Severance payment and long service payment are two important rights and benefits protected under the Employment Ordinance in Hong Kong, which aim to provide financial support to employees who leave their jobs due to specific circumstances. For employers and human resource managers, an accurate understanding of the difference between the two and how they are calculated is the cornerstone of maintaining good labor relations and ensuring corporate compliance.
What is severance pay?
Severance pay is compensation paid by an employer when an employee is terminated due to a "layoff" or "lockout".
Eligibility
The employee must have been employed under a continuous contract for a period of not less than 24 months and meet one of the following conditions:
- Dismissal due to layoff: the employer closes or prepares to close its business, relocates, or the demand for the position disappears or diminishes.
- Non-renewal of contract upon expiration: A fixed-term contract that is not renewed upon expiration due to layoffs.
- Suspended:
- the number of days in any four consecutive weeks on which work is not assigned and for which wages are not paid exceeds one-half of the total number of normal working days; or
- In 26 consecutive weeks, the number of days on which work is not assigned and wages are not paid exceeds one-third of the total number of normal working days.
What is the Long Service Payment?
Long service payment is a form of severance compensation for long-serving employees and applies to situations such as dismissal not due to redundancy or gross negligence.
Eligibility
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Employees must be under a continuous contractEmployed not less than 5 年and meets one of the following conditions:
- Dismissed(but not summarily dismissed as a result of redundancy or serious misconduct).
- Non-renewal of contract upon expiry(Fixed-term contract).
- Death in service(claimed by his personal representative).
- Resignation on health grounds: certification by a registered medical practitioner or registered Chinese medicine practitioner that he/she is permanently unfit for his/her present work.
- Resignation due to old age: Aged 65 or above.
Calculation method and cap (common to both)
The formula and ceiling for calculating severance payment and long service payment are exactly the same.
Calculation formula
- Employees with monthly salary：
(Last Monthly Wage × 2/3) × Years of Service (Prorated for years of service less than one year)
- Daily or piece rate employees：
(Wages for any 18 days within 30 days prior to leaving employment) × Length of Service
Critical Limit
The following two statutory ceilings must be borne in mind in the calculation:
- Maximum monthly salary base figure：HKD $22,500
- Even if the monthly salary is $30,000, the calculation should be based on $22,500.
- That is, the maximum amount for each year of service is calculated as follows: $22,500 × 2/3 = $15,000。
- Total Compensation Limit：HKD $390,000
Comparison table of severance vs long service payment highlights
To avoid confusion, the following table clearly compares the main differences between the two:
| Comparison Items | severance payment | Long Service Payment |
|---|---|---|
|
Length of employment requirement |
At least 24 months (2 years) |
smallest |
|
Main Triggers |
Layoffs, work stoppages |
Non-Redundancy Dismissal, Retirement, Death, Sickness Retirement |
|
Is voluntary resignation applicable? |
Not applicable (except in the case of disguised dismissal) |
Applicable (over 65 years of age or for health reasons only) |
|
Calculation formula |
equal |
equal |
|
limit |
Same ($390,000) |
Same ($390,000) |
*According to the Employment Ordinance, employeesshould notSeverance and long service payments are also paid on the same occasion.
2025 Abolition of MPF 'hedging' arrangements
The abolition of MPF "offsetting" is a major change in Hong Kong's labor laws, which directly affects employers' financial arrangements for severance and long service payments in the future.
May 1, 2025: the old and new systems on 'Conversion Day'
The Government has made 2025年5月1日 is the "Conversion Date". The calculation will be divided into two parts using that day as the boundary:
A. Pre-conversion seniority (the "old system" part)
- Calculation: Remain unchanged.
- Hedging Arrangements: Employersremain availableUse the accrued benefits of their MPF contributions (mandatory + voluntary) for hedging.
- limit: Maintain $390,000.
B. Post-conversion seniority (the "new system" part)
- Calculation: Remain unchanged.
- Hedging Arrangements: EmployersunacceptableThe accrued benefits of the "mandatory contributions" are then used to hedge the
- Note: The employer's accrued benefits from "voluntary contributions" can still normally be used for hedging (depending on the terms of the individual scheme)。
- Financial Impact: The employer will be required to pay an additional portion of this severance/long service payment in company cash.
Government-funded Schemes: To help enterprises adapt, the Government has set up a 25-year subsidy scheme to share part of the employers' expenses in the initial period after conversion (e.g. the first $$500,000 of severance/long service payment expenses).
Let M&N help you make a worry-free transition to the new system.
Understanding the complexities of calculating severance and long service payments and 2025 After the abolition of the "offsetting" arrangement for MPF in 2012, do you find the regulations complicated and difficult to grasp accurately? Instead of spending valuable time on figuring out how to do it on your own and risking miscalculations or labor disputes, why not leave it to the experts?
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References：
Mandatory Provident Fund Schemes Authority:eMPF platform
https://www.mpfa.org.hk/empf/empf-platformLabor Department - A Concise Guide to the Employment Ordinance: Chapter 11: Severance Pay and Long Service Payment https://www.labour.gov.hk/tc/public/pdf/wcp/ConciseGuide/11.pdf
Labor Department - Specialized website on abolition of MPF "hedging" arrangement
https://www.op.labour.gov.hk/tc/index.html
Frequently Asked Questions
eMPF (MPF Easy)It is a one-stop e-commerce service led by the MPFA.flat-roofed buildingIn addition, the MPF scheme will be consolidated with the MPF schemes dispersed among different trustees to facilitate administration by members and employers.
The platform will be rolled out in phases and the migration of all MPF schemes will be completed from 2025 to 2026. Members should pay attention to the official notification to complete the transition.
Yes, register and use eMPF platformNo additional fees are required. The reduction in administrative expenses will help reduce fees and charges of MPF schemes in the long run.
If you find any discrepancies or omissions in your account information, you are advised to make enquiries and corrections through the eMPF platform or the relevant trustee immediately to avoid any disruption to your operations.
eMPF platformStrict information security measures are in place, including authentication and encryption. Users are required to protect their login information from being shared with others.
Disclaimer
This article has been compiled by M&N to provide general guidance based on publicly available information and statutory provisions only. The information contained herein should not be regarded as legal or other professional advice. M&N accepts no liability for any action taken or loss incurred as a result of reliance on the contents of this document. As legislation is amended from time to time, it is important to refer to the latest official regulations or seek independent professional advice in dealing with specific cases.
