Companies sometimes face market changes or strategic adjustments, necessitating layoffs or closures. For employees, severance payment calculation and related matters, such as limits, are critical. Severance compensation protects employee interests and is a legal requirement employers must strictly follow. In this article, NOVA explores long service payment, severance payment calculation, and limits to safeguard the rights of both employers and employees.
What Are Long Service Payment and Severance Payment? How Do They Differ?
Hong Kong’s Employment Ordinance establishes labor rights, providing compensation for employees dismissed, laid off, suspended, or affected by company closure, including long service payment and severance payment. Employees can only claim one of these at a time. Below are the key differences:
Long Service Payment
Long service payment compensates employees for long-term service to the same employer, providing economic support upon leaving for reasons other than redundancy or serious misconduct, recognizing their contributions. Employees must be employed under a continuous contract with the same employer for at least 5 years and:
- Be dismissed for reasons other than redundancy or serious misconduct;
- Have a fixed-term continuous contract expire without renewal;
- Die during employment;
- Resign due to ill health;
- Resign at age 65 or above due to old age.
Severance Payment
Severance payment supports employees laid off due to redundancy, suspension, company closure, or non-renewal of contracts, helping them through unemployment. Employees must be employed under a continuous contract with the same employer for at least 24 months and:
- Be dismissed by the employer due to redundancy;
- Be suspended due to business issues (suspension exceeding half of normal working days in any continuous 4 weeks or one-third in any continuous 26 weeks);
- Have a fixed-term contract expire without renewal due to redundancy.
Calculation Methods and Limits for Long Service Payment and Severance Payment
Calculation Formula for Long Service Payment and Severance Payment
The calculation methods for long service payment and severance payment are identical, with pro-rata adjustments for incomplete years:
- Monthly-paid employees: (Last month’s salary or average monthly salary over the past year × 2/3) × Traceable years of service
- Daily-paid or piece-rate employees: Wages from any 18 of the last 30 normal working days × Traceable years of service
Limits for Long Service Payment and Severance Payment
Both long service payment and severance payment have caps. The current maximum compensable monthly salary is HK$22,500, so the maximum compensation is HK$22,500 × 2/3 × Years of service.
Payment Timelines for Long Service Payment and Severance Payment
After layoffs or dismissal, in addition to settling wages, employees should receive long service payment or severance payment within specified periods as compensation. Details are as follows:
- Long service payment: Employers must pay within 7 days after contract termination; late payment may incur fines up to HK$350,000 and 3 years’ imprisonment.
- Severance payment: Employers must pay within 2 months after the employee issues a severance payment demand notice; late payment may incur fines up to HK$50,000.
Can MPF Offset Long Service Payment and Severance Payment?
Before the MPF offsetting mechanism is abolished (May 1, 2025), employers can use accrued benefits from their MPF contributions (excluding voluntary employee contributions) to offset part of severance payment or long service payment.
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Frequently Asked Questions (FAQ)
If an Employer Dismisses an Employee with 5+ Years of Service Due to Redundancy, Must They Pay Both Severance Payment and Long Service Payment?
If an employee is dismissed due to redundancy, they are entitled to severance payment but cannot receive long service payment simultaneously.
