By Joseph Hong, Director & Head of Payroll and HR Outsourcing Services, and Vinci Tam, Manager of Payroll and HR Outsourcing, BDO in Hong Kong
Continuous changes to the Hong Kong Employment Ordinance can make staff hires and compensation increasingly complicated. Employers would be hard-pressed to ensure their compliance with the updated employment laws of Hong Kong. In particular, multinational organisations who are expanding their businesses to Hong Kong and companies that do not have a local payroll team may find it difficult to keep up and be compliant with the local employment-related legislation.
Over the past few years, several labour disputes have arisen due to the incorrect calculations of wages, holiday pay and annual leave pay. In a recent case, the Chief Executive of a restaurant chain revealed that the company had underpaid holiday wages due to its employees since 2007. It was believed that up to 3,000 employees had been affected, and they were issued an apology letter with the promise to settle the underpaid amounts. Commenting from this incident, the Labour Department has expressed concern and stressed that employers must pay wages to employees in an accurate, complete and timely manner, adhering strictly to the requirements stipulated in the Employment Ordinance.
It is not uncommon that labour disputes involve mistakes in the calculation of an employee’s Daily Average Wages (DAW), which includes the computation of the seven relevant statutory entitlements: holiday pay, annual leave pay, sickness allowance, maternity leave pay, paternity leave pay, end of year payment and payment in lieu of notice.
Employers should pay special attention to the provisions under the Employment (Amendment) Ordinance 2007 (the E(A)O 2007) relating to the calculation of these statutory entitlements. The main objective of this amendment is to ensure that all types of remuneration defined as wages under the Employment Ordinance are included.
Who is eligible for the seven statutory entitlements?
In accordance with the Employment Ordinance, employees employed under a continuous contract by the same employer for four or more weeks and who accumulate at least 18 working hours each week, are eligible regardless of the frequency of their wages payment or the basis of calculation; i.e. by job, hour, week, etc. The calculation of these entitlements shall be computed based on their 12-month average wage.
What is covered by the definition of ‘wages’ by the Employment Ordinance?
According to the Employment Ordinance, 'wages' refers to:
- all types of remuneration that are payable to an employee in respect of work performed and work to be performed;
- allowances (inclusive of attendance, travelling or housing allowances) see Note 1;
- tips, earnings and service charges; and
- commission and overtime pay see Note 1 below.
It does not include:
- employer’s contribution to any retirement scheme;
- the value of any accommodation, education, food, fuel, water, light or medical care provided by the employer;
- non-recurrent travelling allowances or the value of any travelling concession or travelling allowance for actual expenses incurred by the employment;
- a gratuity payable on completion or termination of a contract of employment;
- any sum payable to the employee to defray special expenses incurred by them by the nature of their employment;
- commission, attendance allowances or attendance bonus which is of a gratuitous nature or is payable only at the discretion of the employer; nor
- end-of-year payment or annual bonus which is of a gratuitous nature or is payable only at the discretion of the employer.
How to define the 12-month period?
The relevant statutory entitlements shall be computed based on the average daily/ monthly wages earned by an employee in the past 12-calendar months preceding the specified dates. If an employee is employed by the company for less than 12 months, the calculation shall be based on the shorter period.
What wages and periods are to be disregarded for the computation of daily average wages (DAW)?
One point that is often overlooked in the calculation of DAW—periods during which the employee are not paid (in full, or at all) should not be included in computing the employee’s 12-month average daily/monthly wages:
(a) Rest days, statutory holiday, annual leave, maternity leave, paternity leave or sickness days taken by an employee with no pay or not paid in full by the employer. This also includes sick leave due to work injuries as provided for under the Employees’ Compensation Ordinance; or leave taken with the agreement of the employer.
(b) An employee who is not provided with work by the employer on any normal working day. Please note that an employer does not have to exclude an employee’s full-paid leave (regardless of whether it is a statutory holiday, annual leave, maternity leave, paternity leave or any other leave taken with the agreement of the employer) and the amount received for such leave in computing average wages.
It is imperative that employers strictly adhere to the Employment Ordinance requirements for the computation of DAW applicable for the calculation of the seven relevant statutory entitlements for their employees to avoid any possible labour disputes, penalties or prosecution.
NOTE 1
Please note that overtime pay should also be included as wages for computing the relevant statutory entitlements if:
- it is of a constant character; or
- the monthly average amount over the past 12 months is not less than 20% of the average monthly wages of the employee during that same period; and
- commission, good attendance bonus and travelling allowance are required to be included in the calculation of the end of year payment, maternity leave pay, paternity leave pay, severance payment, long service payment, sickness allowance, holiday pay, annual leave pay and payment in lieu of notice. However, the end of year payment can be the amount as specified in the employment contract. If the amount is not specified, it will be a sum equivalent to one month’s average wages.
