Money Matter

Severance payment

Article exclusively contributed by
the Labour Relations Promotion Unit
of the Labour Department

Nelson was an engineer who had worked in a consultancy firm since January 1,1997. He was engaged under a two-year fixed term contract and his contract was renewed twice. Each contract renewal took effect upon the expiry of the previous contract. His last month's salary was $28,000 and the employer had made contributions to the Mandatory Provident Fund (MPF) Scheme for him.

Due to the economic downturn, the firm underwent restructuring and Nelson's post was eliminated with effect from 1 December 2002. Nelson was given one month's termination notice on 1 November 2002 and he received his final payment on his last day at work. The payment included salary for the notice period and pro-rated annual leave pay. However, he was not paid any severance payment.

Nelson asked his former employer, George, why no severance payment had been paid. George explained that Nelson was not entitled to any severance payment because the firm engaged him under three consecutive fixed-term contracts, so the length of his service did not accumulate. As for the last contract, he had only worked for the firm for one year and 11 months, which was less than the 24-month statutory qualifying period. As such, the firm was not liable to pay him any severance payment.

Was Nelson eligible for any severance payment?

- An employee is eligible for severance payment if he worked for the same employer under a continuous contract for not less than 24 months and his contract of employment was terminated for one of the following reasons:
i)Dismissed for reason of redundancy
ii)Fixed term employment contract expired without being renewed for reason of redundancy
iii)Laid off

- An employee is taken to be dismissed for reason of redundancy if the dismissal is due to the fact that:
1. The employer closes or intends to close his business;
2. The employer has ceased, or intends to cease, the business in the place where the employee was employed; or
3. The requirement of the business for employees to carry out work of a particular kind, or for the employee to carry out work of a particular kind in the place where the employee was employed, ceases or diminishes or is expected to cease or diminish.

- As Nelson's firm was restructured and his position was no longer required, he should be entitled to severance payment if he was employed under a continuous contract for not less than 24 months.

- One should note that the employment period should be counted from the first date of employment till the last date. The fact that Nelson was employed under several fixed term contracts would not break the continuity of his service with his employer.

- Nelson should be entitled to severance payment and the calculation is as follows:

($22,500* x 2/3) x 5 = $ 88,750
(Last month's wages* x 2/3) x reckonable years of service

- * An employee may elect to use his last month's wages or his average wages in the last 12 months for the calculation but the sum should not exceed two thirds of $22,500. Although Nelson's last month's salary was $28,000, the ceiling of $22,500 will be used for calculation.

- Nevertheless, the severance payment is to be reduced by the amount of accrued benefits attributable to the employer's contributions being held in an MPF scheme in respect of the employee or that have been paid to the employee. Hence, Nelson should be entitled to a sum of money calculated on such basis.

Q & A on severance payment
Q1 What is the meaning of "laid-off"?
A1 An employee is taken to be laid off if -
(a) he is not provided with work and not paid for more than half of the total number of normal working days in any four consecutive weeks; or
(b) he is not provided with work and not paid for more than one-third of the total number of working days in any 26 consecutive weeks.

Q2 If an employee has been with the company for more than five years, is the employer required to pay him/her both long service payment and severance payment upon redundancy?
A2 The employer is not required to pay both. An employee who is made redundant is eligible for severance payment but not for long service payment.

Taken from Career Times 17 January 2003

(Last review date: 23 August 2013)

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