When businesses restructure, downsize, or close operations, some eligible employees might be entitled to a statutory severance payment to simplify the financial impact of job loss. But not every employee qualifies for such compensation right away. In this article, we will get to know the specific conditions related to service length, employment contract status, and the reason for termination that must be met before an employee becomes eligible.
What Is Severance Pay in Hong Kong
Severance pay is a statutory payment made to all eligible employees whose employment is terminated due to redundancy or layoff. It is aimed at providing financial support to employees who lose their jobs for reasons that are beyond their control (company restructuring, workforce reduction, or closing of certain operations). In such cases, employers would have to provide a lump sum payment to eligible employees based on their length of service and wages earned. It is governed by the Employment Ordinance (Cap. 57) of Hong Kong.
Severance pay plays its role when an employee is dismissed since their position is no longer needed to work for the organisation. This situation is commonly known as redundancy, which occurs when a business closes, reduces its staff, reorganizes its operations, or no longer requires a specific role. Employees may also qualify for this pay in case of a layoff, where the employer temporarily stops providing work due to business shrinkage or operational reasons.
Who Is Eligible for Severance Pay
The requirements for this pay ensures that it applies only to eligible employees who lose their jobs due to genuine business reasons such as redundancy or layoff. They are:
- Employment under a continuous contract: must work for the same employer for at least 4 weeks and for 18 hours or more per week, for both full-time and part-time employees.
- Minimum length of service: must have completed at least 24 months (2 years) of continuous service with the same employer.
- Termination due to redundancy: dismissed due to reduced number of employee requirement, position restructuring, and operational changes.
- Layoff situation: when an employee is not provided with work or wages for more than half of the normal working days in a month or is not given work for four or more normal working days in a row.
How Severance Pay Is Calculated: Formula and Maximum Pay
Severance pay is calculated based on the employee’s length of service and wages drawn, following the formula pitched by the Employment Ordinance. The calculation method differs slightly, depending on whether the employee is paid on a monthly or daily basis.
Calculation Formula:
For monthly-paid employees:
Severance Pay = (2/3 × Last Full Month’s Wages) × Years of Service
For daily-rated or piece-rated employees:
Severance Pay = 18 Days’ Wages × Years of Service
Note: If an employee has worked for an incomplete year, it is calculated according to the months of service completed and the wages used for calculation are usually the last full month’s wages before termination or the average wages over the previous 12 months.
Example Calculation
If an employee’s monthly wage is HKD 18,000 and years of service is 6 years,
Severance Pay = (2/3 × 18,000) × 6
= 12,000 × 6 = HKD 72,000
Severance pay calculator can also be used for doing the math.
Maximum Pay
The maximum limit of this pay in Hong Kong regardless of the employee’s salary or years of service cannot exceed HKD 390,000. This cap ensures that the statutory payment remains within the legal limit defined by the Employment Ordinance.
How to Claim Severance Pay
Employees who are entitled, must follow a formal process to claim the payment from their employer. Under Hong Kong’s Employment Ordinance, the claim should generally be made within three months after the termination of employment.
- Confirm Eligibility: The employee must
- Be employed under a continuous contract
- Complete at least 24 months with the employer
- Be terminated from employment due to layoff or redundancy
- Submit a Written Claim to the Employer: Provide a written request stating their claim for the pay. It must include:
- Name and employment details of the employee
- Last working day of the employee
- Reason for termination
- Request for severance pay
- Employer Reviews and Processes the Payment: For a valid claim, the employer must calculate the eligible pay and arrange for it to be paid on time.
How Severance Pay is Different From Long Service Payment
Severance pay and Long Service Payment are different from each other in the following ways:
| Basis | Severance Pay | Long Service Payment |
| Purpose | For employees who lose their jobs due to redundancy or layoff | For employees with long service whose employment ends under specific qualifying circumstances |
| Minimum Service Requirement | At least 24 months of continuous service | At least 5 years of continuous service |
| Continuous Contract Required | Yes | Yes |
| Typical Trigger | Redundancy or layoff | Retirement, death, ill health, dismissal |
| Applies When Employee Is Laid Off? | Yes | No |
| Applies When Employee Retires? | No | Yes, if statutory conditions are met |
| Applies When Employee Is Dismissed for Serious Misconduct? | No | No |
| Calculation Basis | Based on wages and years of service | Based on wages and years of service |
| General Formula | 2/3 of last month’s wages or 18 days’ wages × years of service | 2/3 of last month’s wages or 18 days’ wages × years of service |
| Maximum Statutory Cap | HKD 390,000 | HKD 390,000 |
Click to read about long service payment in detail.
How to Manage Severance Pay Calculations
Managing the pay’s calculations accurately is crucial for employers to ensure compliance with Hong Kong’s Employment Ordinance and avoid legal disputes. Since the calculation involves multiple important and accurate factors such as wages, years of service, and statutory caps, having a structured approach is a key requirement. Automating severance calculations through payroll software can:
- Reduce manual errors
- Ensure compliance with legal formulas
- Handle pro-rata and cap calculations automatically
- Maintain accurate records for reporting
Proper management of these calculations not only ensures legal compliance but also helps build transparency and trust between employers and employees. Contact us and stay compliant.
Severance Pay Frequently Asked Questions
How to calculate severance pay?
The pay is calculated as 2/3 of the employee’s last full month’s wages or 18 days’ wages, multiplied by years of service.
How much is 20 weeks of severance?
It depends on the employee’s wages: 20 weeks of severance pay is calculated as 20 weeks’ wages based on the employee’s average or last wages.
Is severance pay in one lump sum?
Yes, in Hong Kong, severance pay is typically paid as a one-time lump sum.
Is severance pay the same as salary?
No, severance pay is not the same as salary. Salary is the regular payment an employee earns for work performed, usually paid monthly or weekly. In contrast, this pay is the statutory compensation provided to the employee when their employment ends due to redundancy or layoff.
