It’s the classic sales nightmare: Your top account manager resigns. You wish them well, throw a farewell lunch, and they walk out the door.

Three weeks later, you realize your sales pipeline has gone quiet. You check in with a long-term client, only to hear: “Oh, we actually moved our account to [Ex-Employee]’s new agency. They gave us a great call last week.”

You’ve been poached.

Many Hong Kong business owners assume their “Non-Compete” clause covers this. But as we discussed in our previous post, non-competes are hard to enforce. The real weapon for protecting your revenue is the Non-Solicitation Clause.

At TITUS, we know that for professional service firms, your client list is the business. Here is how to lock it down legally.

The “Double Lock”: Data vs. Relationships

To stop an employee from walking away with your business, you need to understand that you are protecting two different things: the Data (the contact list) and the Relationship (the influence).

You need a separate legal “lock” for each.

Lock 1: Confidentiality (The Data)

• The Risk: The employee downloads your CRM database to a USB drive or emails the client spreadsheet to their personal email before leaving.
• The Law: This is often a breach of confidentiality or even theft. However, Hong Kong courts are strict: You must prove the information is actually confidential.
• The Trap: If your client list is public (e.g., listed on your website as “Our Partners”), it is not confidential. If the employee just remembers the names in their head, that is also hard to stop.
• The Fix: Your employment contract must specifically define what constitutes Confidential Information.

Lock 2: Non-Solicitation (The Relationship)

• The Risk: The employee doesn’t steal the database, but they know the clients personally. They call them up and say, “I’m at a new firm now, I can offer you a better rate.”
• The Law: A Non-Solicitation clause forbids the ex-employee from actively approaching your clients to generate business.
• The Enforceability: Unlike non-competes (which ban working), courts are more willing to enforce non-solicits because they don’t stop the employee from earning a living—they just stop them from stealing your living.

The “Passive Poaching” Loophole (And How to Close It)

Here is the most common excuse ex-employees use in court:

“I didn’t breach the contract! I didn’t call the client. The client saw my LinkedIn update and called ME. I just answered the phone.”

In Hong Kong law, Solicitation usually requires the employee to make the first move. If the client calls them, a standard non-solicitation clause might not stop them from taking the business.

The Solution: The “Non-Dealing” Clause To plug this hole, you need a Non-Dealing Clause. This goes one step further: it says the ex-employee cannot process any business from your clients, regardless of who called whom. Even if the client begs them, they must say, “I cannot work with you for 6 months due to my contract.”

The “Personal Touch” Rule

Just like non-competes, you cannot be greedy. You cannot ban an ex-employee from contacting every single client your company has ever had.

To be enforceable in Hong Kong, the clause must be a reasonable and adequate protection to the employer. It should usually be limited to clients the employee personally dealt with during their employment.

• Valid: Banning a Sales Manager from poaching the 50 clients they managed.
• Invalid: Banning a Junior Admin from contacting a client they never met.

TITUS Checklist: Is Your Client Protection Real?

Open your current employment contract template. Does it pass this 3-point check?

1. Does it separate “Solicitation” from “Dealing”? (If it only says “Non-Solicit,” you are vulnerable to the “they called me” excuse.)
2. Is the timeframe reasonable? (6 to 12 months is standard. Anything over 12 months is high risk for rejection by courts.)
3. Is “Confidential Information” defined clearly? (Does it explicitly mention client databases, pricing lists, and contact details?)

Protect your assets. Your intellectual property isn’t just your logo; it’s the handshake you have with your clients. Don’t let it walk out the door.

Disclaimer: This article is for general informational purposes only and does not constitute legal advice. Drafting enforceable restrictive covenants requires precise legal wording tailored to your specific business risks. Always consult a solicitor.

The post They Can Leave, But They Can’t Take the Rolodex: Protecting Your Client List in Hong Kong appeared first on Titus.

Related reading

• Protecting Your Client List in Hong Kong
• Termination, Notice Periods and Unfair Dismissal in Hong Kong
• Contact Titus

The post Can My Ex-Employee Join a Competitor? Debunking Non-Compete Myths in Hong Kong appeared first on Titus.

