Take a teacher on HK$50,000 a month, on a two year contract that pays a 21% gratuity at the end, which is the rate the Australian International School advertises in its listings. Applied to gross salary, which is this example's assumption rather than anything the listing states, the gratuity is HK$252,000, paid in the month the contract ends. Spread back over the months it was earned, that is HK$10,500 a month, or about five months of salary arriving as a single payment. ESF's 2018–19 kindergarten terms paid a gratuity "equivalent to 20% of the gross salary", excluding the cash allowance, which on that base works out at 4.8 months. The figures are illustrative. The base a given contract uses is the first thing to check.

What one teacher costs each month

Same teacher, same two-year contract — booked two ways.

Month	With accrual	Payroll only
1	60,500HKD	50,000HKD
2 – 2322 identical months	60,500HKD	50,000HKD
24Contract ends	60,500HKD	302,000HKDsalary + HK$252,000 gratuity
Two years24 months	1,452,000HKD	1,452,000HKD

HK$50,000 salary, 21% gratuity, two-year contract. Accrued, the cost is HK$60,500 every month. Booked from payroll alone, it’s HK$50,000 for 23 months and HK$302,000 in the month the contract ends.

If your close waits for the payout month, every month before it understates what that teacher costs and the payout month overstates it. Many school groups do book a monthly accrual, and an audited group may be doing it through a year-end adjustment rather than per teacher, per month. Where the payroll file is the only feed into the ledger the accrual tends not to exist at all, because payroll posts what was paid. In groups that employ staff through a separate company per school, which is the shape of the chains we've written about before, the gap repeats in each employer company.

Two things complicate the accrual even where it exists. HK$252,000 is this contract's full gratuity, so it is the most the accrual can reach; if the contract forfeits the gratuity on early resignation, the monthly figure should reflect the likelihood of completion, and how that probability is measured is an HKAS 19 question for your accountants and auditor rather than a payroll setting. And a teacher who moves campuses mid-contract may move between employer companies, carrying an accrued balance that one company had the benefit of and another will pay. Someone has to decide whose books it sits in before the transfer rather than at year end.

Why nobody asked before May 2025

The Hong Kong Institute of CPAs set out the starting point in its guidance on the offset abolition:

Gratuities connect to that liability through the same offset. The guidance's footnote notes that benefits derived from voluntary contributions or gratuities "may continue to be used to offset pre- and post-transition LSP". So for many employers the long service liability netted down to a figure that rarely got a line of its own.

On 1 May 2025 the mechanism changed, and the change is specific. Accrued benefits from an employer's mandatory MPF contributions can no longer offset severance or long service payment for service from that date. For employees whose employment straddles the date those mandatory benefits can still offset the portion for service before it. Benefits from voluntary employer contributions and gratuities "based on length of service" can still offset both portions. Whether a particular school's gratuity qualifies depends on its wording and on the service period it relates to, and that is a question for the contract and for counsel. Where it does qualify, the gratuity you accrue monthly is also a balance that reduces what the school owes when a teacher later qualifies for a statutory payment. That is our reading of the Labour Department's two statements, and it is the reason the accrual now has to be tracked rather than estimated.

The statutory formula is two-thirds of a month's wages for each year of service, on wages capped at HK$22,500 a month and a total payment capped at HK$390,000, both unchanged by the reform. For service before 1 May 2025 the wage used is the employee's last full month's wages immediately before that date (or, at the employee's election, a 12-month average), and later pay rises do not move it. Service from that date runs on the wages at termination, under the same cap. For a teacher on HK$50,000 the cap matters more than the salary does. The frozen figure also has to be provable years from now, which is why employers must keep the wage and employment records for the 12 months immediately preceding 1 May 2025 for every affected employee until six months after they leave. The fine for failing to keep them is HK$10,000.

On the accounting, the Institute is careful and so should the reader be. Its guidance covers long service payment only; severance is treated as a termination benefit outside its scope. The liability is measured on actuarial assumptions. There are two acceptable approaches, treating the expected offset as a deemed employee contribution or carrying the employer's right as a reimbursement asset, and the guidance says the result "could become material" depending on the composition and salary of the workforce. A school with long tenured teachers on international salaries is close to the case that sentence describes. A 25-year government subsidy scheme pays part of the post-transition amount, taking the lesser of what was actually paid and what the Ordinance makes payable, at 50% in its first three years (or the amount above a HK$3,000 per-employee cap, whichever is more, within a HK$500,000 annual threshold) before stepping down. It eases the cash. On the books, the Institute's view when it wrote the guidance was that the subsidy did not yet meet the recognition criteria for any element of the financial statements, with entities told to watch later developments, so treat it as cash relief rather than a receivable until the Institute says otherwise. The abolition also applies to MPF-exempted ORSO schemes and to the Grant Schools Provident Fund Rules (Cap. 279C) and the Subsidized Schools Provident Fund Rules (Cap. 279D).

Two retirement schemes in one pay run

Established schools often run an ORSO scheme that predates MPF and is exempted from it. Eligible new joiners get a one-time written choice between the ORSO scheme and MPF within 30 days, and the default is MPF. After a decade or two that produces a staff room with long-tenured teachers in ORSO and newer ones in MPF, two contribution feeds, two reconciliations, and for offset purposes several kinds of balance measured against one statutory formula. Mandatory MPF, voluntary MPF, an exempted ORSO scheme and a qualifying gratuity are each treated differently, so the ledger should hold them separately rather than as one retirement figure. The Institute's guidance says its principles apply equally to ORSO schemes, so the accounting question above does not stop at MPF.

What sits inside the percentage is also a contract question. The government's own NET scheme states its gratuity inclusively: 10% of total current basic salary over the first two contracts and 15% thereafter, in each case "when added to the employer's contribution" to the MPF. A private school's 20% or 21% may or may not work that way. The two schools above describe theirs as a percentage of gross salary, and whether employer contributions sit inside that figure is for each contract to say.

What the ledger should hold, per teacher, per entity

For each employer company, and each teacher inside it:

• contract start and end dates, and the renewal history
• the gratuity percentage and the base it applies to (basic salary, gross salary, with or without allowances)
• whether employer retirement contributions sit inside that percentage
• ORSO or MPF, and the date the choice was made
• years of service before 1 May 2025 with the frozen, capped wage; years after it on current wages, capped
• unpaid gratuity accrued at the balance date, adjusted for expected completion
• gratuity already paid at an earlier contract end, with two tests noted against it: is it based on length of service, and does it relate to the years a later statutory payment would cover
• the 12 months of pre-transition records, retained
• part-timers who now meet the continuous contract test in force since 18 January 2026: at least 17 hours in each week, or, for a week under 17 hours, 68 hours or more across that week and the three before it

The last line needs its caveat. The 468 rule changes who counts as continuously employed. It does not create a statutory payment by itself; those still need their own qualifying service and a qualifying event. What it changes for a school is which tutors and casual staff need the same tracking as everyone else.

Payroll owns the wage data, the employment status and the termination calculations, and it belongs inside a payroll system such as Workstem, which handles the Employment Ordinance's 12-month average wage rules. The ledger owns the monthly accrual per entity, the tranche balances per employee and a consolidation that shows the group what it owes its teachers at each month end. That is the configuration we build for Hong Kong school groups, and our implementation page covers what the project involves.