Terminating an employee in Hong Kong requires careful foresight and consideration of applicable employment laws, especially when calculating termination payments. Depending on the circumstances surrounding an employee’s termination, the employer may be required to make the following payments:
- accrued wages until the last day of employment;
- payment in lieu of notice (in case termination is not made with full notice);
- annual leave and outstanding holiday pay;
- contractual end-of-year entitlements;
- statutory long-service or severance payment;
- any other amounts owed under the employment contract.
This article addresses key questions about statutory payments due upon termination.
The law in this respect is complex. Please note that this article does not, and is not intended to, constitute legal advice, and should not be relied upon as such. Slotine can assist with issues surrounding employment termination. Please contact us if you wish to learn more about this.
WHEN AND HOW TO MAKE TERMINATION PAYMENTS
What is the deadline for the employer to make statutory termination payments?
All statutory termination payments (besides severance payments and certain end-of-year payments, see respective questions below) must be paid to the employee within seven days of the date of termination. An employer who fails to comply with the seven-day limit may be investigated and prosecuted and, in case of conviction, may be liable to a fine of up to HK$350,000 and imprisonment for up to three years.
Is there any requirement for the employer to document the termination payments?
Under the Employment Ordinance (Cap. 57) (EO), employers must keep records of the employee’s wages and employment history for the preceding 12 months, and retain them for six months after the termination date.
Nonetheless, it is good practice for the employer to provide a final payment letter on the employee’s last day of employment, recording all termination payments. The employee may be invited to countersign such letter to confirm reception of the funds.
PAYMENT IN LIEU OF NOTICE (PILON)
In which circumstances are employees entitled to PILON?
Hong Kong employment law is quite unique as it allows both the employee and the employer to unilaterally opt for making a payment in lieu of serving the notice period. If either party chooses to make a PILON, consent by the other party is not required. This right cannot be extinguished contractually. Any term in the employment contract that prevents the exercise of the right to make a PILON is void.
In addition, once notice of termination has been given by a party, either party remains entitled to unilaterally make a switch to PILON for the remaining notice period.
How is PILON calculated?
The calculation method depends on how the notice period is expressed in the employment contract:
- For days or weeks: average daily wages (past 12 months) x number of days in notice period
- For months: average monthly wages (past 12 months) x number of months in notice period
Where a party decides to switch to PILON whilst the notice period has already commenced, the payment will be calculated on a pro-rata basis for the remaining notice period.
How are average daily wages or average monthly wages calculated?
Average daily or monthly wages are calculated by reference to the wages earned by the employee in the 12-month period preceding termination. In case the employee has been employed for less than 12 months, the average wages are calculated with reference to that shorter period.
Under the EO, the definition of “wages” is nuanced and involves multiple components. Generally, it includes an employee’s remuneration and allowances payable in respect of work done. This excludes payments such as discretionary bonuses, expenses and contributions made by the employer to a retirement scheme. The question of whether certain remuneration items such as bonuses, commissions and allowances are categorised as “wages” is not straightforward, as evidenced by the substantial amount of case law on what can be regarded as wages.
ANNUAL LEAVE PAY
How is annual leave pay calculated?
Similar to PILON, annual leave pay is also calculated based on the employee’s average daily wages, earned by the employee in the 12-month period preceding the termination date.
For more information on annual leave, see our Q&A on annual leave entitlements.
When are employees entitled to annual leave pay?
Upon termination, employees are entitled to payment for accrued but untaken annual leave in respect of previous leave year(s). In addition, if the employee has been employed for more than three months within the ongoing leave year as at termination, pro-rata annual leave will also be payable for the current leave year.
Does an employee remain entitled to annual leave pay if they are summarily dismissed?
In cases of summary dismissal (termination without notice nor PILON for serious misconduct), employees are only entitled to payment for accrued but untaken annual leave in respect of previous leave year(s), but they are not entitled to pro-rata annual leave in respect of the ongoing leave year upon termination.
PRO-RATA END-OF-YEAR PAYMENT
What is an end-of-year payment?
Under the EO, an end-of-year payment is any annual payment or bonus of a contractual nature which is not gratuitous. This includes payments such as 13th month pay, end-of-year and Chinese New Year bonuses. A bonus that is purely discretionary in nature does not constitute an end-of-year payment. Unless specifically provided for otherwise in the employment contract, there is a statutory presumption that an end-of-year payment is not gratuitous in nature and governed by the EO.
When are employees entitled to an end-of-year payment upon termination?
The bonus year is the period of accrual of an end-of year-payment. In practice, the due date for payment of an end-of-year payment usually falls after the expiry of the bonus year:
- where an employee is terminated after the bonus year expires but before the payment due date, they are entitled to the fully accrued end-of-year payment.
- where an employee is terminated during the bonus year, they are entitled to a pro-rata end-of-year payment only if they have worked for at least three months in the bonus year. However, if the employee resigns or is terminated by summary dismissal before the end of the bonus year, they are not entitled to a pro-rata payment.
When are end-of-year payments payable?
Like other termination payments, end-of-year payments are payable within seven days after termination. However, if the end-of-year payment is calculated with reference to the employer’s profits, it can be paid within seven days after such profits are determined.
STATUTORY SEVERANCE PAYMENT (SSP) AND LONG-SERVICE PAYMENT (LSP)
In which circumstances are employees entitled to LSP or SSP?
An employee is not entitled to both LSP and SSP simultaneously:
- LSP is payable where an employee has been working continuously for at least five years for the same employer;
- SSP is payable where an employee has been working continuously for more than two years for the same employer and has been terminated by reason of redundancy or lay-off.
An employee who resigns or is summarily dismissed is not entitled to SSP nor LSP.
How are LSP and SSP calculated?
Both LSP and SSP are calculated in the same way. The amount is calculated as follows:
2/3rd of last full month’s wages (capped at 2/3rd of HK$22,500) x years of service
In practice, for employees with monthly wages of HK$22,500 or more, the statutory entitlements are capped at HK$15,000 per year of service.
The maximum LSP or SSP payable upon termination is capped at HK$390,000.
When are LSP and SSP due?
LSP is payable within seven days of the date of termination.
SSP is payable only if an employee requests payment within three months of the termination date, after which the employer must make the payment within two months. However, in practice, most employees make the LSP or SSP (as the case may be) alongside other termination payments within seven days after termination.
How does the Mandatory Provident Fund (MPF) offsetting mechanism work?
Previously, upon termination of employment, the employer could use their accrued MPF contributions to offset LSP or SSP (as the case may be) that was due to the employee. This offsetting mechanism was abolished effective from 1 May 2025. To know more about this and the transitional arrangements in place, read our Employment Update on the Abolition of the MPF Offsetting Mechanism.
KEY TAKEAWAYS
- Termination payments is an area of law that often gives rise to disputes and leads to employees filing claims with the Labour Tribunal.
- Upon termination of an employee, final payments must be paid within the seven-day window.
- Payments such as PILON and annual leave pay are calculated based on the employee’s average daily/monthly wages.
- Calculation of average daily/monthly wages upon termination requires a careful analysis of the employee’s remuneration package, to assess what items qualify as wages.
- Employers should document the termination process and keep records of the circumstances surrounding termination.
If you need help or advice regarding employment-related disputes, get in touch with us.