A vesting agreement (also called a vesting contract or vested equity agreement) sets out how founders, employees and advisors may earn ownership of a company over time. It aligns incentives, reduces the risk of “free-riders,” and is essential for startups, businesses seeking external fundraising and retention of key staff. In Hong Kong, share awards and options linked to employment typically fall under Salaries Tax, and enforceability of post-termination restrictions depends on reasonableness—so your paperwork and policy design really matter.

What is a Vesting Agreement?

If you have ever asked, “What are vesting agreements and how do they work?”—the answer is that a vesting agreement is a contract that links equity (such as shares, options, RSUs or tokens) to time or performance milestones. Normally, the equity is unvested until certain conditions are met. Before it vests in the holder, it can be forfeited or repurchased if the individual leaves the company or fails to meet agreed milestones.

Well-designed vesting contracts:

·   Align incentives between the company and talent

·   Deter early departures (no “free rides”)

·   Signal governance quality to investors

For founders, this often takes the form of reverse vesting: founders hold shares up-front, but the company can repurchase unvested shares at cost if a founder departs before fully vesting.

Common Vesting Structures

1) Time-Based Vesting (with a Cliff)

·   Standard: Four years with a 12-month cliff (no ownership rights during the first 12 months), then monthly or quarterly vesting.

·   Why: Gives the company time to assess whether the holder of the vesting agreement is a good fit and discourages short-term churn.

2) Milestone- or Performance-Based Vesting

·   Use when: Timing is uncertain or the role is KPI-driven (e.g., product launch, revenue targets).

·   Tip: Define milestones precisely and specify who certifies completion.

3) Reverse Vesting for Founders

·   Mechanics: The founder holds shares, but they are subject to repurchase until vesting completes. This protects both the team and future investors.

4) Acceleration (Single vs Double Trigger)

·   Single-trigger: Vesting accelerates on a single event (often an acquisition).

·   Double-trigger: Vesting accelerates only if two events occur—typically a change of control and a qualifying termination (e.g., without cause) within a set period post-deal. Double-trigger acceleration is more market-standard and acquirer-friendly.

What Actually Goes Into a Vesting Agreement?

1. Who + What: Parties, roles, and the equity instruments (shares, options, RSUs).

2. Grant / Purchase Details: Number of shares or options, exercise price (if any), escrow/administration.

3. Vesting Schedule: Duration, cliff, cadence (monthly/quarterly), and any performance criteria.

4. Company Repurchase / Forfeiture Rights: Especially important for reverse vesting on founder share).

5. Acceleration Provisions: Single or double-trigger rules, acquisition definitions, and caps.

6. Leaver Terms: Define “good leaver” vs “bad leaver,” notice, cause/constructive dismissal definitions.

7. Termination & Post-Termination Treatment: Clarify what happens to vested/unvested portions and option exercise windows.

8. Restrictions & Policies: Confidentiality, IP assignment; avoid over-broad non-competes (see HK note below).

9. Governing Law & Dispute Resolution: Typically, Hong Kong law for local teams and coordination if talent is cross-border.

10.  Board/Shareholder Approvals + Cap Table Updates: Keep everything consistent with your ESOP/option plan rules.

Hong Kong–Specific Notes You Shouldn’t Skip

1) Tax Treatment (Salaries Tax)

·   Share options linked to employment are generally taxed on exercise/assignment/release (i.e., not at grant).

·   Share awards/RSUs are generally taxed when the restriction is lifted (i.e., at vesting) if they arise from employment.

·   Always factor in withholding/reporting and cross-border mobility (e.g., split-year, source of employment). See the IRD and gov.hk guidance for current practice.

Further technical reading: IRD DIPN 42 (revised) discusses the interaction of accounting/tax treatment of financial instruments and includes commentary relevant to employee equity. Professional advice is strongly recommended.

2) Enforceability of Post-Termination Restrictions

In Hong Kong, post-termination restraints (non-compete, non-solicit and non-poach) are usually unenforceable and void unless reasonable and necessary to protect a legitimate business interest. Avoid blanket restrictions; tailor duration, scope, and geography, as courts will scrutinise any overreach.

Founder vs Employee: How the Paperwork Differs

·   Founders: Reverse vesting on issued shares plus repurchase mechanics, sometimes with double-trigger acceleration to balance founder protection with acquirer comfort.

