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Article exclusively contributed by Allen & Overy

Who is entitled to severance/long service payments?

by Joyce Leung, senior associate, Employment Law Group, Allen & Overy

Mr Chan has been a salesman with a European fashion retailer for three years and 10 months. His colleague Ms Wong has been the company's accountant for 10 years and two months. Mrs Lee is an in-house writer of the company's promotional materials for its new fashion products. Until nine months ago, she worked on average 20 hours a week, earning HK$10,000 a month.

Because of dwindling turnover the company decided to immediately lay off various staff ranging from salesmen (Mr Chan) to high-pay employees (Ms Wong). On the day of the announcement the company provided all affected employees with a schedule of termination payments.

Mr Chan was very upset, particularly over his severance payment. The company told him this would be set off against his MPF benefits, but he was unsure whether the severance payment had been correctly calculated or whether the employer had such a right of set-off.

Ms Wong checked her termination payment schedule but there was no mention of any severance payment. She complained to the HR director who replied that Ms Wong's position would be filled by a less senior accountant. Therefore, it was not a redundancy and no severance payment was payable. Ms Wong doubted this.

Meanwhile, the number of Mrs Lee's working days (and accordingly her remuneration) had dropped 44 per cent during the preceding nine months, and she thought she might have a right against her employer in such a situation.

Legal position

In general, an employee who has worked not less than two years and whose employment has been terminated by reason of redundancy or lay-off is entitled to a severance payment under the Employment Ordinance (EO). (Now revised: an employee who has worked not less than 24 months.) If an employee has worked not less than five years and is dismissed and his employer is not liable to pay him any severance payment, that employee is generally entitled to a long service payment. The meanings of redundancy and lay-off are as follows:

Redundancy

Redundancy occurs if:

(a) the employer has ceased or intends to cease to carry on the business for which the employee was employed; or
(b) the employer has ceased or intends to cease the business in the place where the employee was employed; or
(c) if the requirements of the business for the employee 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 so employed, cease or diminish or are expected to cease or diminish.

Lay-off

If an employee is employed on such terms that his remuneration depends on being provided with the type of work he is employed to do, he will be regarded as having been laid off if the total number of days on which such work is not provided exceeds:

(a) half of the total number of normal working days in any period of four consecutive weeks; or
(b) one-third of the total number of normal working days in any period of 26 consecutive weeks, and on the condition that the employee is not paid a sum equivalent to the wages he would have earned if work had been provided on the days on which no work was provided.

As to how severance/long service payment is calculated, the EO gives this formula:

2/3 x last monthly wages (capped at HK$22,500) x years of service (pro-rata for incomplete years)

The same formula applies to calculation of long service payment. And the maximum amount of severance/long service payment payable to an employee is currently HK$390,000.

As defined by the EO, "wages" essentially means all remuneration, earnings, allowances, commission, overtime pay and tips and service charges payable to an employee under his employment contract, except certain items specified under the EO such as annual bonuses and discretionary commission.

An employee is entitled to either a severance or long service payment, but not both. The EO permits an employer to set off any severance or long service payment made to an employee against that employee's retirement benefits under an MPF scheme which are attributable to employer's contributions.

Q & A on severance/long service payments
Q1 What is Mr Chan's severance/long service payment entitlement?
A1 Mr Chan's position no longer exists after his dismissal, and therefore is a redundancy situation. The company rightly paid him a severance payment determined according to the formula above. Furthermore, the company was entitled to set off his severance payment against his retirement benefits representing the employer's contributions under the MPF scheme. Mr Chan therefore has no further claims in respect of severance payment.

Q2 Does Ms Wong have any rights to severance/long service payment?
A2 Ms Wong will be replaced by a junior accountant and therefore this is not a redundancy situation involving any severance payment. However, because of her service of more than 10 years, she is entitled to a long service payment calculated according to the formula above. She can file a claim with the Labour Department for the outstanding long service payment.

After making the long service payment, her employer may apply to the MPF scheme's service provider for a set-off against Ms Wong's retirement benefits which are attributable to the employer's MPF contributions.

Q3 What may be Mrs Lee's rights?
A3 As the number of her working days (and accordingly her remuneration) dropped by 44 per cent during the preceding nine months, it can arguably be a lay-off situation for the purpose of claiming a severance payment under the EO against her employer.


Taken from Career Times 20 April 2007

(Last review date: 23 August 2013)


Disclaimer: The opinions expressed in this article are those of the contributor

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