The practical answer is to separate three things from the start: eligibility, statutory severance pay, and any additional commercial payment. That approach helps you avoid one of the most common mistakes in termination discussions, which is treating every payment described informally as a “severance package” as though it were part of the same legal entitlement.
This distinction also matters in 2026 because Hong Kong’s statutory framework has continued to evolve. The “continuous contract” test changed on 18 January 2026, while the abolition of MPF offsetting had already taken effect before 2026 and now affects how severance is financed for employees whose service spans the transition date. The underlying statutory severance formula itself remains unchanged.
Understanding Severance Package Meaning and Basic Entitlements in HK
Severance package meaning can vary depending on who is using it. In Hong Kong employment practice, a statutory severance payment is a specific entitlement under the Employment Ordinance. A “severance package” is often used more broadly by employers, employees and advisers to describe the full collection of payments and benefits offered when employment ends. That wider package may include statutory severance, payment in lieu of notice, accrued salary, unused annual leave, an end-of-year payment, contractual benefits and, where agreed, an additional ex-gratia amount.
The two should not be confused. The Labour Department separately lists severance payment among the possible termination payments and explains that the amount and items due depend on the reason for termination, length of service and the employee’s contract. Other termination payments normally include outstanding wages, payment in lieu of notice, unused annual leave pay, pro-rata annual leave pay and relevant end-of-year payment.
For redundancy cases, the legal reason for termination is central. An employer closing its business, ceasing business at the location where you work, or experiencing a reduction or expected reduction in the need for employees to perform work of a particular kind can fall within the statutory definition of redundancy. A poor performance dismissal is not automatically a redundancy case simply because the employer pays a termination sum.
Lay-off is also defined rather than left entirely to ordinary workplace language. Where your remuneration depends on being provided with work and the employer fails to provide work or wages beyond the statutory thresholds, you may be regarded as laid off. The thresholds are more than half of the normal working days in any four consecutive weeks, or more than one-third of the normal working days in any 26 consecutive weeks, subject to the detailed statutory exclusions.
A fixed-term contract presents another common misunderstanding. Expiry of a contract does not automatically create a right to severance. For statutory severance to arise, the contract must expire without being renewed due to redundancy. The Labour Department also states that where the employer has offered in writing, at least seven days before the relevant dismissal or contract expiry, to renew the employment or re-engage the employee under a new contract, an employee who unreasonably refuses the offer may lose the relevant statutory entitlement.
Statutory Eligibility Criteria Under the Hong Kong Employment Ordinance
- You generally need at least 24 months of employment under a continuous contract immediately before the relevant termination date.
- You must fall within a statutory severance ground: dismissal by reason of redundancy, expiry of a fixed-term contract without renewal because of redundancy, or lay-off.
- The employer’s offer to renew or re-engage may affect eligibility if it was made in writing at least seven days before the relevant date and you unreasonably refused it.
- For the continuous-contract test applicable from 18 January 2026, you must have been employed continuously by the same employer for at least four weeks and meet either the 17-hours-per-week test or the 68-hours-in-four-weeks alternative where a week falls below 17 hours.
- The revised continuous-contract rule is not retrospective. Employment periods before 18 January 2026 remain subject to the earlier 18-hours-per-week threshold when determining continuous-contract status for that historical period.
- If you have more than five years of service and your employment ends because of redundancy, you are entitled to statutory severance rather than both severance payment and long service payment for the same termination.
The revised continuous-contract rule is particularly relevant to part-time and irregular workers. Before 18 January 2026, the ordinary working-hours test was at least 18 hours each week after four weeks of continuous employment. From 18 January 2026, a worker can meet the requirement by working at least 17 hours each week, or by reaching 68 hours over the specified four-week period where one of the weeks falls below 17 hours. The Labour Department has also stated that employers carry the burden of proving that an employment contract is not a continuous contract where the status is disputed.
Key Differences Between Severance Pay and Long Service Payment
Severance pay and long service payment are often discussed together because they use a similar statutory calculation method, but they arise in different circumstances. A redundancy dismissal generally leads to severance payment if the qualifying conditions are met. Long service payment is designed for qualifying long-serving employees whose employment ends for other specified reasons, and it is not payable alongside severance payment for the same termination.
| Point of comparison | Severance payment | Long service payment |
|---|---|---|
| Minimum service | At least 24 months under a continuous contract | At least 5 years under a continuous contract |
| Main qualifying grounds | Redundancy, qualifying fixed-term non-renewal due to redundancy, or lay-off | Dismissal other than redundancy or serious misconduct, qualifying fixed-term expiry, death, specified ill-health resignation, or resignation at age 65 or above |
| Can both be paid for the same termination? | No | No |
| Maximum statutory amount | HK$390,000 | HK$390,000 |
The difference is important when you read a termination letter. If the stated reason is redundancy, you should not assume that the employer can simply call the payment “long service payment” because you have five or more years of service. The Labour Department specifically states that an employee dismissed by reason of redundancy is eligible for severance payment but not long service payment for that termination.