·   Employees: Options (or RSUs) under an ESOP/Share Option Plan, with time-based vesting, standard exercise windows, and clear treatment on termination.

Practical Tips to Get Vesting Right (First Time)

1. Start with policy, not just a template. Document your equity philosophy: who gets what, when, and why.

2. Standardise schedules (e.g., 4-year / 1-year cliff) unless you have a strong reason to deviate.

3. Define “cause,” “good reason,” “good/bad leaver,” and change of control precisely.

4. Choose your acceleration carefully. Double-trigger is usually investor- and buyer-friendly; single-trigger can spook acquirers.

5. Synchronise documents: offer letters, option grant notices, shareholders’ agreements, IP assignment, and confidentiality agreements.

6. Mind Hong Kong tax timing: options at exercise; awards at vesting/restriction lift. Budget for payroll/tax compliance.

7. Keep a clean cap table with board approvals and leaver calculations.

8. Anticipate mobility—if employees relocate, vesting and tax exposure can change.

Common Mistakes We See (and How to Avoid Them)

·   No reverse vesting for founders: Risk of a departed co-founder keeping a large stake with no ongoing contribution.

·   Vague leaver/acceleration clauses: Leads to disputes at the worst possible time—M&A, down rounds, or exits.

·   Over-broad non-competes: Often unenforceable in Hong Kong; tailor them surgically.

·   Tax timing surprises: Failing to plan for the taxable event (exercise vs vesting) and reporting obligations.

FAQs

Is a vesting agreement legally required?

Not always, but investors expect founders to have vesting in place and employees to be covered by a formal plan.

What is the difference between a vesting agreement and a shareholders’ agreement?

A vesting agreement governs how and when equity becomes owned, while a shareholders’ agreement deals with broader company and shareholder rights.

What is double-trigger acceleration?

A clause that accelerates vesting only when two events occur (e.g., change of control and qualifying termination). It is commonly used and acquirer-friendly.

How are share options and share awards taxed in Hong Kong?

Generally, options tied to employment are taxed on exercise/assignment/release; share awards are taxed when restrictions lift (vesting). Always check the latest IRD guidance.

Related Reading from TITUS

·   Convertible Notes—Overview, Advantages, and Terms (Hong Kong) – our practical guide for founders and investors. https://titus.com.hk/what-is-a-convertible-note-overview-advantages-and-terms/

·   What Is an ESOP (Employee Share Ownership Plan)? – Navigating Employee Share Ownership Plans in Hong Kong. https://titus.com.hk/what-is-an-esop-employee-stock-ownership-plan/

How TITUS Can Help

We design and implement founder reverse vesting, ESOPs/share option plans, vested equity agreements, and M&A-ready acceleration that stand up to investor and acquirer scrutiny—with Hong Kong tax and enforceability baked in.

Thinking about a vesting agreement or ESOP?

Email us at info@titus.com.hk or message us on LinkedIn to set up a quick consult.

Important Note

This article provides general information and does not constitute legal advice. You should seek advice tailored to your specific circumstances.

The post What are vesting agreements and how do they work? appeared first on Titus.

In today’s dynamic business landscape, attracting and retaining top talent is a critical challenge for companies worldwide, and Hong Kong is no exception. Business owners, company directors, startup managements, and founders are constantly seeking innovative strategies to incentivise their teams and foster a sense of shared success. One such powerful tool gaining increasing recognition is the Employee Stock Ownership Plan (ESOP).

This comprehensive ESOP guide aims to demystify the concept of an ESOP, explore its benefits, and provide crucial insights into its application to various stakeholders within Hong Kong. Whether you are considering a new incentive scheme or looking to understand the intricacies of an ESOP scheme, this article will provide valuable information to help you navigate this complex yet rewarding approach to employee engagement and ownership.

What Exactly is an Employee Stock Ownership Plan (ESOP)?

An Employee Stock Ownership Plan (ESOP) is a type of qualified retirement plan that provides employees with an ownership interest in the company through shares of its stock. Unlike traditional retirement plans, an ESOP primarily invests in the stock of the sponsoring employer. This unique structure aligns the interests of employees with those of the company, as employees become direct stakeholders in the business’s success.

