment Ordinance formula is not subject to Salaries Tax. The IRD treats it as compensation, not employment income.
However, if an employer pays more than the statutory entitlement (e.g., a contractual severance package), the excess above the statutory formula is assessable to Salaries Tax under Hong Kong salaries tax. For the tax treatment of severance payments and other employer tax obligations, see our Hong Kong corporate tax guide.
Example: If statutory SP is HKD 120,000 and the employer pays HKD 200,000, the HKD 80,000 excess is taxable.
What employers need to do now
- Update payroll and HR records: track continuous service dates accurately; errors in service length affect SP calculations
- Review redundancy cost modelling: the MPF offset abolition increases the real cost of redundancies; factor this into headcount planning
- Maintain written records: keep evidence of the reason for dismissal (redundancy vs misconduct) in case of disputes
- Consult your company secretary: your company secretary handles statutory registers and can assist with compliance documentation around employment changes
- Review all statutory entitlements: severance payment is one of several obligations. For the full picture of employee statutory entitlements, see our employee compensation guide
Air Corporate handles company secretary services for Hong Kong companies from USD 955/year. This includes compliance documentation, statutory registers, and annual filings. Get started
