[Must-read for employees and employers] What is the difference between long service payment and severance payment? How does the 2025 abolition of MPF offsetting affect them? A clear guide to the long service payment legislation and how it is calculated

Labour protection is something every employer and employee needs to be familiar with. At present, after an employee leaves, they can receive long service payment and severance payment if they meet the conditions, but what is the difference between the two? Is the long service payment calculated differently from severance payment? This article shares the conditions for receiving long service payment and severance payment and how the amounts are calculated.

Long service payment and severance payment

Under the labour rights set out in Hong Kong's Employment Ordinance, employees who are dismissed by the company, made redundant or laid off in specified circumstances can receive a certain amount of compensation through long service payment and severance payment.

Note, however, that if the conditions for both severance payment and long service payment are met at the same time, the employee is entitled only to the higher of the two amounts.

What long service payment is

An employee who has been employed under a continuous contract for not less than 5 years meets the basic eligibility for Long Service Payment, and can receive it on leaving the job in any one of five situations.

Conditions for receiving long service payment

Conditions for receiving long service payment:

• The employee is dismissed summarily for reasons other than redundancy or serious misconduct;
• The employee is on a fixed-term employment contract that is not renewed after it expires;
• The employee dies during employment;
• The employee resigns after a registered medical practitioner or registered Chinese medicine practitioner issues a specified certificate certifying that they are permanently unfit for their current job;
• The employee resigns at the age of 65 or above.

* If the employee dies during employment, the eligible person must complete the specified form and apply to the employer for long service payment within 30 days after the employee's death.

What severance payment is

For Severance Payment, the employee must have been employed under a continuous contract for not less than 24 months and be dismissed by the company for one of three reasons, such as redundancy or lay-off, in which case they can receive severance payment as compensation.

Conditions for receiving severance payment

Conditions for receiving severance payment:

• Dismissed because of redundancy;
• Not renewed because of redundancy after a fixed-term contract expires;
• Laid off.

An employee dismissed in any of the following circumstances is regarded as dismissed because of redundancy:

• The employer closes the business or intends to close it;
• The employer ceases or intends to cease carrying on the business at the place where the employee is employed;
• The employer's requirement for work of the kind the employee does, or for work of that kind at the place where the employee is employed, has reduced or ceased

If the employment contract provides that the employee's pay depends on the amount of work provided by the employer, for example pay calculated by the number of orders or by output, and the employee has no work and so receives no wages, the total number of such days will be regarded as lay-off in the following situations:

• More than half of the total number of normal working days in any 4 consecutive weeks
• More than one third of the total number of normal working days in any 26 consecutive weeks

Normal working days do not include days of factory closure, rest days, annual leave and statutory holidays.

2025 update: how to calculate long service payment and severance payment

Before looking at the calculation methods, you need to know about the “MPF offsetting mechanism”, which affects how long service payment and severance payment are calculated:

Abolition of the MPF offsetting mechanism

In the past, when an employee was made redundant or left and met the conditions, the employer had to pay severance payment or long service payment, but could use the employer's contributions in the employee's MPF account to “offset” part of it. This is commonly known as the “MPF offsetting mechanism”.

However, the Legislative Council passed a bill in 2024 to abolish the offsetting mechanism, which will take effect on 1 May 2025.

This means that, from 1 May 2025, for the years of service an employee accumulates, if they are dismissed by reason of redundancy or meet the conditions for long service payment, they will receive more substantial compensation, because the amount will no longer be offset by MPF contributions.

Latest calculation of long service payment and severance payment

Long service payment and severance payment are calculated in the same way:

* The wages for the last full month may be calculated as the average wages for the 12 months immediately before the date of termination of the contract, and the final amount is capped at two-thirds of $22,500 (i.e. $15,000).

** Reckonable years of service of less than 1 year are calculated pro rata.

Caps on long service payment and severance payment

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

Employees' reckonable years of service

If you have worked for the company for more than 30 years, your fully reckonable years of service must be calculated as follows.

