A Guide to Severance Pay in HK: Rules & Calculations

What Is Severance Pay (HK)?

Severance pay is a statutory compensation payment mandated under the Employment Ordinance. It is payable by an employer specifically when an employee's contract is terminated due to redundancy or lay-off. Its purpose is to provide financial support for employees who lose their jobs involuntarily — not through their own conduct, but as a consequence of business decisions made by the employer.

It is important to understand from the outset that severance pay is not a general exit payment. It does not apply to every departure from employment. The entitlement is conditional — tied to how the contract was ended, how long you have been employed, and the structure of your working arrangement.

Are You Eligible for Severance Pay in HK?

To be legally entitled to severance pay under the Employment Ordinance, you must satisfy all three of the following conditions simultaneously.

Condition 1: Continuous Contract Under the "468 Rule"

You must have been continuously employed by the same employer for 4 weeks or more, and your working arrangement must meet at least one of the following thresholds:

• You work no fewer than 17 hours per week; or
  
• Your total working hours across any 4-week period are no fewer than 68 hours
  

This is known as the "468 Rule." It applies equally to full-time employees, part-time employees, and long-term casual workers. If your arrangement meets these thresholds, you are covered under a continuous contract.

Condition 2: A Minimum of 24 Months' Continuous Service

This is the hard statutory threshold. If your total continuous service with the employer is less than 24 months — even by a single day — your employer has no legal obligation to pay severance pay, though notice pay or payment in lieu of notice may still be owed.

If you have been continuously employed for 5 years or more, a separate entitlement known as Long Service Payment may apply. However, you can only claim one of the two — severance pay and long service payment cannot both be claimed for the same termination.

Condition 3: Your Dismissal Was Due to Redundancy or Lay-Off

Under the Employment Ordinance, your termination qualifies as redundancy if your employer terminated your contract because they:

• Have ceased or intend to cease their business entirely
  
• Have ceased or intend to cease operating the specific workplace where you were employed
  
• Have experienced, or reasonably anticipate, a reduced need for employees performing the type of work you did — for example, due to business restructuring, automation, or downsizing
  

A fixed-term contract that is not renewed for any of the above reasons is also treated as a qualifying redundancy.

Lay-off is a separate qualifying ground that primarily applies to employees paid by piece-rate or daily rate — that is, where your pay depends directly on work being allocated by the employer. It is triggered when, during any consecutive 4-week period, the number of days you receive no work and no pay exceeds half of your normal working days; or when, during any 26-week period, this exceeds one-third of your normal working days.

If you do not qualify: Voluntary resignation, dismissal for serious misconduct, and refusal of a renewed contract on terms no less favourable than your original contract do not entitle you to severance pay.

Am I Eligible for Other Entitlements at Termination?

Severance pay is the primary statutory payment on redundancy, but it is not the only one. Depending on the circumstances of your termination and your contract, you may also be entitled to the following.

• Notice Pay or Payment in Lieu of Notice
  

Unless your contract provides otherwise, the Employment Ordinance requires your employer to give you at least one month's notice of termination, or to pay you one month's wages in lieu of notice. Some employment contracts specify longer notice periods — your entitlement is whichever is greater: the contractual period or the statutory minimum.

If you were dismissed without notice and without a payment in lieu, this is a breach of the Ordinance and can be pursued through the Labour Tribunal.

• Accrued But Untaken Annual Leave
  

Any annual leave that you have accrued but not taken by the date of termination must be paid out at your daily rate of wages. This applies to leave entitlements that have already been earned under your contract. Pro-rated leave for the current leave year should also be considered, though the treatment depends on the terms of your contract and when in the leave cycle the termination falls.

• MPF Entitlements
  

Your Mandatory Provident Fund (MPF) accrued benefits belong to you. Upon termination, both your own employee contributions and the vested portion of your employer's mandatory contributions will be accessible to you through your MPF trustee. Note that if your employer exercises their right to offset severance pay against pre-transition MPF contributions (see below), the amount available to you from the MPF account may be reduced accordingly.

