Payment in lieu of notice under Hong Kong law

What Is Payment in Lieu of Notice

Payment in lieu of notice (PILON) is wages paid to an employee in place of the required notice period when either party terminates the contract of employment. Under the Employment Ordinance (Cap. 57), an employer may choose to make a payment in lieu of notice rather than requiring the employee to work through the notice period. The amount is calculated based on the employee's average earnings over a defined period, and the payment does not affect the employee's other statutory entitlements such as severance payment or long service payment.

Payment in Lieu of Notice Hong Kong

In Hong Kong, payment in lieu of notice ends employment without the employee serving the contractual or statutory notice period. The employer must pay the wages the employee would have earned during that period. The Labour Department advises the payment should reflect the employee's average daily or monthly earnings, including allowances and commissions, calculated over the preceding 12 months or the full period of employment if shorter.

Employment Ordinance Notice Period

The Employment Ordinance sets minimum notice periods for employees under a continuous contract. No notice is required for the first month of employment. After one month but within the first year, the minimum notice period is seven days. After the first year, the minimum is one month, though the contract may specify a longer period. The notice period must be the same for both employer and employee unless the contract states otherwise. Payment in lieu of notice is calculated using the same period.

PILON Hong Kong Employment

PILON in Hong Kong employment is distinct from summary dismissal. Summary dismissal occurs without notice and without payment in lieu, and is permitted only for gross misconduct. Payment in lieu of notice is a contractual termination where the employer chooses to pay rather than require the employee to work. The employee is not required to accept payment in lieu if the contract requires actual notice, though in practice most contracts allow either party to make a payment in lieu.

Terminating Employment Notice Pay HK

When terminating employment in Hong Kong, notice pay is calculated using the employee's average wages. The Employment Ordinance defines wages broadly to include commissions, overtime pay, and allowances, but excludes certain items such as end-of-year payments and severance payments. The average daily wage is calculated by dividing the total wages earned in the 12 months preceding termination by the number of days worked. This average is then multiplied by the number of days in the notice period to arrive at the payment in lieu of notice.

Effect on Other Statutory Entitlements

Payment in lieu of notice does not extinguish an employee's right to other statutory entitlements. An employee who receives PILON remains entitled to severance payment if the dismissal is due to redundancy, and to long service payment if the employee has at least five years of continuous service and is dismissed for reasons other than redundancy or misconduct. The employee is also entitled to accrued annual leave, end-of-year payment calculated on a pro-rata basis, and any rest days that would have fallen within the notice period.

Summary Dismissal and PILON

Summary dismissal is termination without notice and without payment in lieu. It is permitted only where the employee commits gross misconduct, such as dishonesty, violence, or serious insubordination. An employer who summarily dismisses without proper cause may be liable for wrongful dismissal and ordered to pay damages equivalent to the notice period. Payment in lieu of notice is therefore the safer route where the employer wishes to end the employment but does not have grounds for summary dismissal.

Practical Considerations

An employer making a payment in lieu of notice should issue a written statement confirming the termination date, the amount of the payment, and the basis of calculation. The payment is subject to Mandatory Provident Fund contributions and employees' compensation insurance premiums in the same way as ordinary wages. The employer should also notify the Inland Revenue Department using Form IR56F where the employee is about to cease employment. The employee retains the right to claim any unpaid wages, annual leave, or other entitlements even after receiving PILON.