The Employment (Amendment) Ordinance sets out the basis by which an employee’s statutory entitlements are calculated. It was brought into force on July 13, 2007 – hence its ‘713’ tag. Despite being on the statute books for over 10 years, some companies are still unclear about their requirements – specifically those relating to the calculation of employees’ statutory entitlements. This lack of insight exposes businesses to potential penalties for non-compliance in addition to reputational harm. We look at key aspects of the regulations and explore how employers can comply with the legislation.
In November 2017, it was found that a well-known international restaurant chain in Hong Kong had underpaid its staff’s holiday wages for the past 10 years. Up to 3,000 people were estimated to have been affected, and the then chief executive had to make a public apology. This mistake related to the 2007 Employment Ordinance amendment, which states that monthly commissions must be included when calculating holiday and annual leave pay.
And this wasn’t the only case. In May of that same year, a local electrical firm was discovered to have excluded commissions when calculating holiday pay since 2007. The Labour Department had to step in to help the employees recover the owed wages.
These are just a couple of examples that have been reported in the news. There may be many others. So, it is worth taking a fresh look at this topic, beginning with definitions of statutory entitlements.
The 8 Key Statutory Entitlements
In Hong Kong, employees are legally entitled to receive eight key statutory entitlements:
- Holiday pay
- Annual leave pay
- Sickness allowance
- Maternity leave pay
- Paternity leave pay
- End of year payment
- Payment in lieu of notice
- Any further sums for non-compliance with an order of reinstatement or re-engagement for unreasonable and unlawful dismissal
The amounts of these statutory entitlements are based on an employee’s wages. This means that an improper calculation of what constitutes an employee’s wage will also result in an incorrect statutory entitlements figure. What, then, is the right method for establishing an employee’s pay?
The employer must establish the following:
- Does the individual qualify as an employee?
- What payments can be categorised as wages?
The “418” Rule and the Amended Definition of Wages
The so-called “418” rule of the Employment Ordinance lays out two simple guidelines that employers can use to check whether a worker meets the legal definition of employee:
- Has the individual been continuously employed by the same employer for at least four weeks?
- Does the person work for at least 18 hours per week?
Suppose the answer to these two questions is yes. In that case, the worker is considered as being employed under a continuous contract and is entitled to the eight statutory entitlements listed above. It does not matter whether they are full-time or part-time – only that they meet the above conditions.
As for what payments can be categorised under wages, this definition was amended in the 713 Ordinance. Wages are defined as:
“All remuneration, earnings, allowances (including travelling allowances, attendance allowances, commission and overtime pay), tips and service charges, however designated or calculated, payable to an employee in respect of work done or work to be done.”
While this is a highly expansive definition, there are also exceptions: retirement scheme contributions, discretionary bonuses, directly reimbursable travel expenses, or any employer-provided accommodation, education, food, or medical care, are not included in the definition.
The Correct Method of Calculating Average Daily Wages
The specific basis used to calculate the relevant statutory entitlements is called the Average Daily Wage (ADW). The formula for ADW is:
(Total wages earned in a 12-month period) – (Total earnings for days with less than full wages)
(Days in the 12-month period) – (Days with less than full wage)
When the individual has been employed for less than 12 months, then the shorter period will apply. The crucial amendment here is the exclusion of days where the employee earned less than full wages. This avoids the ADW figure from being artificially lowered by including days where the employee does not receive their full salary – such as due to being on annual leave, sick leave, or any other reasons.
For certain statutory entitlements, such as payment in lieu of notice, the calculation may be based on the average monthly wage instead. However, the measure is largely the same. For example, suppose an employee is entitled to one month’s wages in lieu of notice. A few assumptions:
- Base salary of $30,000 a month
- Total wages for the past 12 months were $500,000 (mainly due to commissions)
- They had also taken 20 days of half-pay leave.
Because those 20 days must be excluded, the number of months that apply here would be: [(365 – 20 days) / 365 days] x 12 = 11.34 months.
The 20 days of half-pay leave equals $10,000 – being (50% x 20/30 x $30,000) – and is to be disregarded.
The average monthly wage is therefore: ($500,000 - $10,000) / 11.34 months = $43,210. That will be the amount owed to the employee in lieu of notice.
Automated Payroll Systems to Remain Compliant
The above calculation is relatively simple. Having to do the same for possibly hundreds of employees for eight different statutory entitlements is a far more complex task – and one that increases the risk of miscalculations and possible non-compliance.
The key to staying compliant lies in robust internal systems. Can firms automatically:
- Calculate a 12-month average wage each month?
- Exclude periods and wages where less than full pay is earned?
- Differentiate between statutory holidays and paid annual leave?
- Segment fixed-wage employees from commission-based ones?
EAO Compliance for Effective Employer Operations
Assuming the answer to even one of the above is a no, it may be time to look again at the current systems. If upgrades are required, then external expertise could prove useful. This would incur expending resources in the short term, but the longer-term benefits of remaining compliant are clear: companies will avoid the monetary and, importantly, reputational costs associated with non-compliance.