At its core, an ESOP is designed to be an employee benefit plan, similar in some ways to a profit-sharing plan. The company establishes a trust, which then acquires company stock. This stock is held in the trust for the benefit of the employees, and shares are allocated to individual employee accounts over time. The value of these accounts fluctuates with the company’s stock performance, offering employees a direct stake in the company’s growth and profitability.

ESOPs are often utilised to achieve various corporate objectives, including but not limited to providing a market for the shares of a departing owner, raising new capital, or as a tool for corporate finance. However, their fundamental purpose remains to foster employee ownership and engagement, ultimately aiming to enhance productivity and create a more cohesive and motivated workforce. An ESOP transforms employees into owners, giving them a vested interest in the company, which enables the long-term success of the enterprise.

How Does an ESOP Work? The Mechanics of Employee Ownership

The implementation of an Employee Stock Ownership Plan involves several key steps and mechanisms that ensure its proper functioning and compliance with relevant regulations. Understanding these mechanics is crucial for any business owner or founder considering an ESOP scheme.

• Establishing the ESOP Trust: The first step involves the creation of a trust, which is a legal entity designed to hold the company’s stock for the benefit of its employees. This trust acts as the legal owner of the shares.
• Funding the ESOP: The company contributes shares of its own stock or cash to the ESOP trust. If cash is contributed, the trust then uses this cash to purchase company stock, either from the company directly or from existing shareholders. These contributions are generally tax-deductible for the company, providing a significant financial incentive.
• Allocating Shares to Employee Accounts: Once the stock is in the trust, it is allocated to individual employee accounts. This allocation is typically based on a predetermined formula, which might consider factors such as an employee’s salary, years of service, or a combination of both. It is important to note that employees do not directly own the shares in their accounts until they are vested.

• Vesting Schedule: Employees gain full ownership of the allocated shares over time through a vesting schedule. This schedule dictates the rate at which an employee’s ownership in the ESOP becomes non-forfeitable. Common vesting schedules might be cliff vesting (e.g., 100% vested after 3 years) or graded vesting (e.g., 20% vested per year over 5 years). Employees typically cannot sell or transfer their shares until they leave the company or retire.
• Repurchase Obligation (for Private Companies): For privately held companies, there is a crucial aspect known as the repurchase obligation. When an employee leaves the company, retires, or becomes disabled, the ESOP trust or the company itself is obligated to repurchase the shares from the employee at their fair market value. This ensures liquidity for employees who cannot sell their shares on an open market.
• Distribution to Employees: Upon an employee’s departure or retirement, their vested shares are distributed to them. This distribution can be in the form of company stock or cash, depending on the ESOP plan document. Employees can then sell these shares back to the company or the ESOP, or hold them if the company is publicly traded.

This process ensures that employees gradually build an ownership stake in the company, aligning their long-term financial interests with the company’s sustained success. The structure also provides significant tax advantages for the company, as further elaborated below, making it an attractive option for business owners seeking innovative ways to reward and retain their workforce.

The Benefits of Implementing an ESOP: A Win-Win for Companies and Employees

Implementing an Employee Stock Ownership Plan offers a multitude of advantages for both the company and its workforce, making it a compelling strategy for businesses in Hong Kong and beyond. These benefits extend beyond mere financial incentives, fostering a culture of shared responsibility and collective success.

For Employees:

• Direct Ownership Stake: ESOPs provide employees with a tangible ownership interest in the company they work for. This direct stake cultivates a sense of belonging, pride, and shared purpose, transforming employees from mere workers into true partners in the enterprise.
• Potential for Wealth Creation: As the company’s value grows, so does the value of the employees’ stock holdings. This offers a significant opportunity for wealth creation, providing a long-term financial benefit that can supplement or even form a substantial part of their retirement savings.
• Alignment of Interests: With their financial well-being tied to the company’s performance, employees are naturally incentivised to contribute to its success. This alignment of interests often leads to increased motivation, productivity, and a greater commitment to achieving organisational goals.
• Enhanced Retirement Security: An ESOP can serve as a powerful retirement vehicle, offering a potentially substantial nest egg for employees upon their departure or retirement. This can be particularly attractive in a competitive talent market like Hong Kong, where comprehensive benefits packages are highly valued.

