Severance and long service payments are important employee entitlements under Hong Kong’s Employment Ordinance, providing financial support when employment ends in specified circumstances. For employers and HR managers, understanding the differences and calculations helps maintain good employment relations and compliance.
What Is a Severance Payment?
A severance payment is compensation paid by an employer when an employee is dismissed due to redundancy or laid off.
Eligibility
An employee must have worked under a continuous contract for at least 24 months and meet one of the following conditions:
- Dismissal by reason of redundancy: the employer closes or plans to close or relocate the business, or the need for the role ceases or diminishes.
- Non-renewal of a fixed-term contract: the contract expires and is not renewed because of redundancy.
- Lay-off:
- in any 4 consecutive weeks, the days without allocated work or wages exceed half of the normal working days; or
- in 26 consecutive weeks, the days without allocated work or wages exceed one-third of the normal working days.
What Is a Long Service Payment?
A long service payment compensates employees with long service when employment ends in circumstances such as dismissal other than redundancy or summary dismissal for serious misconduct.
Eligibility
Qualifying Circumstances for Long Service Payments
An employee must have worked under a continuous contract for at least 5 years and meet one of the following conditions:
- Dismissal, other than redundancy or summary dismissal for serious misconduct.
- Non-renewal of an expired contract that was for a fixed term.
- Death during employment, with the claim made by the estate’s representative.
- Resignation on health grounds: a registered medical practitioner or Chinese medicine practitioner certifies that the employee is permanently unfit for the current work.
- Resignation due to old age: the employee is aged 65 or above.
Calculations and Caps Applying to Both Payments
Severance and long service payments use the same calculation formula and caps.
Calculation Formula
- Monthly-rated employees:
(Last month’s wages × 2/3) × Years of service (An incomplete year of service is calculated proportionately)
- Daily-rated or piece-rated employees:
(Wages for any 18 days selected from the 30 days before termination) × Years of service
Key Caps
Observe these two statutory caps when calculating:
- Maximum monthly wage base: HK $22,500
- Even if monthly wages are $30,000, the calculation uses a maximum base of $22,500.
- The maximum amount for each year of service is therefore $22,500 × 2/3 = $15,000.
- Maximum total payment: HK $390,000
Severance vs Long Service Payments: Key Comparison
The table below compares the main differences:
| Comparison | Severance Payment | Long Service Payment |
|---|---|---|
|
Minimum service requirement |
At least 24 months (2 years) |
At least 5 years |
|
Main triggering circumstances |
Redundancy or lay-off |
Non-redundancy dismissal, retirement, death or retirement on health grounds |
|
Does voluntary resignation qualify? |
No, except constructive dismissal |
Yes, only for those aged 65 or above or on qualifying health grounds |
|
Calculation Formula |
Same |
Same |
|
Cap |
Same ($390,000) |
Same ($390,000) |
*Under the Employment Ordinance, an employee cannot receive both a severance payment and a long service payment for the same termination.
The 2025 Abolition of MPF Offsetting
Abolishing MPF offsetting is a major change to Hong Kong employment law that directly affects how employers finance future severance and long service payments.
1 May 2025: The Transition Date Dividing the Old and New Arrangements
The Government has designated 1 May 2025 as the transition date. Calculations are divided into two parts at this date:
A. Service Before the Transition Date: The Old Arrangements
- Calculation: unchanged.
- Offsetting: employers may still use accrued benefits from their mandatory and voluntary MPF contributions for offsetting.
- Cap: remains $390,000.
B. Service After the Transition Date: The New Arrangements
- Calculation: unchanged.
- Offsetting: employers cannot use accrued benefits from mandatory contributions for offsetting.
- Note: accrued benefits from employers’ voluntary contributions can generally still be used for offsetting, depending on the individual scheme’s terms.
- Financial effect: employers must use company funds to pay this additional portion of severance or long service payments.
Government subsidy scheme: to help businesses adapt, the Government has introduced a 25-year subsidy scheme to share some early post-transition costs, such as the first $500,000 of severance or long service payment expenditure.
Let M&N Help You Manage the Transition
Finding the calculations and the 2025 abolition of MPF offsetting difficult to navigate? Instead of spending time working through complex provisions and risking calculation errors or employment disputes, seek professional support.
M&N has an experienced team helping clients incorporate companies and providing Company Secretarial Services, Accounting services, Virtual Offices and related services. From payroll and HR advice to tax filing services, we handle the process to ensure smooth, accurate administration in accordance with the latest Employment Ordinance.
References:
Mandatory Provident Fund Schemes Authority: eMPF Platform
https://www.mpfa.org.hk/empf/empf-platformLabour Department – A Concise Guide to the Employment Ordinance: Chapter Eleven—Severance Payment and Long Service Payment https://www.labour.gov.hk/tc/public/pdf/wcp/ConciseGuide/11.pdf
Labour Department – The Abolition of MPF Offsetting Arrangement Website
https://www.op.labour.gov.hk/tc/index.html
Frequently Asked Questions
Severance payments may apply to qualifying cases of dismissal or non-renewal due to redundancy, or lay-off. Long service payments concern other qualifying circumstances. Eligibility depends on conditions such as length of employment and the relevant circumstances.
An employee cannot receive both a severance payment and a long service payment for the same termination.
An incomplete year of service is calculated on a pro-rata basis for severance and long service payments.
The transition date is 1 May 2025. Where employment spans that date, check the applicable scheme rules for calculating service before and after it and for the relevant offsetting arrangements.
Gather employment start and end dates, the reason for termination, wage records, length of service and relevant MPF contribution records. Check the applicable conditions and calculations against the Labour Department’s latest guidance.
Disclaimer
This article was prepared by M&N using publicly available information and legislation for general guidance only. It should not be treated as legal or other professional advice. M&N accepts no responsibility for actions taken or losses arising from reliance on this article. Legislation changes from time to time; consult the latest official provisions or seek independent professional advice for a specific case.
