Severance Payment in Hong Kong: Employee Rights and Employer Obligations

What Is a Severance Payment?

Severance payment, also known as redundancy payment, is a financial package aimed at providing support to employees who face termination due to unforeseen circumstances related to their employment. The primary purpose of severance pay is to assist employees in transitioning to new employment or to serve as temporary financial assistance until they find a new job.

Employers are responsible for offering employees a fair and reasonable payout, ensuring they leave the organisation on a positive note. Employers acknowledge employees' contributions and demonstrate their commitment to facilitating a smooth transition by providing this financial cushion.

When determining the amount of severance payment, various factors come into play. These factors include the length of service, salary, and the circumstances surrounding the termination. In some cases, employers may offer additional benefits such as extended healthcare coverage or career counselling services to support the affected employees further.

Severance payment is a safety net for employees who suddenly find themselves without a job. It provides them with a financial buffer, allowing them to cover their essential expenses while they search for new employment opportunities. This period of financial stability can significantly reduce the stress and anxiety associated with job loss.

Moreover, severance pay can also help employees maintain their standard of living during the transition period. It allows them to continue meeting their financial obligations, such as rent or mortgage payments, utility bills, and other essential expenses. This stability enables individuals to focus on their job search and explore new career options without the added pressure of immediate financial strain.

Additionally, exit package can positively impact an employee's morale and well-being. It demonstrates that the employer values their contributions and recognises their dedication to the organisation. This recognition can boost the employee's confidence and motivation as they embark on a new career journey.

Furthermore, severance payment can also contribute to the overall reputation of the employer. Organisations that prioritise the well-being of their employees and provide fair severance packages are often seen as socially responsible and compassionate. This positive perception can attract talented individuals to the company and enhance its employer brand.

Severance Payment and Long-Service Payment

In Hong Kong, the Employment Ordinance governs the provision of severance payments. Under the Employment Ordinance, employees employed under a continuous contract for at least 24 months are entitled to severance pay upon dismissal. The duration of continuous employment significantly impacts the amount of compensation to be received.

It is important to note that separate provisions exist for long-service payment, which is granted to employees who have been employed under a continuous contract for at least five years. Long-service payment operates as an additional safeguard, ensuring further compensation for employees who have dedicated a substantial amount of time to an organisation.

How To Calculate a Severance Payment?

In Hong Kong, calculating a severance payment involves considering the employee's length of service and monthly wages. The formula typically entails two-thirds of the monthly wages for each year of service up to the first $22,500 per month, and half thereafter. It's crucial to adhere to the guidelines outlined in the Employment Ordinance and seek legal guidance for accurate calculations and compliance.

To help employees, the Labor Department of Hong Kong provides an online severance payment calculator on its website, simplifying the calculation process and ensuring fair compensation. Additionally, seeking professional accounting services can also aid employers in accurately determining the appropriate compensation for their employees.

Statutory minimum payment

Hong Kong's Employment Ordinance mandates a statutory minimum severance payment for eligible employees. This payment is calculated based on the individual's length of service and wages and serves as a baseline protection for employees facing termination.

Calculation method based on length of service and wages

Beyond the statutory minimum, severance payment can be determined using a formula that considers the employee's service length and average wages. This calculation method ensures that employees receive compensation proportionate to their years of service and their salary.

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Eligibility for Severance Payment

Employees are eligible for payment if they meet the below criteria. Employers must ensure compliance with statutory procedures for dismissal, which include providing written notice to employees, conducting consultation sessions, and allowing a reasonable period for employees to consider alternative employment options. Failure to fulfil these obligations may result in legal consequences for employers.

Length of service requirement

​​To be eligible for a severance payment, employees must have served their employer continuously for at least two years, according to the Employment Ordinance. If an employee meets this length of service requirement and is later terminated, they are entitled to receive payments in accordance with the applicable rules.

Exclusions and exceptions

Despite meeting the length of service requirement, certain situations may exempt employees from receiving payments. Exclusions can include termination due to serious misconduct or if the employer can provide valid reasons under the Employment Ordinance that justify the employee's termination without severance pay.

Payment Procedures and Timelines

Employers are encouraged to establish transparent payment procedures and communicate them effectively to employees. This includes providing the necessary documentation, such as pay slips and bank transfer receipts, to ensure a smooth and hassle-free payment process and accurately facilitate the employees' tax return filing.

Employer's responsibility for severance payment

Once an employee becomes eligible for a payment, it is the employer's responsibility to make the payment within seven days after the termination of the employment contract. The payment should be made in full, without any deductions or conditions imposed by the employer.

Timeline for payment after termination

According to the Employment Ordinance, employers must make a severance pay within two months of the of the employment contract termination. Prompt payment is crucial to avoid any disputes or penalties for late payment.

Alternatives to Severance Payment

While severance payment is the most common form of compensation for employees facing redundancy, it is worth noting that employers may offer alternative packages based on negotiations and mutual agreement. These alternative packages could include benefits like extended healthcare coverage, outplacement services, or other arrangements facilitated through online payment gateways for a smoother and more convenient process.

Voluntary retirement schemes

Sometimes, employers may offer voluntary retirement schemes as an alternative to severance payment. These schemes are typically mutually agreed upon and can provide additional benefits or incentives to employees opting for early retirement.

Termination with notice and payment in lieu

Instead of severance payment, employers may choose to terminate an employee with advance notice or payment in lieu of notice. This option gives employees time to seek new employment while providing them with financial support during the transition period.

Impact of Severance Payment on Other Employee Entitlements

Receiving severance payment does not affect an employee's entitlement to other statutory benefits, such as long-service payment, annual leave, or sick leave. These entitlements remain intact and should not be compromised or withheld by the employer.

Impact on long service payment

Severance payment can affect an employee's entitlement to long-service payment, another form of compensation for long-serving employees. Depending on the circumstances of termination, an employee may receive either severance or long service payment, but not both.

Effect on other benefits and gratuity

The payment may affect other employee benefits and gratuities, such as end-of-year bonuses or retirement packages. Employers and employees must understand how severance pay interacts with other entitlements to ensure fair and compliant compensation.

Conclusion

In summary, severance payment plays a vital role in safeguarding the welfare of employees in Hong Kong. It provides financial assistance during times of uncertainty and serves as a bridge to new opportunities. By understanding the definition, calculation, eligibility, payment procedures, and impact of severance payment, employees and employers can navigate this aspect of employment with confidence and mutual respect.