For Companies:

• Increased Employee Motivation, Productivity, and Performance: Employee-owned companies often report higher levels of employee engagement and productivity. For instance, when employees feel a direct connection between their efforts and the company’s success or financial performance, they are more likely to go the extra mile. Higher levels of employee performance also led to higher company profitability and contribute to a more resilient corporate culture.
• Attraction and Retention of Top Talent: In Hong Kong’s dynamic business environment, attracting and retaining skilled professionals is paramount. An ESOP can be a powerful differentiator, making a company more attractive to prospective employees and encouraging existing talent to stay long-term.
• Succession Planning and Ownership Transition: For business owners looking to retire or transition out of their company, an ESOP can provide a smooth and tax-efficient mechanism for selling their shares. This allows for a gradual and orderly transfer of ownership, ensuring the continuity of the business.
• Tax Advantages: While specific tax implications vary by jurisdiction, ESOPs often offer significant tax benefits to the sponsoring company. These can include tax deductions for contributions to the ESOP trust, making it a fiscally attractive option.

ESOPs in Hong Kong: Navigating the Local Landscape

While the fundamental principles of an ESOP remain consistent globally, their implementation and implications can vary significantly depending on the local legal and regulatory environment. For businesses operating in Hong Kong, understanding the specific nuances of establishing and managing an ESOP scheme is crucial.

Legal Framework and Flexibility:

One key advantage for companies considering an ESOP in Hong Kong is the relative flexibility of its legal framework. Unlike some jurisdictions with highly prescriptive ESOP regulations, Hong Kong law generally imposes no specific restrictions on the terms of an ESOP for a private company [1]. This means that companies have considerable latitude in designing their ESOPs to best suit their specific objectives and circumstances. Similar to companies incorporated in the Cayman Islands, Hong Kong companies can structure their ESOPs with a high degree of customisation, provided they adhere to their articles of association and general company law principles.

However, it is important to distinguish between a broad ESOP and an Employee Share Option Plan (ESOP), which is a common form of employee incentive in Hong Kong. An Employee Share Option Plan typically grants employees the right, but not the obligation, to purchase company shares at a predetermined price within a specified period. These plans are widely used to incentivise executives and employees by aligning their interests with shareholder value creation.

Tax Implications in Hong Kong:

Taxation is a critical consideration for any ESOP, and Hong Kong has its own set of rules that must be carefully navigated. The tax implications of an ESOP in Hong Kong can arise at various stages:

• Grant of Options: The grant of share options itself is not subject to Hong Kong salaries tax. However, this can change if the options are granted at a discount or if there are other specific arrangements.
• Exercise of Options: When an employee exercises their share options, the difference between the market value of the shares at the time of exercise and the exercise price (the price at which the employee can buy the shares) is generally considered a taxable perquisite and is subject to salaries tax.
• Sale of Shares: The tax treatment of the sale of shares acquired through an ESOP depends on whether the gains are considered capital in nature or revenue in nature. Hong Kong does not have a capital gains tax, so if the gains are considered capital, they are not taxable. However, if the gains are deemed to be revenue in nature (e.g., if the employee is considered to be trading in securities), they may be subject to profits tax.

Given the complexities of Hong Kong’s tax laws, companies should seek professional tax advice when structuring and implementing an ESOP. This will ensure that the plan is tax-efficient for both the company and its employees, and that it complies with all relevant regulations.

Setting Up an ESOP in Hong Kong: Key Steps

For business owners and founders in Hong Kong considering an ESOP scheme, the process typically involves the following key steps:

• Define Objectives: Clarify the goals of the ESOP. Is it primarily for talent retention, succession planning, or to foster a culture of ownership? The objectives will shape the design of the plan.
• Plan Design: Work with legal and tax advisors to design the ESOP, including the type of plan (e.g., share option plan, share award scheme), eligibility criteria, vesting schedule, and other key terms.
• Valuation: For private companies, it is essential to obtain an independent valuation of the company’s shares to determine the fair market value. This is crucial for both tax purposes and for ensuring fairness to employees.
• Legal Documentation: Draft the necessary legal documents, including the ESOP plan rules, trust deed (if applicable), and individual grant agreements for employees.
• Communication and Implementation: Clearly communicate the details of the ESOP to employees, ensuring they understand its benefits and how it works. Implement the plan and establish procedures for its ongoing administration.

