Severance Payment

Under the Employment Ordinance, an employee employed under a continuous contract for not less than 24 months is eligible for a severance payment if any one of the following is true:

  • They are dismissed by reason of redundancy.
  • Their fixed term employment contract expires without being renewed due to redundancy.
  • They are laid off.

Under the Employment Ordinance, the amount of the severance payment is two-thirds of the employee’s last month’s wages or two-thirds of $ 22,500, whichever is lower, multiplied by the total number of years of service. The current maximum severance payment payable is $ 390,000. An employee may also elect to use their average wages over the last 12 months for the calculation.

Average Daily Wage is discussed in the following article:

Mandatory Provident Fund scheme benefits, retirement scheme benefits, and gratuities that are due to the employee, based on the employee’s length of service, can be used to offset the Severance Payment. The amount offset from your employee’s account in any case should not be more than the amount of the severance payment made to the employee.

Tax implications of severance payments

Severance payments that are paid in accordance with the provisions of the Employment Ordinance are not tax assessable, and neither the employer nor the employee is required to report these payments in their tax returns. However, it is mandatory for the employer and employee to report any payment that is in excess of the Employment Ordinance’s stipulated statutory entitlement.

Severance payments can be added to the payslip by selecting the system termination lump sums item as follows:

  1. Go to the relevant employee's profile.
  2. Click on Add next to Payslip Inputs.
  3. Click on Termination Lump Sums.
  4. Enter the Severance Payment amount.
  5. Click Save.