What is severance payment?
“Severance” is defined as: employees affected by the suspension or redundancy can’t perform normal work. “Severance Payment” means the payment made by the employer to an employee who is forced to quit the job for the reasons above.
According to the Employment Ordinance, an employee employed under continuous contract for no less than 24 months is suspended or laid off, the employer must pay severance payment as soon as possible.
Why is severance payment important?
If an employee is qualified for the severance payment, the employer is able to calculate the severance payment based on the employee’s income pattern.
In order to avoid the potential legal risks, 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 HK$50,000.
It is worth noting that although the corresponding calculation method is the same, severance payment and long service payment cannot be paid together, and there is a cap. Besides, when the employer actually pays the severance payment, part of the payment can be offset by the MPF contributed to the employee during the employment period, which is commonly known as “MPF offsetting”.
Calculation of severance payment
After the employee meets the corresponding qualifications, how should the employer calculate the employee’s compensation?
| monthly-paid（with fixed income） | wages x 2/3 x reckonable years of service* |
| monthly paid（without fixed income） | average daily wage in the last 12 months* X 2/3 x 2/3 x reckonable years of service |
| daily paid/annual paid | any 18 days’ wages of last 30 normal working days x reckonable years of service |
*For reckonable years of service and maximum limit, please refer to official documents for more information.
Workstem
As the leading cloud-based Payroll & one-stop HRM system in the Asia-Pacific region, Workstem can not only support the recording of employee files and MPF contribution history, but also calculate the employee’s years of service, severance payment and total employer contribution. It is convenient to quickly determine whether an offsetting arrangement is needed and satisfied.
Read more:
When will an employee be entitled to severance & long service pay?
As Layoffs Spread, How to Calculate Severance Payment or Long Service Payment to Employees?
How to Offset Severance / Long Service Payment When Employee is Terminated?