Given the legal and financial complexities involved, it is highly recommended that companies engage experienced legal and financial professionals to guide them through the process of setting up an ESOP in Hong Kong. This will help to ensure that the plan is structured effectively, complies with all legal and regulatory requirements, and achieves its intended objectives.

Conclusion: Empowering Your Business with an ESOP

In Hong Kong’s fast-paced business environment, an Employee Stock Ownership Plan (ESOP) can be a transformative tool for companies looking to gain a competitive edge. By offering employees a direct stake in the company, an ESOP scheme can foster a culture of ownership, drive productivity, and align the interests of your team with the long-term success of your business. From attracting and retaining top talent to facilitating a smooth ownership transition, the benefits of a well-structured ESOP are numerous and compelling.

However, as we have seen, navigating the legal and tax complexities of an ESOP in Hong Kong requires careful planning and expert guidance. The flexibility of Hong Kong’s legal framework offers a unique ESOP to your specific needs, but it also underscores the importance of getting the details right. From plan design and valuation to tax compliance and ongoing administration, every step must be carefully considered to ensure the plan is both effective and compliant.

At TITUS, our team of experienced Hong Kong solicitors understands the intricacies of corporate law and employee incentive schemes. We can provide you with the expert legal advice you need to design and implement an ESOP that is right for your business. Whether you are a startup founder looking to incentivise your early employees or an established business owner planning for succession, we can help you navigate the complexities of an ESOP and unlock its full potential.Contact us today for a consultation to learn more about how an ESOP can benefit your business.

Related reading

• What are vesting agreements and how do they work?
• What is a Convertible Note? Overview, Advantages, and Terms
• Contact Titus

The post What Is an ESOP (Employee Stock Ownership Plan)? appeared first on Titus.

The Importance of Notice Periods

When an employment contract is terminated, whether by the employer or the employee, a notice period is typically required. This period allows both parties to prepare for the transition. In Hong Kong, notice periods are governed by Employment Ordinance, Cap. 57 and in accordance with any terms of your individual employment contract.

General Rules for Notice Periods 

• Probationary Period: An employment contract may contain a probation period, where your employment contract does specify a probation period, the employer or employee is required to provide to the other the following notice period apply: 

• No Probation Period or Continuous Contracts: Where an employee has been employed continuously by the same employer for four weeks or more, with at least 18 hours worked in each week, the employee is regarded as being employed under a continuous contract. For continuous contracts or where an employment contract does not contain a probation period, the following notice period apply: 

• For a non-continuous contract: Where an employee is not deemed to work under a continuous contract, please refer to the continuous contract section after, the length of notice shall be the agreed period.

• Employment Contact: It is crucial to review your employment contract carefully for these details, to ensure that the proper notice is provided by you or the employer to ensure that the employment contract or legislation is not breached. 

Payment in Lieu of Notice

Either the employer or the employee can choose to terminate the employment contract without giving the required notice. In such cases, a payment in lieu of notice must be made to the other party. This payment is equivalent to the wages that would have been earned during the notice period. Payment of lieu is not required if termination is carried out during the first month of probation unless the contract provides that there is a notice period or specifies otherwise. 

Calculation of Payment in Lieu of Notice: This payment is calculated based on your average daily or monthly wages over the 12-month period immediately preceding the termination date and multiplied by (i) Number of days in the notice period for which wages would normally be payable to the employee (if notice is expressed in days or weeks) or (ii) Number of months specified in the notice period (if notice is express in months). 

Unfair Dismissal: Knowing Your Protections

While employers can terminate employment for valid reasons, including redundancy, Hong Kong law provides significant protections against unfair or unlawful dismissal. It is vital for employees to understand what constitutes an unfair dismissal and what remedies are available.

What is Unreasonable Dismissal?

An unreasonable dismissal occurs if you have been employed under a continuous contract for not less than 24 months and are dismissed for reasons other than the valid reasons specified in the Employment Ordinance. While redundancy can be a valid reason, the process must be fair and non-discriminatory.

What is Unreasonable and Unlawful Dismissal?

This is a more serious category of unfair dismissal. It occurs when your dismissal is not for a valid reason and is also in contravention of the law. This often involves discriminatory practices or other breaches of statutory protections.