• Manual employees whose employment contract is terminated after 1/10/2004: fully reckonable years of service, regardless of pay.
• Non-manual employees whose employment contract is terminated after 1/10/2004, with average monthly wages for the 12 months before 8 June 1990 not exceeding $15,000: reckonable years of service
• Non-manual employees whose employment contract is terminated after 1/10/2004, with average monthly wages for the 12 months before 8 June 1990 exceeding $15,000: service is reckonable back to 1980

Long service payment calculator and severance payment calculator

To estimate the actual amounts of long service payment and severance payment, you can use the Statutory Employment Entitlements Reference Calculator.

Time limits for payment of long service payment or severance payment

Time limit for payment of severance payment

Under the Employment Ordinance, an employee who wishes to claim severance payment must give the employer written notice of the claim within 3 months of being dismissed or laid off, and the employer must pay the severance payment within 2 months of receiving the notice.

Time limit for payment of long service payment

Long service payment must be paid within 7 days after the employment contract is terminated.

FAQ

If an employee with 5 years of service is dismissed for redundancy, does the company need to pay both severance payment and long service payment?

An employee can claim only one of severance payment or long service payment and the accrued benefits derived from the employer's MPF contributions, whichever is the greater amount.

If an employee with 5 years of service resigns before the age of 65 because of poor health, can they receive long service payment?

Yes. After 5 years of service, an employee who resigns for health reasons may be entitled to long service payment, but must provide the employer with a certificate issued by a registered medical practitioner or registered Chinese medicine practitioner proving that they are permanently unfit for their current job. The employer also has the right to arrange, at its own cost, for the employee to be examined again by a designated doctor.

What are the consequences if an employer does not pay long service payment and severance payment to employees?

Severance payment: an employer who fails to pay severance payment on time is liable on conviction to a fine of up to HK$50,000.

Long service payment: an employer who fails to pay long service payment is liable on conviction to a fine of up to HK$200,000 and imprisonment for one year.

If an employee does not renew their contract before it expires, can they receive long service payment or severance payment?

If, not less than 7 days before the date of termination or expiry of the contract, the employer asks the employee in writing to renew the contract or be re-employed under a new contract, and the employee unreasonably refuses, the employee is not entitled to long service payment or severance payment.

Can severance payment or long service payment still be offset by MPF contributions now?

No. The Legislative Council has abolished the MPF offsetting mechanism. Following the change, there are now two situations:

• Years of service before 1 May 2025: the employer can still use MPF contributions to offset the compensation amount as before.
• Years of service after 1 May 2025: offsetting is no longer allowed. The employer must pay severance payment or long service payment separately and cannot deduct it from MPF contributions.

Professional accounting services in Hong Kong: SetupHK

We have many years of experience helping employers handle employee termination procedures. We are familiar with the Employment Ordinance and the changes to the MPF offsetting policy, and can help you complete the calculations and filings in compliance with the law, so your business can run with peace of mind. We provide the following professional services:

• Dedicated staff to help with calculation and reporting of amounts: based on the employee's length of service, reason for leaving, wages and MPF records, we calculate precisely the severance payment or long service payment payable, and confirm whether offsetting can be used.
• One-stop documentation and procedural support: whether an employee is about to leave, has been dismissed, or in special circumstances such as the death of an employee, we can provide a complete solution and advice on handling the paperwork.
• Compliance risk control: we remind you of statutory deadlines, help you keep supporting records and handle employee enquiries or complaints, to avoid legal disputes or labour disputes later.

Just provide basic employee information and employment records, and we can handle the entire compensation calculation process for you, so you can deal with departures properly in compliance with the law and safeguard your company's reputation and internal management.

About the author

Marx Chan

Founder and director, SetupHK

With over 10 years of experience, he has served more than 1,000 Hong Kong SMEs, focusing on company registration, company secretarial services, accounting and profits tax filing. He is the founder and director of SetupHK (Deluxe Business Solution Limited) and holds a Bachelor of Information Technology from Swinburne University of Technology, Australia.

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