yes it is within their right.
from the relevant website:
OFFSETTING OF LONG SERVICE PAYMENTS/SEVERANCE PAYMENTS
Under the provisions of the Employment Ordinance, an employee may become entitled to a long service payment or a severance payment from the employer on the occurrence of circumstances specified in that Ordinance. The employer is entitled to offset such payments out of the accrued benefits derived from the contributions made by the employer in respect of the employee in the MPF scheme.
The employer can apply to the trustee to deduct a relevant amount for this purpose for payment to a leaving employee. Some examples will illustrate:
If the amount of benefits accrued from the employers contributions is HK$55,000 and the amount of the long service payment is HK$80,000, the employer should pay HK$80,000 to the employee but he can apply to withdraw HK$55,000 from the employees MPF account as reimbursement of his payment of HK$80,000. The balance of HK$25,000 must be paid from his own funds to the leaving employee.
If the long service payment is only HK$40,000 (with accrued benefits as with (i) above), the employer can only request the trustee to reimburse him for HK$40,000 paid to the leaving employee. The remaining accrued benefits, namely the balance of HK$15,000 derived from the employers contributions, together with those derived from the total contributions made by the employee, have to be transferred to the MPF scheme designated by the employee and preserved until the employee retires. (These comments apply to mandatory contributions. The employee may choose to withdraw his voluntary contributions subject to the governing rules of the scheme.)
(c) The employer should note that in offsetting long service payments or severance payments, he will need to comply with other requirements set out in the Employment Ordinance concerning such payments.