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Payment in lieu of Notice
If we want to terminate the contract of employment of an employee, we can either give our employee due notice, or give wages in lieu of notice.
How much do we need to pay for wages in lieu of notice?
If the notice period in the employment contract is expressed in days or weeks, the amount of wages in lieu of notice equals:
[Average Daily Wage (ADW) of Prior 12-Month] x [Number of days in the notice period where wages are payable]
If the notice period in the employment contract is expressed in months, the amount of wages in lieu of notice equals:
[Average Monthly Wage of Prior 12-Month] x [Number of months in the notice period]
To avoid understating the average wages, in case the employee is not paid in full amount for a certain period, both 1) the sum paid to the employee in the period and 2) the time period should be excluded from the calculation of average wages.
Refer to the details of Average Daily Wage (ADW) for reference:
Is Payment In Lieu of Notice part of the relevant income subjected to MPF contribution?
According to MPFA, Payment in lieu of Notice is not consideration of service rendered, it is not part of relevant income and therefore not subjected to MPF contribution.
Is Payment In Lieu of Notice taxable?
According to IRD, Payment in lieu of Notice paid on or after 1 April 2012 is taxable.
And if employee pay employer for early termination of contract, this payment is not tax deductible.