There is also a timing difference. Long service payment is generally due within seven days after termination. Severance payment is different: the employee must normally serve a written claim notice within three months after dismissal or lay-off takes effect, and the employer must make the payment no later than two months after receiving that written notice.
How to Calculate Severance Payment HK Entitlements?
The statutory calculation is more precise than simply multiplying one month’s salary by years of service. The amount depends on whether you are monthly-rated or daily/piece-rated, which wages are used for the calculation, whether you have a partial year of service, and whether your employment spans the MPF offsetting transition.
For a monthly-rated employee, the basic formula is two-thirds of the relevant month’s wages multiplied by reckonable years of service, subject to the HK$22,500 monthly wage ceiling. Because two-thirds of HK$22,500 is HK$15,000, the statutory amount cannot exceed HK$15,000 for each reckonable year before the overall HK$390,000 cap is applied. A monthly-paid employee may elect to use average wages for the 12 months immediately preceding termination instead of the last full month’s wages, subject to the statutory rules.
For daily-rated or piece-rated employees, the calculation is based on any 18 days’ wages chosen by the employee from the last 30 normal working days, or the alternative average-wage method permitted by the law. The amount used for those 18 days is capped at HK$15,000 for the purpose of the calculation.
Statutory Formula and Maximum Capped Amounts
For a monthly-rated employee, you can express the calculation as:
Severance payment = 2/3 × relevant monthly wages × reckonable years of service
But there are two critical limits. First, the monthly wages adopted for the calculation cannot exceed HK$22,500. Second, the total statutory severance payable to an individual cannot exceed HK$390,000. For a non-monthly-rated employee, the relevant 18-day wage amount cannot exceed HK$15,000. These ceilings remain in force in 2026.
Reckonable service includes full years plus a proportion for an incomplete year. The Labour Department’s calculation guidance uses the exact number of days in the relevant year when determining the pro-rata portion: 365 days in a non-leap year and 366 days in a leap year. That matters when your employment ends part way through a year, especially where the final fraction materially affects the result.
| Illustrative case | Calculation basis | Statutory severance |
|---|---|---|
| Monthly-rated, HK$24,000 wages, 6 years | Cap at HK$22,500 → 2/3 × HK$22,500 × 6 | HK$90,000 |
| Monthly-rated, HK$18,000 wages, 3.5 years | 2/3 × HK$18,000 × 3.5 | HK$42,000 |
| Daily-rated, selected 18 days = HK$13,500, 4.25 years | HK$13,500 × 4.25 | HK$57,375 |
These examples are arithmetic illustrations rather than personalised legal calculations. The hardest part in practice is often identifying the correct wage figure, not doing the multiplication. A basic monthly salary figure shown on a payslip may not be identical to the statutory “wages” used for severance calculations.
Under the Employment Ordinance, “wages” is a broad statutory concept. It can include remuneration, earnings, allowances, commission, tips and service charges, while particular items are excluded. The Labour Department also states that overtime pay should be included when calculating severance and other statutory entitlements if it is of a constant character or if its monthly average over the preceding 12 months is at least 20% of the employee’s average monthly wages over the same period.
This is where many calculations go wrong. An employer may start with basic salary and overlook a recurring allowance or qualifying overtime. Conversely, an employee may assume every benefit appearing on the payslip must be part of the statutory calculation. Neither assumption is safe. The statutory definition needs to be applied to each pay element.
For employees whose service spans the MPF offsetting transition, the calculation has an additional layer. The severance amount is divided into a pre-transition portion and a post-transition portion. The pre-transition portion is calculated using the relevant wage basis immediately before the transition, while the post-transition portion uses the wage basis immediately before termination. The total remains subject to the HK$390,000 maximum.
The financing treatment also changed. Employer mandatory MPF contributions can still be used to offset the pre-transition portion for employees whose employment spans the transition date, but they cannot be used to offset the post-transition portion. Employer voluntary MPF contributions and certain qualifying gratuities can continue to be used for offsetting in the circumstances permitted by law. This distinction is particularly important for long-serving employees whose salary increased materially over time.
How to Use a Severance Payment Calculator for Accurate Results
The Hong Kong Labour Department provides an official severance payment calculator as part of its Statutory Employment Entitlements Reference Calculator. You can enter the employment start date, relevant termination date and the applicable employment and wage information, then select the severance payment calculation. The tool also identifies whether a case needs to be treated as a specified employee for the MPF offsetting transition arrangements.
Use the calculator as a checking tool, not as a substitute for reviewing the contract and payroll records. The Labour Department itself warns that the calculator output should not be used as evidence in legal proceedings and may not fully reflect case-specific factors.