- The specified dates of the relevant statutory entitlements are the day of the statutory holiday/annual leave/sickness day/maternity leave/paternity leave. If there is more than one day of such leave entitlement, the first day of such leave entitlement would be regarded as the specified date.
For the end of year payment, the specified date is the due day of the payment.
For payment in lieu of notice, the specified date is the day when a notice of termination of contract is given.
Example 1: Holiday Pay
Employee A, having been employed under a continuous contract for not less than three months immediately preceding a statutory holiday, is entitled to holiday pay. Holiday pay should be paid to Employee A no later than the day on which he is next paid his wages following that statutory holiday.
Computing holiday pay for 1 July 2019
According to the Employment Ordinance, 'wages' refers to:
- Remuneration: basic salary of HK$20,000 per month with paid rest days
- Total amount of commission earned for Employee A for the past 12-month period from 1 July 2018 to 30 June 2019: HK$200,000
- 12-month wages earned by the employee for the period from 1 July 2018 to 30 June 2019: HK$438,000 (this amount has already excluded three days unpaid pay sick leave and only includes leave where full wages were payable)
- Three days unpaid sick leave at HK$666.67 per day (i.e. HK$2,000 = HK$666.67 x 3 days)
Periods and wages to be disregarded
Rest days, statutory holidays and annual leave have all been taken by Employee A in the past 12-month period with full pay, except for three days of unpaid sick leave. As such, three days and the respective amount received by Employee A must be excluded.
Wages to be excluded
Since no payment was made for the three sick days, no amount must be excluded but the three days must be excluded.
Period to be excluded
365 days - 3 days= 362 days
Holiday pay computation according to the average daily wage of the past 12-month period.
Average daily wage
Total wages in the 12-month period minus three days of unpaid sick leave/(365 days - 3 days)
Total wages in 12-month period - three-day unpaid sick leave= (HK$240,000 + HK$200,000) - HK$2,000 = HK$438,000
Average daily wage= HK$438,000/362 days= HK$1,209.94 per day
Holiday pay
Holiday pay for 1 July 2019 is calculated as HK$1,209.94. An error is possible in the calculation of holiday pay by using only the monthly basic salary/31 days= HK$20,000/31 days= HK$645.16 per day.
Therefore, the amount underpaid to Employee A would be HK$564.78 (i.e. HK$1,209.94 - HK$645.16).
Example 2: Annual Leave Pay
Annual leave pay should be paid to Employee B no later than the normal payday after the period of annual leave was taken.
Calculating three days of annual leave pay (annual leave to be taken from 25 to 27 March 2019)
- Remuneration: Basic salary of HK$30,000 per month with paid rest days
- Total amount of commission earned for Employee B for the past 12-month period from 1 March 2018 to 28 February 2019: HK$300,000.
- 12-month wages earned before the first day of annual leave from 25 March 2019: HK$657,000 (This amount already includes the total amount of commission but excludes five days of special concession leave pay for which the employee received pay at HK$600 per day and only includes fully paid leave)
- Five days special concession leave commencing 10 September 2018 with special concession leave pay at HK$600 per day (i.e. HK$3,000 = HK$600 x 5 days).
Periods and wages to be disregarded
The three days annual leave pay shall be calculated based on Employee B's average daily wage in the past 12 months (i.e. from 1 March 2018 to 28 February 2019). Rest days, statutory holidays and annual leave have all been taken by Employee B in the past 12-month period with full pay, except for five days of special concession leave and the respective amount received has to be excluded in computing the average daily wage.
Wages to be excluded
The five days of special concession leave pay from the total wages earned in the preceding 12-month period.
Periods to be excluded
The period of five days of special concession leave from the preceding 12-month period (i.e. 365 days - 5 days).
Average daily wage
Total wages in the 12-month period minus five days special concession leave pay/ (365 days - 5 days)
Total wages in 12-month period - five days special concession leave pay= (HK$360,000 + HK$300,000) - HK$3,000 = HK$657,000
Average daily wage= HK$657,000/360 days= HK$1,825 per day
Annual leave pay
Annual leave pay of three days= HK$1,825 x 3 days= HK$5,475. An error is possible in the calculation of annual leave pay by using only the monthly basic salary/31 days= HK$30,000/31 days= HK$967.74 per day.
Therefore, the amount underpaid to Employee B would be HK$857.26 (i.e. HK$1,825 - HK$967.74) x 3 days= HK$2,571.78.
The above two examples show only the details of the computation of holiday pay and annual leave pay as per the requirements of the Employment Ordinance. If you require additional information regarding the requirements for the calculation of other statutory entitlements, please speak to our payroll professionals for specific advice.
It is imperative that employers strictly adhere to the Employment Ordinance requirements for the computation of DAW applicable to the calculation of the seven relevant statutory entitlements for their employees. This will avoid any possible labour disputes, penalties or prosecution. Full compliance with the law offers the best protection of the rights of both employers and employees for the duration of employment.
Further information can be accessed from BDO's website: bdo.com.hk
Paul Arkwright
Publisher