What Your Employer CANNOT Do (Examples of Unlawful Dismissal)

Even if an employer is undergoing genuine redundancy, they cannot lawfully dismiss you for certain prohibited reasons. These include:

• Discrimination: Dismissal based on your sex, marital status, pregnancy, family status, disability, or race. For instance, dismissing an employee because she is on pregnancy leave is strictly prohibited and constitutes unlawful dismissal.
• Trade Union Membership: Dismissal due to your involvement in trade union activities.
• Work-Related Injury: Dismissal while you are on sick leave due to a work-related injury.
• Giving Evidence: Dismissal for giving evidence or information in proceedings under the Employment Ordinance.

Remedies for Unfair Dismissal

If you are found to have been unreasonably or unlawfully dismissed, you may be entitled to various remedies, which can include:

• An order for reinstatement (getting your job back) or re-engagement.
• An award of terminal payments.
• For unreasonable and unlawful dismissal, an additional award of compensation not exceeding HK$150,000.

What to Do If You Are Illegally Terminated

If you believe you have been unfairly or unlawfully dismissed, it is crucial to act promptly to protect your rights:

• Gather Documentation: Collect all relevant documents, including your employment contract, pay slips, any correspondence related to your dismissal, and records of your work performance.
• Seek Legal Advice: Employment law can be complex. Consulting with legal professionals specializing in employment law can help you understand your specific situation, assess your rights, and determine the best course of action.

Protect Your Rights: Contact Us Today

Navigating employment termination can be challenging, but you don’t have to do it alone. At TITUS, we are dedicated to protecting the rights of employees in Hong Kong. If you have questions about notice periods, unfair dismissal, or believe you have experienced illegal termination, contact us immediately for expert legal advice and support.

Tel： 3702 0045

Email: info@titus.com.hk

Keywords: notice period, unfair dismissal, illegal termination

References: [1] Labour Department. (n.d.). Abolition of MPF Offsetting Arrangement. Retrieved from https://www.labour.gov.hk/eng/news/aoa.htm [2] Labour Department. (n.d.). Chapter 10: Employment Protection. Retrieved from https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/10.pdf [3] Labour Department. (n.d.). Chapter 9: Termination of Contract of Employment. Retrieved from https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/09.pdf

The post Navigating Termination: Understanding MPF Offsetting, Notice Periods and Unfair Dismissal in Hong Kong appeared first on Titus.

What is MPF Offsetting?

Historically, employers in Hong Kong were permitted to use the accrued benefits made by mandatory contributions by the employer to the employee’s Mandatory Provident Fund (MPF) scheme to offset an employee’s severance payment (SP) or long service payment (LSP). This practice, known as MPF offsetting, has been a long-standing feature of the employment landscape in Hong Kong.

The Abolition of MPF Offsetting: Key Changes from 1 May 2025

The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022, officially abolishing the MPF offsetting arrangement. With effect from the implementation date of 1 May 2025 (the “Transition Date”), employers can no longer use the accrued benefits derived from their mandatory MPF contributions to offset an employee’s SP/LSP.

However, to mitigate the risk of large-scale dismissals before the transition date, a “grandfathering” arrangement has been put in place for the pre-transition portion of SP/LSP for employees already in employment before 1 May 2025. The legislation does not cover employers’ voluntary MPF contributions, as well as gratuities based on length of service, which still can be used to offset SP/LSP.

Severance Payment and Long Service Payment in the Context of MPF Offsetting

Before delving into the specifics of how the abolition impacts your entitlements, let’s first clarify the eligibility for severance payment and long service payment in Hong Kong.

Severance Payment (SP)[2]

An employee is eligible for severance payment if they meet the following conditions:

• They have been employed under a continuous contract for not less than 24 months.
• They are dismissed by reason of redundancy.
• Their employment contract expires without being renewed by reason of redundancy.
• They are laid off (meaning they are not provided with work and wages for a specified period).

Long Service Payment (LSP)[2]

An employee is eligible for long service payment if they meet the following conditions:

• They have been employed under a continuous contract for not less than 5 years.
• They are dismissed (but not summarily dismissed due to serious misconduct, and not by reason of redundancy).
• Their employment contract expires without being renewed (not due to redundancy).
• They die.
• They resign on grounds of ill health.
• They resign at or above the age of 65.