For a more reliable result, gather the information in this order:
- Confirm the employment start date and relevant termination date.
- Check whether the employee meets the 24-month continuous-contract requirement and the applicable 2026 working-hours rules.
- Identify the statutory reason for termination and confirm whether redundancy, lay-off or qualifying fixed-term non-renewal applies.
- Review the last full month’s wages and the 12-month wage record, because the employee may have an election concerning the wage basis used for the calculation.
- Separate basic salary from allowances, commissions, overtime and bonuses, then test which items fall within the statutory definition of wages.
- Check whether employment spans the MPF offsetting transition and whether the two-portion calculation applies.
- Apply the HK$22,500 monthly wage ceiling, the HK$15,000 equivalent annual-service calculation ceiling and the HK$390,000 overall maximum.
For employees who are asked to sign a termination agreement, run the statutory calculation before negotiating any additional payment. This gives you a reference point. If the employer offers a larger commercial amount, you can then distinguish the statutory entitlement from the negotiated excess instead of treating the entire sum as though it had the same legal basis.
You should also keep copies of your employment contract, payslips, wage statements, bonus documents and the termination letter. These records become particularly useful where a dispute involves whether a payment is part of statutory wages, whether the termination was genuinely due to redundancy, or whether the employer calculated a partial service year correctly.
What Is Included in a Standard Severance Package?
A standard statutory termination package in Hong Kong is broader than severance pay alone. The exact amount depends on the employment contract and the reason for termination, but termination payments may include outstanding salary, payment in lieu of notice, unused annual leave, pro-rata annual leave pay, outstanding or pro-rata end-of-year payment and, where appropriate, statutory severance or long service payment.
A commercial severance package can go further. Employers sometimes offer an additional ex-gratia payment to support an agreed departure, particularly where the company wants a clean settlement, a release of claims or a mutually agreed termination. That extra amount is not automatically required by the Employment Ordinance simply because the employee is being made redundant.
The wording is important. “Three months’ severance” could mean three months of statutory-style compensation, three months of base salary as an ex-gratia payment, or three months of total cash compensation. The phrase itself is not precise. Your termination agreement should identify the amount and the legal or contractual basis for every significant component.
| Potential package component | Usually statutory or contractual? | What to check |
|---|---|---|
| Statutory severance payment | Statutory, where eligibility is met | 24-month service requirement, redundancy/lay-off ground, calculation and cap |
| Payment in lieu of notice | Statutory or contractual | Notice period, contract wording and taxable treatment |
| Unused annual leave pay | Statutory, subject to entitlement | Unused days and applicable average-wage calculation |
| Additional ex-gratia payment | Commercial, not automatically statutory | Amount, payment date, tax treatment and release wording |
There can also be non-cash elements. Depending on the employer and the agreement, you may see continued medical cover for a defined period, outplacement support, career coaching, a reference letter, retention of certain benefits through the notice period, or agreed treatment of deferred incentives. These are commercial arrangements and should be documented clearly rather than assumed from a verbal discussion.
Tax is another area where the label can mislead you. The Inland Revenue Department states that severance payments made strictly in accordance with the Employment Ordinance are not assessable to salaries tax, subject to the treatment of certain offsetting or retirement-scheme benefits. Sums paid in excess of the statutory entitlement should be reported, although the eventual tax treatment can depend on the circumstances and nature of the payment.
Payment in lieu of notice is different. The Inland Revenue Department treats payment in lieu of notice accruing from 1 April 2012 onwards as assessable to salaries tax, which is another reason why you should not assume that every payment within a termination package has the same tax treatment.
If the company is insolvent and cannot pay statutory severance, a separate safety net may apply. The Protection of Wages on Insolvency Fund can provide ex-gratia payment to eligible employees of insolvent employers for covered items including wages, wages in lieu of notice, severance payment and certain untaken leave. From 21 March 2025, the maximum ex-gratia amount for severance under the Fund was increased to HK$200,000 plus 50% of any excess entitlement, subject to the statutory scheme.
For a normal solvent employer, however, you should not think of the Protection of Wages on Insolvency Fund as part of your ordinary severance package. It is a statutory safety net for insolvency situations, not a substitute for an employer’s normal obligation to pay amounts that have become due.
One further timing point matters in practice. Most termination payments other than severance payment should generally be made as soon as practicable and no later than seven days after termination or contract expiry. Severance payment has its separate two-month deadline after the employee’s written claim. Keeping those two timing rules distinct can prevent unnecessary disputes when final payroll is being processed.
FAQ About HK Severance Payment
1. What is severance payment in Hong Kong?
Statutory severance payment is a payment due to an eligible employee whose employment ends through qualifying redundancy, lay-off or certain fixed-term non-renewal circumstances. The employee generally needs at least 24 months under a continuous contract. The calculation is prescribed by law and is separate from any additional ex-gratia or negotiated termination payment.
