9. When is an employer required to pay a severance payment to an employee?

An employer should pay a severance payment when an employee, who has been employed under a continuous contract for not less than 24 months, is dismissed due to redundancy or is laid off. (Note: A series of short contracts of employment of less than 24 months may still be treated as a single contract. More details are stated on the last two paragraphs.)

Meaning of Redundancy

An employee is considered to be dismissed due to redundancy if the dismissal is due to the fact that:

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

Meaning of Lay-off

If an employee is employed on such terms and conditions that the remuneration depends on the amount of work provided by the employer, the employee will be considered to be laid off if the total number of days on which no work is provided or no wage is paid exceeds:
- half of the total number of normal working days in any four consecutive weeks; or
- one-third of the total number of normal working days in any 26 consecutive weeks.
Rest days, annual leave and statutory holidays should not be counted as normal working days during the above periods.

Employees who wish to claim for severance payments should serve written notice to their employers within three months after the dismissal/lay off takes effect. The deadline for serving such notice may be extended if approved by the Commissioner for Labour. The employers must make the severance payments to their employees not later than two months from the receipt of such notice.

Amount of payment

The following formula applies to the calculation of both severance payments and long service payments:

Service for an incomplete year should be calculated on a pro rata basis.

* The sum should not exceed 2/3 of $22,500. Employees may also elect to use their average wages in the last 12 months for the calculation.

Reckonable Years of Services

For (i) all manual employees and (ii) those non-manual employees whose average monthly wages did not exceed $15,000 for the 12 months preceding 8 June 1990, the years of service should be reckoned in accordance with Table 1. If the years of service exceed the fully reckonable years of service, 50% of such years of service should be reckoned.

For non-manual employees whose average monthly wages exceeded $15,000 for the 12 months preceding 8 June 1990, their years of service can be reckoned up to 1980.

Table 1

Example:

Date of dismissal: 1.10.2002
Monthly wages before dismissal: $15,000
Years of service: 43 years

Amount of Severance Payment/ Long Service Payment :

$15,000 x 2/3 x [41 +( 43 - 41)/2 )]* = $420,000 (=$370,000)**

NOTE : An employee will not be simultaneously entitled to both long service payment and severance payment.

For details of the calculation, please visit the Labour Department’s webpage at http://www.labour.gov.hk/eng/faq/cap57l_whole.htm#q6 or call the Labour Department's hotline at 27171771.

Offences and Penalties

Employers who fail to pay severance payment to employees are liable to prosecution and, upon conviction, to a fine of $50,000.

In order to avoid paying the severance payment, many industries in Hong Kong have adopted a method which precludes the operation of the Ordinance's protection. It is by way of a series of contracts of employment of less than 24 months. The employee is required to take a short break before taking up a new contract. An example can be found in a Court of Appeal case ( Wong Man Sum v Wonderland Sea Food Restaurant O/B Long Yield Co. Ltd ).

With reference to the judgment of the above case, if the employer has said or done something such as to show that the parties regarded the employment relationship as continuing despite the termination of the contract of employment, then a series of “less than 24 months” contracts can be treated as a single contract. However, an expectation that the employee would return to his old job after a short break is insufficient. There must be evidence of mutual arrangement between the employer and the employee. This will involve complex legal argument and legal advice must be sought.