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Long Service Payment and Severance Payment: Requirements for Employers

When running a business and hiring people as an employer in Hong Kong, it's crucial to understand the legal obligations and entitlements related to long service payment and severance payment. In this guide, we will delve into the details of long service payment and severance payment, providing you with the necessary understanding to navigate the local rules effectively.

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What is Long Service Payment?

Long service payment is a statutory payment provided to eligible employees who have completed a continuous period of service with a single employer for not less than 5 years and has met certain conditions under the Employment Ordinance (Cap. 57).


Eligibility for Long Service Payment

To be eligible for long service payment, employees must meet following criteria:


Primary criteria : Employees must have served the same employer for a continuous period of not less than five years. This includes periods of uninterrupted employment, even if there were changes in the employee's terms and conditions or transfers within the same group of companies,  

and one of the following criteria:

  1. Dismissal: Long service payment is payable upon the employee's dismissal, except the staff is summarily dismissed due to serious misconduct or by reason of redundancy* (please see below definition)

  2. Fixed term contract without being renewed: If the employer provides a written offer to renew the employment contract or engage the employee under a new contract, not less than 7 days before the dismissal/expiry of the fixed-term contract for severance payment, or not less than 7 days before the expiry of the fixed-term contract for long service payment, and the employee unreasonably refuses the offer, they will not be eligible for the entitled benefits.

  3. Retirement: Long service payment is also payable upon the employee's retirement at or after the age of 65

  4. Death

  5. Ill Health: Resigns on the ground of ill health


What is Severance Payment?

Severance payment is another statutory payment provided to eligible employees in the event of redundancy or termination due to business closure. The Employment Ordinance (Cap. 57) governs severance payment and ensures that employees are compensated fairly when facing redundancy.


Eligibility for Severance Payment

To be eligible for severance payment, employees must meet the following criteria:

  1. Minimum Period of Service: Employees must have been employed under a continuous contract for not less than two years; and

  2. Redundancy or Business Closure: Severance payment is payable when an employee is dismissed due to redundancy*; or

  3. Fixed term contract expires without being renewed by reason of redundancy*


*Definition of redundancy:

An employee is taken to be dismissed by reason of redundancy if the dismissal is due to the fact that:

  1. the employer closes or intends to close his business;

  2. the employer has ceased, or intends to cease, the business in the place where the employee was employed; or

  3. the requirement of the business for employees to carry out work of a particular kind, or for the employee to carry out work of a particular kind in the place where the employee was employed, ceases or diminishes or is expected to cease or diminish.


Exceptions: It's important to note that severance payment is not applicable in certain circumstances, such as when an employee is dismissed due to serious misconduct or poor performance or fixed-term contracts that expire naturally without renewal or the employee resigns voluntarily


Calculation of Long Service Payment / Severance Payment

The calculation is based on the employee's monthly wages and the completed years of service. The formula is as follows:


(2/3 of the employee's last full month's wages#)* × reckonable years of service


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


# Instead of last month's wages, an employee may also elect to use his average wages in the 12 months immediately preceding the termination of employment contract for the calculation.


For example, if an employee's last full month's wages were HKD 30,000 and has completed 10 years of service, the long service payment calculation would be:


2/3 × HKD 22,500 × 10 = HKD 150,000


Maximum Limits for Long Service Payment / Severance Payment

If the relevant date of termination of employment occurs on or after 1 October 2003, the maximum amount of severance payment or long service payment is HKD$390,000.


Payment deadline for Long Service Payment / Severance Payment

Long service payment should be paid to an employee within seven days after the date of termination of employment contract.


For Severance Payment, the staff has to serve a written notice to his employer within three months after the dismissal / lay off takes effect. The employer shall make the severance payment to the employee not later than two months from the receipt of such a notice.


Can Long Service Payment or Severance Payment be offset from MPF?

Under the existing law, employers may still opt for offsetting the LSP/SP payable to employees under the Employment Ordinance against the accrued benefits of MPF derived from the employer’s mandatory and voluntary contribution. These offset arrangements must be documented and agreed upon by both the employer and employee. The offset amounts should not surpass the total amount owed to the employee for these payments and should not be used to evade compensatory obligations. Seek our advice for more details on the offsetting procedures!


Abolition of MPF offsetting arrangement

As announced by the government, the abolition of the MPF offsetting arrangement comes into effect on 1 May 2025. Employers are required to pay long service payments and severance payments in full without making an offsetting request. It is essential for employers to plan ahead for budgeting these payments in the future. Additionally, employees need to understand their entitlements and the changes resulting from the abolishment. Consult with us for more details!




FAQs

Is Long Service Payment / Severance Payment taxable?

Sums paid as severance payments or long service payments strictly in accordance with the provisions of the Employment Ordinance (EO) are not assessable to salaries tax. 



Is Long Service Payment / Severance Payment part of relevant income for computing MPF?

No, relevant income excludes severance payments or long service payments under the Employment Ordinance.



Are there any exemptions or special circumstances where an employer may not be required to provide these payments?

Employees who meet the length of service requirement may still be exempt from receiving these payment in certain situations. For Severance Payment, these exclusions can arise if the termination is not by reason of redudancy, e.g. as a result of serious misconduct or poor performance or if the employer has valid reasons under the Employment Ordinance to justify terminating the employee without providing severance pay.


I wish to pay an extra amount exceeding the Employment Ordinance formula as a compensation to the staff. Are these amount non-taxable?

No, only the part that is calculated in accordance with the Employment Ordinance can be considered as non-taxable.


If any amount paid to the employees exceeds the amount calculated as per the formula, the excess amount will be an additional reward for your services and will be subjected to taxes. It should also be reported in the employers' returns to the Inland Revenue Department.


How is long service payment calculated for domestic helpers in Hong Kong?

Same as above formula, (Monthly salary x 2/3) x number of years of service. The maximum amount is HKD $390,000 and employers must pay it to helpers who have worked continuously for at least five years.


Can an employee be entitled to both Long Service Payment and Severance Payment at the same time?

No, an employee will be entitled to only either Long Service Payment or Severance Payment.



Conclusion

Understanding the requirements and implications of long service payment and severance payment is crucial for employers. It ensures compliance with the law and protects the rights of employees. Long service payment is based on an employee's length of service, while severance payment is provided in case of redundancy or termination. Employers must also understand the key differences between the two payment types and their impacts on company finances and employee relations.


Additionally, it is important to be aware of the arrangements for offsetting these payments and the upcoming abolition of the MPF offsetting arrangement. If you have any further questions or need assistance, please don't hesitate to get in touch with our HR & Payroll Outsourcing Team.


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