Probation and Notice Periods: The Payment in Lieu Formula

At a glance

Notice requirements and calculation methods are as set out in the Employment Ordinance and as most recently published by the Labour Department.

Probation does not mean “dismiss at will”

This is the most common misconception.

Probation only carries a special arrangement in the first month — within that month either the employer or the employee can terminate without notice.

After the first month, notice is required even during probation (as the contract provides, at least 7 days). “They are still on probation, so I told them today not to come back” does not work.

And note that probation does not switch off the other statutory protections. Employees’ compensation insurance is still required, MPF is still payable (see do part-timers and casuals need MPF), and wages still have to be paid on time.

How is payment in lieu calculated?

The formula:

Average daily wages over the preceding 12 months × days of notice (or average monthly wages over the preceding 12 months × months of notice)

It uses average wages, not the last month. So where an employee earns commission, bonuses or overtime, those go into the average — using basic salary alone under-calculates it.

Payment in lieu and severance pay are two different things: payment in lieu replaces the notice period, while severance compensates for length of service. A single redundancy may involve both.

When can you dismiss summarily?

The law permits summary dismissal in specific serious circumstances, with no notice and no payment in lieu — wilful disobedience of a lawful and reasonable order, misconduct, fraud or dishonesty, or habitual neglect of duties.

But two points need real care in practice:

One: the threshold is high. “Poor performance” or “not a fit” generally do not amount to grounds for summary dismissal. This means serious misconduct, not ordinary dissatisfaction.

Two: you need evidence. Once an employee complains to the Labour Department or files at the Labour Tribunal, the burden of proof is on the employer. With no written records, no warning letters and no contemporaneous notes, the position is hard to sustain.

So unless the situation is genuinely clear-cut, the normal approach is to give the full notice or payment in lieu rather than use summary dismissal to save it — the amount saved is far smaller than the cost of a dispute.

Some situations where dismissal is prohibited

Several categories carry specific protection, including (but not limited to):

• While an employee is on statutory maternity or paternity leave
• While an employee is on paid sick leave
• Where an employee has made a work injury claim and compensation has not yet been determined
• Dismissal because an employee took part in trade union activities or gave evidence

Dismissal in these situations may be unlawful, with consequences far more serious than paying money back.

Before deciding to dismiss, confirm the employee is not in one of these states. It takes a moment and saves a great deal.

What has to be paid on the day?

Work it out in full:

• Outstanding wages
• Payment for untaken annual leave
• Payment in lieu of notice (where full notice is not given)
• Severance pay or long service payment (where eligible)
• The final MPF contribution

Apart from severance pay (within 2 months of receiving a written claim), all of it is payable within 7 days of termination.

And on the tax side: IR56F is filed one month before employment ends. Which means the tax filing clock starts the moment you decide to dismiss — not once the employee has gone.

Do the arithmetic before you have the conversation

What most often goes wrong in a dismissal is not whether it can be done; it is not having worked out how much is due and by when. Seven days is tight, and calculating under pressure is where things get missed.

Want someone to work out exactly what has to be ready? Talk to us.

This is general information and does not constitute legal advice. Notice periods, grounds for summary dismissal and protected situations are as set out in the Employment Ordinance and as most recently published by the Labour Department; for a dismissal dispute, consult a solicitor or the Labour Department.