Severance Payment vs Long Service Payment Under Hong Kong Employment Law

Understanding Hong Kong Severance Payment vs Long Service Payment

Under the Employment Ordinance (Cap. 57), two statutory payments exist for employees whose employment ends after a period of continuous service: severance payment and long service payment. The distinction between hong kong severance payment vs long service payment lies primarily in the reason for termination and the length of service required. Both payments compensate an employee for the loss of employment, but the trigger events differ. Severance payment applies when an employee is made redundant or dismissed by reason of redundancy, while long service payment applies when an employee who has served for at least five years leaves employment for reasons other than redundancy, including resignation at or after age 65, dismissal not due to redundancy, or death.

Eligibility Triggers: Severance Payment vs Long Service Payment

Both payments are mutually exclusive. An employee cannot receive both for the same period of service. If the employee qualifies for both, the higher amount is payable.

Hong Kong Severance Payment Eligibility

To qualify for severance payment, the employee must have been employed under a continuous contract for at least 24 months immediately before the termination date. The termination must be by reason of redundancy. The Employment Ordinance (Cap. 57) defines redundancy as dismissal where the employer ceases or intends to cease carrying on the business, or where the employer's need for employees to carry out work of a particular kind has ceased or diminished, or is expected to cease or diminish.

A lay-off of more than four consecutive weeks, or six non-consecutive weeks in a four-month period, also triggers severance payment eligibility. The employee must give written notice to the employer within one month of the lay-off to claim the payment.

The employee loses the right to severance payment if the employer offers suitable alternative employment and the employee unreasonably refuses it, or if the employee is dismissed for misconduct.

Hong Kong Long Service Payment Calculation

Long service payment is calculated using the same formula as severance payment. The amount is:

• For the first 40 years of service: (last month's wages × 2/3) × years of service
• For service beyond 40 years: (last month's wages × 1/3) × years of service

The maximum number of years of service that can be counted is capped at 60. The payment is also capped at a maximum of HK$390,000 per employee, based on the last month's wages of HK$22,500 multiplied by 2/3 and then by 26 years (the maximum service period used in the cap calculation).

"Last month's wages" means the wages earned by the employee in the month immediately before the termination date, excluding any overtime pay, end-of-year payment, or other discretionary bonuses. The Labour Department provides a calculator on its website to assist with the computation.

Hong Kong Employment Ordinance Termination Payments

The Employment Ordinance (Cap. 57) governs all termination payments, including severance payment, long service payment, payment in lieu of notice, and end-of-year payment. The ordinance requires employers to make these payments within seven days of the termination date, unless the employee has given less than the required notice period, in which case the payment is due within seven days of the notice being given.

Termination payments are separate from wages and must be paid in addition to any outstanding wages, annual leave pay, or holiday pay. The ordinance also provides for remedies if an employer fails to make a termination payment, including the right for the employee to claim the amount through the Labour Tribunal.

The 4-18 Rule and Continuous Contract

Both severance payment and long service payment require the employee to be under a continuous contract. The 4-18 rule defines a continuous contract as employment with the same employer for four or more consecutive weeks, with at least 18 hours worked in each week. This rule unlocks all statutory entitlements under the Employment Ordinance, including rest days, paid annual leave, sickness allowance, and the termination payments discussed here.

MPF Offsetting and the Abolition

Before 1 May 2025, employers could use the accrued benefits from their mandatory MPF contributions to offset severance payment or long service payment. This offsetting arrangement was abolished with effect from 1 May 2025. Employers may no longer use mandatory contribution accrued benefits to offset the portion of severance or long service payment calculated on service on or after that date.

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 the entire payment.

The Government operates a subsidy scheme to share employers' expenses on severance and long service payment for service on or after 1 May 2025. Employers should consult the Labour Department for details on the subsidy application process.

Practical Considerations for Employers

Employers must maintain accurate records of each employee's continuous service, wages, and MPF contributions. The Labour Department recommends keeping these records for at least six years after the termination of employment. When calculating severance or long service payment, employers should:

1. Confirm the employee's continuous service period under the 4-18 rule.
2. Determine the reason for termination and whether it triggers severance or long service payment.
3. Calculate the payment using the statutory formula, applying the cap on years of service and the maximum payment amount.
4. Deduct any offsettable MPF accrued benefits for service before 1 May 2025, if applicable.
5. Make the payment within seven days of termination.

Failure to pay severance or long service payment on time may result in the employer being ordered to pay the amount plus interest, and the Labour Department may prosecute for non-compliance.

Summary of Key Differences

Employers should review their payroll systems and employment contracts to ensure compliance with the current rules, particularly the abolition of MPF offsetting. The Labour Department provides guidance notes and a severance/long service payment calculator on its website.