fbpx

As Layoffs Spread, How to Calculate Severance Payment or Long Service Payment to Employees?

Share on facebook
Share on twitter
Share on linkedin

“Layoffs” is nothing new, and the “wave of layoffs” is not only caused by the epidemic. In the past two years, there have been constantly happening in large companies, banks, airlines, and automakers announcing their layoffs, merged departments, removed certain senior positions (such as CMO), and so on.

ManpowerGroup, a human resources agency, recently released a survey of 137 employers in Hong Kong’s employment outlook for the third quarter of 2020, which showed that 12 per cent of employers intended to hire more or reduce their staff in the next quarter, while 76 per cent said they would remain unchanged. ManpowerGroup believes that the local job market will remain under pressure in the short term and that employers’ hiring intentions are weak.


How should the employer make the severance payment or long service payment if an employee is unfortunately laid off or his contract expires without renewal?

Severance Payment

Under the Employment Ordinance(EO), an employee employed by the same employer not less than 24 months under a continuous contract, 1) he is dismissed by reason of redundancy, 2) his employment contract of a fixed term expires without being renewed by reason of redundancy, and 3) he is laid off is entitled to severance.

Note: The employer shall make the severance payment to the employee not later than two months from the receipt of such a notice. An employer who without reasonable excuse fails to pay severance payment to an employee is liable to prosecution and, upon conviction, to a fine of $50,000. 


Long Service Payment 

Under the EO, an employee employed by the same employer for not less than 5 years under a continuous contract, 1) is not summarily dismissed due to his serious misconduct or the reason of redundancy, 2) his employment contract of a fixed term expires without being renewed, 3) he dies*, 4)  a certificate in the form specified by the Commissioner for Labour and issued by a registered medical practitioner or a registered Chinese medicine practitioner, certifying that he is permanently unfit for his present job, and 5) aged 65 or above, resigns on ground of old age is entitled to long service payment.

*If an employee dies, the person who wishes to claim for long service payment must serve an application in a specified form to the employer within 30 days after the death of the employee. 

Note⚠️: Long service payment should be paid to an employee within seven days after the date of termination of employment contract. An employer who wilfully and without reasonable excuse fails to pay long service payment to an employee is liable to prosecution and, upon conviction, to a fine of $350,000 and to imprisonment for three years. 

Tips💡:

If an employee has been employed for five years, he will not be simultaneously entitled to both long service payment and severance payment, and he can only select one payment; If an employee is dismissed by reason of redundancy after five years of employment, the employer is only required to make the severance payment.

The following formula applies to the calculation of both severance payment and long service payment: 

Monthly-paid employee: (last month wages X 2/3) X reckonable years of service 

Daily-rated employee: (any 18 days’ wages chosen by the employee out of his last 30 normal working days) X reckonable years of service 

Tips💡:

  1. Service of an incomplete year should be calculated on a pro rata basis
  2. For a daily-rated employee, he may also elect to use his average wages in the 12 months immediately preceding the termination of employment contract for the calculation. 
  3. If the relevant date of termination of employment occurs on or after 1 October 2003, the maximum amount of severance payment or long service payment is $390,000. 

Note⚠️: To calculate the amount of severance payment or long service payment, the sum should not exceed 2/3 of $22,500 (i.e. $15,000). For example, the last-month salary is $50,000, then use this formula: 22,500 X 2/3, is equal to $15,000 X years of service.

When an employee terminates, except for the severance payment and long service payment, there are other pay items that need to be calculated. Workstem is a one-stop human resources system, and can help you quickly handle the employee’s final pay, and all of your C&B stuff. Get the free trial!



(The article on this website is intended to be for reference and general information purposes only. Workstem does not warrant or represent that such information is complete, accurate or up to date. It should not be treated as a complete and authoritative statement of law or court practice, or a substitute for professional legal advice.)

Recommended Articles

Categories

Prevent Employee Disputes, Receive the Latest HR News in Your Inbox Weekly!

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *