Terminating an employee and relevant payments in Hong Kong

Employers should comply with their statutory and contractual obligations owed to their employees at all times.  Despite the financial difficulties an employer may face amid the covid-19 pandemic, the employer should consider the following issues carefully when terminating any Hong Kong employment relationship with its staff.

Severance payment

An employee is entitled to a severance payment if he has been employed continuously for at least two years but is dismissed due to redundancy if (1) the employer closes or intends to close the business, (2) the employer has ceased, or intends to cease, the business in the place where the employee was employed, or (3) the business requirement for the employee to carry out work ceases or diminishes or is expected to cease or diminish.

Severance payment = 2/3 X the employee’s last full month’s salary (the employee may elect to use his average wages in the last 12 months for this calculation) or HK$22,500 (whichever is lower) X number of years of service (a pro-rata amount for any incomplete year). The statutory cap of the severance payment for each employee is HK$390,000. This formula applies to the calculation of both a severance payment and a long service payment. But no employee can receive both the long service payment and the severance payment.

The severance payment can be reduced by the total amount of gratuities paid to the employee based on length of service, or by the then current value of benefits accrued in respect of that employee in a Mandatory Provident Fund scheme or occupational retirement scheme, to the extent that those contributions are attributable to the employer over the same employment period. A severance payment is not payable if the employee unreasonably refuses a re-employment offer, has been dismissed summarily or for a reason other than redundancy.

Long service payment

This is payable to an employee who is dismissed after having been employed continuously for at least five years, resigns on grounds of old age after having reached 65 years of age, or having been certified by a medical practitioner as having become permanently unfit for the role for which the employee was employed. No long service payment is payable if the employee is entitled to a severance payment, unreasonably refuses a re-employment offer in certain cases, or is dismissed summarily.

Protected employees

The Employment Ordinance prohibits:

1. dismissal of a pregnant employee,
   
2. dismissal while the employee is on paid sick leave,
3. dismissal because an employee has given evidence/information in connection with the enforcement of labour legislation, industrial accidents or breach of work safety regulations,
4. dismissal for trade union membership/activities; or
5. dismissal of an injured employee before the parties concerned have entered into an agreement for compensation or before the issue of a certificate of injury assessment.

Employee rights on insolvency

The Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong (Cap. 32) provides that employees are entitled to payment out of the employer’s assets in preference to other creditors in respect of wages, wages in lieu of notice, accrued holiday remunerations and severance payments.

Takeaway

Employers should comply with their statutory and contractual obligations owed to their employees at all times.