Statutory severance payments (“SP”) * and long service payments (“LSP”) ** are payable to employee’s whose employment is involuntarily terminated by the employer. One of the unique features of the SP and LSP system was that employers could deduct an amount equal to the SP or LSP that was paid to the employee from the employer’s contributions towards the employee’s MPF/ORSO scheme. In effect, employees paid their own severance from their pension pots.
After more than a decade of debate, with effect from 1 May 2025, , employers will no longer be able to use the employer’s contributions to MPF/ORSO to set off the portion of SP/LSP that relates to the period after 1 May 2025. The set-off abolition is not retrospective, and employers can continue to use MPF/ORSO benefits for offsetting any SP/LSP that relates to the period of employment up to 30 April 2025.
The Hong Kong Government will launch a 25-year subsidy scheme totalling $33.2 billion to help employers cover the additional costs relating to the change of rules.
The change to the rules will make the calculation of termination payments more complicated. Accounting for such payments will also become more complicated with the Hong Kong Institute of Certified Public Accountants publishing Guidance for “Accounting implications of the abolition of the MPF-LSP.
The Labour Department has encouraged employers to start planning for the changes now, reminding employers of their obligations to keep the wage and employment records of each employee covering the period of their employment during the preceding 12 months; and, for employees whose employment commenced before 1 May 2025 – the wage records covering the employment period during the 12 months immediately preceding 1 May 2025.
The Labour Department has also stressed that dismissing employee prior to 1 May 2025 will not result in any savings with regard to the SP and LSP.
The calculation of SP and LSP remains the same: [2/3 of the last month’s wages (capped at HK$22,500)] X years of service (pro-rata for partial years).
The framing of the calculation of 2/3 of the last month’s wages capped at HK$22,500 often causes confusion. However, it essentially means that for employees earning HK$22,500 per month, the maximum payment is HK$15,000 for each year of service.
For more in-depth information, you can also refer to our previous article Abolishment of MPF Offsetting Mechanism: is it finally here?.
If you require assistance or have any query related to HR issues, please do not hesitate to contact our Employment & Business Immigration team.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
Notes:
SP (*) Statutory severance payment is payable to employees with not less than 24 months’ service whose employment is terminated due to redundancy.
LSP (**) Statutory long service payment is payable to employee with 5 or more years’ service whose employment is terminated by the employer otherwise than due to redundancy or serious misconduct/cause.
