What is Severance Payment in Hong Kong?
Severance payment is a compensation under the Employment Ordinance that you must pay as an employer if requested by the employee when they are let go, applied when an employee’s role becomes redundant through business restructuring, department closures, or downsizing. This compensation serves as a financial cushion, giving your employee time to find new work without any active income.
| Scenario | Eligibility for Severance Payment |
| Position eliminated due to restructuring | Yes |
| Employee dismissed with notice, position remains | No |
| Termination for serious misconduct | No |
| Business closure affecting employee | Yes |
What is Long-Service Payment in Hong Kong?
Long-service payment is another form of statutory compensation in Hong Kong, designed to reward employees for their long-term commitment to a company. Unlike severance payment, which is often triggered by redundancy, long-service payment applies when the contract of an employee of over five years is terminated for reasons other than redundancy or serious misconduct. Other situations include resignation due to ill health, retirement at age 65 or older, or death of the employee.
What is the difference between severance payment and long-service payment?
The main difference between severance payment and long-service payment is the reason for termination, where severance payment is made eligible to an employee that is made redundant, while long-service payment is applied when long-term employees leave under circumstances unrelated to redundancy.
Key Differences between severance payment and long-service payment
| Aspect | Severance Payment | Long-Service Payment |
| Minimum service | 2 years | 5 years |
| Trigger | Redundancy or lay-off | Dismissal (not redundancy/misconduct), resignation due to ill health, resignation at 65+, death |
If an employee qualifies for both severance pay or long-service pay, you’re required only to pay the higher amount. As an example, if you dismiss a 7-year employee due to redundancy, they will only receive a severance payment and cannot claim long-service payment simultaneously.
What are the eligibility requirements for severance payment and long-service payment?
Severance Payment Eligibility
Your employee qualifies for severance payment if they have at least 24 months of service under a continuous contract and are dismissed due to redundancy, laid off, or their fixed-term contract expires without renewal because the role is redundant, defined by three scenarios:
- You close or plan to close your business
- You shut down operations where the employee works.
- The need for their type of work decreases or disappears.
Long-Service Payment Eligibility
Your employee qualifies for long-service payment if they have at least 5 years of service under a continuous contract and are dismissed for reasons other than redundancy or serious misconduct. Circumstances include where their fixed-term contract expires without renewal, they resign with a medical certification declaring that they are permanently unfit for their job, they are 65 or older and are resigning due to age, or they die during employment.
| Scenario | Details |
| Dismissal | You dismiss them for reasons other than redundancy or serious misconduct |
| Contract non-renewal | Fixed-term contract expires without renewal (but if you offered renewal 7+ days before expiry with fair terms and they refused, they are not eligible) |
| Ill health resignation | They resign with medical certification proving permanent unfitness for their job |
| Old age resignation | They are 65+ and resign due to age |
| Death | Employee dies during employment |
How is severance pay and long-service pay calculated?
Both severance pay and long-service pay is calculated using the same formula, with slight differences depending on the employee’s terms of payment, with a wage cap for each.
Formula for monthly-paid employees:
Last month’s salary or 12-month average salary—whichever is higher × 2/3 × Years of service
The wage cap for severance pay is HK$22,500 per month with a maximum payment cap of HK$390,000.
As an example, Sarah is a full-time employee at 65 years of age, who is about to retire after having worked for 6 years in the same company with a monthly salary of HK$28,000. Because her salary exceeds the HK$22,500 wage cap, her long-service pay would be calculated as:
HK$22,500 × 2/3 × 6 years = HK$90,000
Formula for daily-paid or piece-rate employees:
Wages from any 18 of the last 30 normal working days × Years of service
Incomplete years are pro-rated, meaning that someone with 3 years and 8 months of service would be calculated as 3.67 years.
David is a daily worker who worked 4 years and 3 months earning an average monthly wage of HK$18,000. His severance pay would be calculated as:
HK$18,000 × 2/3 × 4.25 years = HK$51,000
The Labour Department offers an online calculator you can use to calculate your employee’s statutory entitled pay.
How are severance pay and long-service pay taxed?
Statutory severance and long-service payments within the wage cap are tax-free and do not need to be reported in your employer’s return or in the employee’s salaries tax, so long as they are calculated strictly according to the Employment Ordinance’s formula.
Any amount paid above the statutory entitlement, however, is considered taxable income. For instance, if the law requires you to pay HK$80,000 as severance pay, but you decide to pay HK$100,000 as a goodwill gesture, the extra HK$20,000 becomes taxable income for your employee, and will need to be reported via Form IR56F or IR56G for employers, and on the BIR60 for employees.
Abolition of MPF Offsetting
Prior to May 1, 2025, you could reduce severance or long-service payments by using the accrued benefits from your mandatory MPF contributions. This meant that if an employee was entitled to a HK$200,000 severance payment and your accumulated MPF contributions were HK$120,000, you would only need to pay HK$80,000 in cash, with the rest covered by the MPF funds.
Under the current new system however, offsetting is no longer allowed for the post-transition portion of payments. As an employer, you must pay the full statutory amount in cash, and you cannot use your mandatory MPF contributions to cover any part of it. In the same scenario as above, you would now be required to pay the full HK$200,000 in cash, and the HK$120,000 in your employee’s MPF account would remain untouched.
However, it is important to note that the abolition does not have a retrospective effect. For employees whose employment began before May 1, 2025, you can still use the accrued benefits from your mandatory MPF contributions to offset the portion of severance or long-service payments accrued before the transition date.
Payment Timelines
Severance Payment
Employers need to make severance payments no later than two-months after the qualified employee provides a notice claiming the severance payment. Failure to make the payment on time can result in a fine of up to HK$50,000.
Long-Service Payment
Long-service payments on the other hand must be paid within 7 days after the contract is terminated. The penalties for late payment are much harsher, with fines up to HK$350,000 and 3 years imprisonment.
Summary
Severance payments are taken seriously in Hong Kong due to the abrupt nature of their trigger, and long service payments more so to reward company loyalty. Calculations for both are very similar and vary according to the employee’s terms of payment. If you have questions about either with regards to your Hong Kong business, drop us a message and we’d be happy to help!