How the Abolition Affects Your Entitlements: Before and After the Transition Date

The abolition of MPF offsetting is not retrospective. This means that the rules for offsetting differ depending on whether your employment period falls before or after the transition date of 1 May 2025.

For employees who are already in employment before the transition date, their SP/LSP will be divided into two portions:

• Pre-transition portion: This covers the employment period before 1 May 2025. It is calculated based on the monthly wages immediately preceding the transition date and the years of service before the transition date.
• Post-transition portion: This covers the employment period starting from 1 May 2025. It is calculated based on the last monthly wages before termination of employment and the years of service starting from the transition date.

Key Point: Employers can continue to use the accrued benefits derived from their MPF contributions (regardless of whether the contributions are made before, on, or after the transition date, and regardless of whether they are mandatory or voluntary) to offset the pre-transition portion of SP/LSP. However, they cannot use these contributions to offset the post-transition portion [1].

The maximum amount of SP/LSP (the sum of pre-transition and post-transition portions) remains capped at HK$390,000. If an employee’s total SP/LSP exceeds HK$390,000, the excess amount will be deducted from the post-transition portion [1].

Calculation of SP/LSP After Abolition

For a monthly-rated employee, the calculation of SP/LSP after the abolition of the MPF offsetting arrangement is as follows [1]:

1. Employment period before the transition date: Employee’s last full month’s wages immediately preceding the transition date × 2/3 × years of service before the transition date

2. Employment period starting from the transition date: Employee’s last full month’s wages before termination of employment × 2/3 × years of service starting from the transition date

The ceiling on the monthly wages for calculating SP/LSP is HK$22,500, and the maximum SP/LSP amount is HK$390,000. These ceilings remain unchanged [1].

Example Calculation

Let’s consider an example provided by the Labour Department to illustrate the calculation:

Scenario:

• Commencement of employment: 2 May 2016
• Termination of contract: 1 May 2025 (the effective date of the new legislation)
• Salary: HK$15,000 per month (never changed)

• LSP Calculation: (Monthly wages × 2/3) × years of services (with an incomplete year calculated on a pro-rata basis) (HK$15,000 × 2/3) × 9 complete years = HK$10,000 × 9 = HK$90,000.00

• Employer’s MPF Contributions: 5% of salary (employer’s mandatory contribution) = HK$750.00 per month – assuming payments made for 106 months (MPF for employee only needs to be registered within the first 60 calendar days) = HK$750.00 × 106 = HK$79,500.00

• Long Service Payment Due (after offsetting): HK$90,000.00 (Total LSP) – HK$79,500.00 (Employer’s MPF Contributions) = HK$10,500.00

This example demonstrates how the pre-transition MPF contributions can still be used to offset the LSP for the period before 1 May 2025.

Situations Where MPF Offsetting Does Not Apply

The abolition of the MPF offsetting arrangement primarily targets the MPF System. However, it is also applicable to other occupational retirement schemes that are granted exemption under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D), and overseas occupational retirement schemes joined by employees from outside Hong Kong which are exempted from the MPF System [1].

It is important to note that the abolition of MPF offsetting arrangement is not applicable to employees who are currently not covered by the MPF System or other statutory retirement schemes. This includes:

• Foreign and local domestic helpers
• Employees aged less than 18 or more than 65 or above

For these categories of employees, their SP/LSP, if applicable, will continue to be calculated on the basis of the last monthly wages or 12-month average wages before the termination of employment in accordance with the existing provisions of the Employment Ordinance [1].

Protect Your Rights: Contact Us Today

Understanding the intricacies of MPF offsetting and its impact on your severance and long service payments can be complex. At Titus.com.hk, we are dedicated to protecting the rights of employees in Hong Kong. If you have questions about your entitlements or need legal advice regarding your employment, contact us immediately for expert legal advice and support.

References: [1] Labour Department. (n.d.). Abolition of MPF Offsetting Arrangement. Retrieved from https://www.labour.gov.hk/eng/news/aoa.htm [2] Labour Department. (n.d.). Chapter 11: Severance Payment and Long Service Payment. Retrieved from https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/11.pdf

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