How Severance Pay Is Calculated in HK: The Updated Formula (Post-MPF Offset Abolition)

The abolition of the MPF offset mechanism on 1 May 2025 changed how severance pay is calculated for employees who were in employment before that date. Understanding the two-part structure is essential to verifying whether the amount your employer has calculated is correct.

The Core Formula

Severance Pay = Years of Service × Last Month's Salary × 2/3

Two statutory caps apply:

• The monthly salary used in the calculation is capped at HK$22,500, giving a maximum of HK$15,000 per completed year of service
  
• The total severance payment is capped at HK$390,000 regardless of length of service
  

Two-Part Calculation for Employees in Service Before 1 May 2025

If you were employed before 1 May 2025, your total service years must be split into two portions at the Transition Date, because different offset rules apply to each.

Part 1 — Pre-Transition Service (up to 30 April 2025)

The salary used to calculate this portion is your full monthly wage in April 2025 (the last month before the Transition Date), or the average of your monthly wages over the 12 months preceding 1 May 2025 — you are entitled to elect whichever is more favourable.

Your employer retains the right to offset this portion using their accrued MPF mandatory and voluntary contributions. This means the amount your employer actually pays you in cash for this portion may be reduced — or potentially eliminated — by the MPF balance they apply.

Part 2 — Post-Transition Service (from 1 May 2025 onwards)

The salary used for this portion is your full monthly wage in the last month before your termination date, or the average of your monthly wages over the last 12 months of employment — again, whichever you elect.

For this portion, mandatory MPF contributions cannot be used to offset your severance pay under any circumstances. Your employer must pay this amount entirely in cash from company funds. Voluntary MPF contributions, if any, may still be applied as an offset.

For employees who joined on or after 1 May 2025: Your entire period of service falls under the post-transition rules. No mandatory MPF offset applies to any part of your severance pay.

Worked Example

Scenario: You joined on 1 May 2021 and were made redundant on 1 May 2026 — exactly 5 years of service. Your monthly salary in April 2025 was HK$21,000. Your monthly salary in April 2026 was HK$24,000.

• Pre-transition portion (4 years: 1 May 2021 – 30 April 2025) April 2025 salary of HK$21,000 is below the HK$22,500 cap, so the full salary is used: HK$21,000 × 2/3 × 4 = HK$56,000 Your employer may offset this against their MPF contributions accrued over this period.
  
• Post-transition portion (1 year: 1 May 2025 – 1 May 2026) April 2026 salary of HK$24,000 exceeds the cap, so HK$22,500 is used: HK$22,500 × 2/3 × 1 = HK$15,000 Your employer must pay this in cash. No mandatory MPF offset is permitted.
  
• Total statutory severance entitlement: HK$71,000 Of this, HK$15,000 must be paid to you directly in cash. The remaining HK$56,000 may be offset by the employer from their MPF trustee account, subject to the balance available.
  

What If Your Employer Claims They Cannot Pay?

If your employer is insolvent — meaning the company is being wound up, the individual employer has been declared bankrupt, or the business has ceased operations — you may apply for assistance through the Protection of Wages on Insolvency Fund.

This government fund provides ex-gratia payments to employees who cannot recover their statutory entitlements because their employer is financially unable to pay. Applications are made to the Labour Department.

The maximum amounts currently payable under the Fund are:

[Table:1]

Note that the Fund applies caps to each category. If the full statutory amount owed to you exceeds these limits, the excess may not be recoverable through this route — though you may still pursue a claim through the liquidator or bankruptcy proceedings.

Is Severance Pay Subject to Salaries Tax?

This is one of the most commonly misunderstood aspects of severance pay for employees.

