Running a redundancy properly in Hong Kong: process and severance payment

Hong Kong Redundancy Process and Severance Payment Requirements

The hong kong redundancy process is governed by the Employment Ordinance (Cap. 57). A lawful redundancy in Hong Kong must be based on a genuine business need: the cessation or relocation of the business, a reduction in the workforce, or a change in job requirements. Get this wrong and the dismissal becomes an ordinary termination, exposing the employer to claims for wrongful dismissal or unlawful discrimination. The process involves fair selection of employees, consultation, proper notice or payment in lieu, and calculation of severance payment where the employee qualifies.

Genuine Business Need and Fair Selection Criteria

Under the Employment Ordinance (Cap. 57), redundancy occurs when an employer ceases or intends to cease carrying on the business for which the employee was employed, where the business relocates, or where the requirement for the employee to carry out work of a particular kind has ceased or diminished. A redundancy that looks like a performance dismissal will be treated as one. The employer must demonstrate that the redundancy is genuine and not a pretext for dismissal on other grounds.

Fair selection criteria are essential. Use objective criteria, skills, performance, attendance, or length of service, when selecting employees for redundancy. Selection based on trade union membership, race, gender, disability, or family status may lead to claims of unlawful discrimination. Document the selection process and retain records to demonstrate fairness. The Labour Department recommends both. Without records, the employer carries the burden of proof with nothing to show.

Hong Kong Redundancy Procedure

The hong kong redundancy procedure begins with the employer identifying the need to reduce staff and determining which positions are redundant. Consult affected employees or their representatives next. Hong Kong law does not mandate a statutory consultation period. That absence of a fixed timeline is not a licence to skip consultation. A failure to consult can turn an otherwise genuine redundancy into an unreasonable dismissal. Consultation allows the employer to explain the reasons for redundancy, discuss alternatives such as redeployment or reduced hours, and consider employee feedback.

After consultation, provide notice of termination in accordance with the employment contract or the statutory minimum under the Employment Ordinance (Cap. 57). For employees under a continuous contract, the statutory notice period is not less than seven days for the first month of employment, and not less than one month for subsequent months. The employer may make a payment in lieu of notice instead of requiring the employee to work through the notice period. Make the payment with the final settlement.

Hong Kong Employment Ordinance Redundancy

The hong kong employment ordinance redundancy provisions are found in Part VA of Cap. 57. An employee qualifies for severance payment if they have been employed under a continuous contract for at least 24 months and are dismissed by reason of redundancy. The employee must also have been engaged under a continuous contract, defined by the 4-18 rule: an employee employed continuously by the same employer for four weeks or more, working at least 18 hours in each week. Check this before calculating anything. An employee who falls short of the 24-month threshold receives no severance payment, regardless of the reason for dismissal.

Pay the severance payment within seven days of the date of termination. If the employer fails to pay, the employee may claim the amount through the Labour Department or the District Court. The Labour Department provides a free conciliation service for disputes over severance payment. Late payment attracts interest and invites a claim that costs far more than compliance.

Hong Kong Severance Payment Requirements

The hong kong severance payment requirements are set out in section 31G of the Employment Ordinance (Cap. 57). The severance payment is calculated as two-thirds (2/3) of the employee's last month's wages multiplied by the number of years of service. For incomplete years, the calculation is proportionate. The maximum severance payment is capped at HK$390,000, and the maximum reckonable years of service is 30.

The formula is: (2/3 × last month's wages) × years of service, subject to the cap. An employee with 10 years of service and a last month's wage of HK$20,000 would receive (2/3 × HK$20,000) × 10 = HK$133,333. If the last month's wage is HK$60,000, the calculation would be (2/3 × HK$60,000) × 10 = HK$400,000. The cap of HK$390,000 applies. Run the calculation twice: once on the formula, once against the cap. Pay the lower figure.