2. How much severance pay can you receive?
There is no single fixed amount because the payment depends on the statutory wage basis and reckonable service. For a monthly-rated employee, the calculation is generally two-thirds of the relevant monthly wages multiplied by reckonable years of service, with the wage calculation capped at HK$22,500. The resulting amount is therefore capped at HK$15,000 per reckonable year, with an overall maximum of HK$390,000.
3. Does every employee who is made redundant receive severance payment?
No. The 24-month continuous-contract requirement must generally be met, and the dismissal must fall within the statutory redundancy rules. The circumstances of the termination, the employee’s contract status and the applicable continuous-contract test all matter.
4. Can you receive severance payment if your fixed-term contract simply expires?
Not automatically. Statutory severance may apply where a fixed-term contract expires without renewal because of redundancy. An ordinary contract expiry without the qualifying redundancy reason does not by itself create a severance entitlement.
5. Does lay-off mean the same thing as dismissal?
No. Lay-off is a defined statutory situation relating to the employer’s failure to provide work or wages where remuneration depends on being given work. The Employment Ordinance sets specific thresholds based on normal working days over four-week and 26-week periods.
6. How long do you have to claim severance payment?
You should normally serve written notice to the employer claiming severance payment within three months after the dismissal or lay-off takes effect. The Commissioner for Labour may extend that period in appropriate circumstances. Once the employer receives the written claim, the employer must generally pay the severance payment within two months.
7. Does your basic salary determine severance payment?
Not necessarily. The statutory calculation uses the legal definition of wages, which can include certain allowances, commissions and overtime payments as well as ordinary salary. Qualifying regular overtime can also form part of the wage basis. You therefore need to review the components of pay rather than simply copy the “basic salary” figure from the payslip.
8. Can bonuses be included in severance calculations?
Some can. The Employment Ordinance definition of wages includes qualifying remuneration and certain bonuses, but it excludes an end-of-year payment or annual bonus that is genuinely gratuitous or payable only at the employer’s discretion. The terms of the bonus and the way it is paid therefore matter.
9. Does overtime count towards severance payment?
It can. The Labour Department states that overtime pay should be included in calculating severance payment when it is of a constant character or its monthly average over the preceding 12 months is at least 20% of the employee’s average monthly wages during the same period.
10. What changed for severance payment after the MPF offsetting reform?
The statutory formula and HK$390,000 maximum did not change. What changed was the ability to use employer MPF mandatory contributions to offset the entitlement. For employment spanning the transition, employer mandatory MPF benefits can continue to offset the pre-transition portion but not the post-transition portion. Employer voluntary MPF benefits and certain service-related gratuities may still be used subject to the applicable rules.
11. Is statutory severance payment taxable in Hong Kong?
Severance payment paid strictly in accordance with the Employment Ordinance is generally not assessable to salaries tax. However, other termination payments can have different tax treatment, and amounts exceeding the statutory entitlement should be reported to the Inland Revenue Department. Payment in lieu of notice is treated separately for salaries tax purposes.
12. What is normally included in a severance package?
A termination package may contain statutory severance plus outstanding salary, notice pay, annual leave pay, a pro-rata end-of-year payment and other contractual sums. An employer can also agree an additional ex-gratia payment or non-cash benefits. Because these elements can have different legal and tax treatment, your termination agreement should identify them separately rather than using one unexplained lump-sum figure.
References
- Hong Kong Labour Department — The Employment Ordinance, Severance Payment and Long Service Payment: https://www.labour.gov.hk/eng/faq/cap57l_whole.htm
- Hong Kong Labour Department — Chapter 11: Severance Payment and Long Service Payment: https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/11.pdf
- Hong Kong Labour Department — Statutory Employment Entitlements Reference Calculator: https://www.labour.gov.hk/eng/labour/Statutory_Employment_Entitlements_Reference_Calculator.htm
- Hong Kong Labour Department — Education Tool on the New Continuous Contract Requirement: https://www.labour.gov.hk/eng/labour/Continuous_Contract_EduTool.htm
- Hong Kong Labour Department — Abolition of MPF Offsetting Arrangement: https://www.op.labour.gov.hk/en/what-is-abolition.html
- Hong Kong Labour Department — Statutory Employment Entitlements and MPF Offsetting Calculator: https://www.op.labour.gov.hk/en/calculator.html
- Hong Kong Inland Revenue Department — FAQ on Completion of Tax Return: https://www.ird.gov.hk/eng/faq/ctr.htm
- Community Legal Information Centre — Severance Payment: https://clic.org.hk/en/topics/employmentDisputes/mattersRelatedToEmploymentOrdinance/terminationOfEmploymentAndTheRelevantPayments/severance_payment
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