Statutory severance pay is exempt from salaries tax. The amount calculated and paid in strict accordance with the Employment Ordinance formula does not need to be declared on your BIR60 tax return as assessable income. The exempt amount is calculated after deducting:

• Any completion-of-contract gratuity paid by reference to years of service
  
• Benefits from an occupational retirement scheme attributable to employer contributions and investment returns
  
• The accrued mandatory benefits from your employer's MPF contributions and related returns
  

However, any amount above the statutory entitlement is taxable. If your employer pays you an ex-gratia payment on top of the legally required severance amount — or if your total redundancy package exceeds the statutory calculation — the excess is treated as assessable employment income and must be declared.

Payments received through the Protection of Wages on Insolvency Fund follow the same principle: the statutory portion is exempt, and any excess above that is assessable.

For your personal tax filing, you only need to declare the taxable portion in your BIR60 return. The statutory exempt net amount does not need to be reported. If you are uncertain about your specific position, the Inland Revenue Department's guidance on chargeable and non-chargeable income is the authoritative reference.

How to Pursue Your Entitlements: Practical Steps

If you believe your employer has underpaid, miscalculated, or refused to pay your statutory entitlements, you have formal recourse available.

• Step 1: Request a written breakdown. Ask your employer to provide a written calculation of your severance pay, including the salary figures used, the service years applied, and whether — and how much — any MPF offset has been applied.
  
• Step 2: Verify the calculation yourself. Use the formula above to cross-check their figures. Pay particular attention to whether the pre- and post-transition split has been applied correctly, and whether the wage caps have been observed.
  
• Step 3: Contact the Labour Department. The Labour Department operates free conciliation services for employment disputes. You can submit a claim online or attend any of their district offices. In most cases, the Department will first attempt conciliation between you and your employer.
  
• Step 4: File a claim with the Labour Tribunal. If conciliation fails, you may file a claim with the Labour Tribunal — a court specifically established for employment disputes in Hong Kong. Claims involving amounts within the jurisdiction limit are handled without the need for legal representation, though you may choose to instruct a solicitor.
  

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Frequently Asked Questions

Q: I resigned — am I entitled to severance pay?

No. Voluntary resignation does not qualify. Severance pay is payable only when the employer terminates the contract due to redundancy or lay-off. The termination must be initiated by the employer for a qualifying business reason.

Q: My fixed-term contract was not renewed. Does this count as redundancy?

It may. If your fixed-term contract was not renewed because of a reduction in the need for your type of work, a business closure, or a workplace closure — and you have at least 24 months of continuous service — you may qualify. If your employer offered renewal on terms that are no less favourable than your original contract and you declined, you would not qualify.

Q: Can my employer use my MPF to reduce my severance pay?

Partly, depending on when your service commenced. For service years up to 30 April 2025, your employer retains the right to offset using their mandatory and voluntary MPF contributions. For service years from 1 May 2025 onwards, mandatory MPF contributions cannot be used as an offset — your employer must pay that portion in cash. Voluntary contributions may still be offset for both periods.

Q: I reached exactly 24 months of service during my notice period. Am I entitled?

Yes. Service years are calculated up to the actual termination date of the contract — the last day of the notice period. If the notice period ends on the day you complete exactly 24 months of continuous service, you meet the qualifying threshold.

Q: Does company relocation count as redundancy?

It can, depending on the facts. If the new location significantly increases your commuting time or cost and your employment contract does not provide for changes in work location, your refusal to relocate may constitute constructive dismissal — which can be treated as redundancy. This is a fact-specific question; consulting the Labour Department or a qualified employment lawyer is recommended before drawing any conclusions.

Q: What is the difference between severance pay and long service payment?

Both are calculated using the same formula, but they apply in different circumstances. Severance pay applies when you are dismissed due to redundancy or lay-off. Long service payment applies when you are dismissed for reasons other than redundancy (and not due to serious misconduct), or when you resign after 5 or more years of service due to ill health, or upon reaching the age of 65. You cannot receive both for the same period of service.