When will an employee be entitled to severance & long service pay

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Under what circumstances should an employer pay his employee severance payment? How to calculate severance payment and long service payment? These are the common topics for our HR or employers to tackle. For more information on long service payment and severance pay, Let’s check out more with Workstem now!

In fact, at the time when the employee signs the voluntary resignation agreement, it means they will no longer be entitled to any long service pay or severance pay. However, if they are re-hired by a new cleaning contractor in the meantime, the reckonable years of service will then be re-calculated automatically according to the labour law, which will also affect their long service pay, employee severance pay and annual leave calculation, etc.

People may only see the strike as dinner-party material, however, it is far beyond that. Once employees are under the contract of employment, the Employment Ordinance and the Employees’ Compensation Ordinance both apply to them.

What is the long service pay and how is the employee severance paid? Workstem will share insights on these in this article.

 

Under what circumstances should an employer pay his employee severance payment/ long service payment?

Severance payment: An employee employed under a continuous contract for not less than 24 months is eligible for severance payment if:

     ( 1 ) he is dismissed by reason of redundancy*;

     ( 2 ) his fixed term employment contract expires without being renewed due to redundancy*; or

     ( 3 ) is laid off.

Long service payment: An employee employed under a continuous contract for not less than 5 years is eligible for long service payment if:

     ( 1 ) he is dismissed (except by reasons of redundancy or summary dismissal due to the employee’s serious misconduct);

     ( 2 ) his fixed term employment contract expires without being renewed*;

     ( 3 ) he dies during employment;

     ( 4 ) he has been issued a certificate in a specified form by a registered medical practitioner or a registered Chinese medicine practitioner, certifying that he is permanently unfit for his present job and he resigns; or

    ( 5 ) he is aged 65 or above and resigns on ground of old age.

Long service pay/ severance pay calculation formula

If the employee meets the above conditions, he is entitled to the long service pay or severance pay. The employer should then compute the relevant payment according to his past working mode more specifically.

However, the employee cannot get both long service payment and severance pay at the same time, and these have upper limits.

Monthly-paid employee (with fixed basic salary) (last full month’s wages * 2/3)#* reckonable years of service
Monthly-paid employee(no fixed basic salary) (average wages in the 12 months* 2/3)#*reckonable years of service
SDaily-rated/piece-rated employee (any 18 days' wages chosen by the employee out of his last 30 normal working days)#* reckonable years of service

# the sum should not exceed 2/3 of $22,500 (i.e. $15,000).

Notice:There is a maximum limit for the amount of long service payment and the severance payment. If the relevant date of termination of employment is on or after 1 st October 2003, the maximum amount of long service payment or severance payment is $390,000.

For example:

Scenario 1: If Michel worked as a secretary in company G for 2 years with the monthly salary of HK$12,000, the long service payment or severance payment he is entitled to is calculated as below:

HK$12,000 x 2/3 x 2 years =HK$16,000

Scenario 2: If Michel worked as a manager in a hotel B for 4 years with an average salary of HK$50,000, the long service payment or severance payment he is entitled to is calculated as below:

HK$22,500* 2/3 x 4 years =HK$60,000

Scenario 3: Let’s suppose Michel worked in a company over 40 years, will she one day receive millions if the employee meets the conditions above? 

In fact, according to the labour law, regardless of the reckonable years of service and whether long service payment or severance payment the employee is going to get the maximum amount is $390,000.

Scenario 4: If Michel got dismissed on January 1st, 2002, her salary was HK$15,000 and the reckonable years of service is 43 years. The long service payment or severance payment she is entitled to is calculated as below.

HK$15,000*2/3 x [41 +( 43 – 41)/2 )] = HK$420,000 (=HK$370,000)

Notice: As an employee who was dismissed in 2002, the reckonable years of service is 41 years, the rest of years of service will only be calculated as half of it.

As an employee who was dismissed in 2002, the maximum amount of long service payment or severance payment is $390,000.

Thus, Michel will finally receive HK$370,000.

Offsetting LSP/SP against MPF

According to the Mandatory Provident Fund Scheme Authority, employers can offset the LSP/SP payable to employees under the Employment Ordinance against the MPF derived from the employer’s mandatory and voluntary contributions.

More specifically, suppose Michel who worked as a manager in a hotel for 4 years will get HK$35,000 when she is dismissed, as the amount of MPF derived from the employer’s contributions to her is HK$35,000 during her working time, the employer is required to pay the outstanding balance to the employee which is HK$25,000 in this case.

Q&As

Q1:Under what circumstances should an employer pay his employee severance payment?

An employer should pay severance payment when an employee, who has been employed under a continuous contract for not less than 24 months, is dismissed by reason of redundancy or is laid off.

Q2:Under what circumstances should an employer pay his employee long service payment?

An employer should pay long service payment when an employee who has been employed under a continuous contract for no less than 5 years:

  1. is dismissed by reason other than serious misconduct or redundancy;
  2. is certified by a registered medical practitioner or registered Chinese medicine practitioner as permanently unfit for the present job and he resigns
  3. is aged 65 or above and he resigns; or
  4. dies in service.

Q3: Is there a difference when calculating the long service payment of severance payment?

No difference. Long service payment and severance payment are calculated as follows:

Monthly-paid employee: (monthly wages X 2/3)* X reckonable years of service
Daily-rated/piece-rated employee: 18 days' wages* X reckonable years of service
  1. Employee’s vested benefits derived from the employer’s voluntary contributions, if any;
  2. Accrued benefits derived from the employer’s mandatory contributions.

Q4: Can long service or severance payments be offset against MPF?

Employers can offset the LSP/SP payable to employees under the Employment Ordinance against the MPF derived from the employer’s mandatory and voluntary contributions.

Q5: What should employers do before applying offsetting LSP/SP against MPF?

The employer should first communicate their intention to the concerned employees with regard to LSP/SP claim to the trustees before making any decision on the offsetting arrangement.

Q6: Will employers and employees be informed after the completion of the offsetting procedure?

Both the employers and employees will receive a notification after the completion of the offsetting procedure, which lists out the offsetting amount in the employee’s MPF account.

With the help of Workstem’s built-in MPF calculation formula, your MPF calculations would be highly accurate, automatic, and complied with up-to-date HK labour law regulation. Click the link now to enjoy 14 days 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.)
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