Hong Kong Layoff Rules

The hong kong layoff rules under the Employment Ordinance (Cap. 57) distinguish between redundancy and layoff. A layoff occurs when an employer temporarily suspends work or reduces working hours due to a shortage of work. If the layoff lasts for more than four consecutive weeks, or for more than 26 weeks in a 52-week period, the employee may be deemed to have been dismissed by reason of redundancy and may claim severance payment. The deeming provision bites hard. A layoff intended as a temporary measure can crystallise into a full redundancy liability if the clock runs past these thresholds.

An employee who is laid off may also claim severance payment if the employer fails to provide work for at least 12 weeks in a 52-week period. Document layoffs carefully. Communicate with employees about the expected duration and terms of the layoff. Silence during a layoff is the fastest route to a constructive dismissal claim.

Distinguishing Severance Payment From Long Service Payment

Severance payment and long service payment are both statutory entitlements under the Employment Ordinance (Cap. 57). They apply in different circumstances. Severance payment is payable when an employee is dismissed by reason of redundancy after at least 24 months of continuous service. Long service payment is payable when an employee resigns after at least five years of continuous service, or when the employee is dismissed for reasons other than redundancy after at least five years of service. The trigger matters. A redundancy dismissal activates severance; a resignation or non-redundancy dismissal activates long service payment.

An employee cannot receive both for the same period of service. If the employee qualifies for both, the employer pays the higher amount. The calculation for long service payment is the same as for severance payment: two-thirds of the last month's wages per year of service, subject to the same cap of HK$390,000 and a maximum of 30 years of service. Calculate both, compare, and pay the larger sum.

Abolition of MPF Offsetting From 1 May 2025

The abolition of MPF offsetting took effect on 1 May 2025. Before this date, employers could use the accrued benefits from their mandatory MPF contributions to offset severance payment or long service payment. Under the new rules, employers may no longer offset severance or long service payment using accrued benefits from mandatory contributions made on or after 1 May 2025. The change is not transitional in the sense of phasing in. It is a hard cut.

The abolition has no retrospective effect. For employees whose employment began before 1 May 2025, accrued benefits from mandatory contributions may still offset the portion of severance or long service payment calculated on years of service before that date. Accrued benefits from voluntary contributions, and gratuities based on length of service, may still be used to offset severance or long service payment. This means a single termination on 2 May 2025 can produce a split calculation: pre-abolition service offsettable, post-abolition service not.

The Government runs a subsidy scheme to share employers' expenses on severance and long service payment for service on or after 1 May 2025. Apply to the Labour Department for the subsidy within the prescribed timeframe.

End-of-Year Payment and Other Entitlements

An end-of-year payment, such as a thirteenth-month bonus, is not mandatory under Hong Kong law unless it is expressly provided for in the employment contract or is a customary entitlement. If the contract provides for an end-of-year payment, pay it in accordance with the terms. In a redundancy situation, settle any accrued but unpaid end-of-year payment as part of the final settlement. Do not assume redundancy extinguishes a contractual bonus obligation. It does not.

Settle any accrued but untaken annual leave, statutory holiday pay, and sickness allowance in the final settlement. The settlement must be made within seven days of the date of termination. That seven-day window covers severance payment, wages in lieu of notice, accrued leave, and any contractual sums. Miss it and the employee can file a claim the next day.

Record Keeping and Documentation

Maintain records of the redundancy process: the reasons for redundancy, the selection criteria used, the consultation process, and the calculation of severance payment. The Employment Ordinance (Cap. 57) requires employers to keep wage and employment records for at least six months after the termination of employment. The Labour Department may request these records in the event of a dispute. Six months is the statutory minimum. Retain them longer. A claim can surface well after the file has been archived.

Ensure that MPF contributions are made up to the date of termination and that the employee's MPF account is properly handled. Notify the MPF trustee of the termination within the required timeframe. An MPF shortfall discovered during a redundancy dispute turns a civil matter into a criminal one.