Is Your Company Compliant with the Employment (Amendment) Ordinance 2007?
Recently we’ve seen a significant increase in audit activity in respect of whether clients are complying with the Average Daily Wage or 713 Ordinance. We have received increasing requests for reviews of Average Daily Wage calculations and heard of a number of companies facing penalties and reimbursing employees for underpaid salaries.
Effective for over 10 years, many companies in Hong Kong are still unaware of the requirements of the Employment (Amendment) Ordinance 2007. Here’s a concise guide around the calculation of the 12-month average wage as instructed in the 713 Ordinance.
Calculating Statutory Entitlements Using the 12-Month Average Wages
Annual leave (and other statutory leave e.g. maternity, sickness) pay in Hong Kong is calculated from the average daily wages earned by an employee over a 12-month period. See below for details on how the 12-month period is determined.
The main purpose of the 12-month average wages calculation is to protect employees. Implementation of this calculation minimizes the chance of unfair reduction of statutory entitlements that’s resulted from deflation of average wage. Based on our experience, employers with large portions of sales staff who have a higher amount of variable or non-base salary benefits (e.g., commissions) are at higher risk of the chance of calculating Average Daily Wages incorrectly.
The 12-month average wages is applicable to all employees covered by the Labour Ordinance regardless of how they’re rated (monthly, daily, or piece rated). It is used to calculate the following statutory entitlements.
- Holiday pay
- Annual leave pay
- Sickness allowance and related provisions
- Maternity leave pay and related provisions
- Paternity leave pay
- End of year payment
- Payment in lieu of notice
- Further sum for non-compliance of an order of reinstatement or re-engagement for unreasonable and unlawful dismissal
How the 12-Month Period of Average Wage is Calculated
For employees who have been with the company for less than 12 months, the calculation should be measured on a shorter period. Regularly, the 12 month period will be calculated as follows.
In order to avoid deflating the amount due for the statutory entitlement, periods where the employee is not paid the full wages or any wages should be excluded. Wages from these periods are also excluded from the calculation.
This includes the following scenarios:
- Leave provided under the Employment Ordinance
- Rest day
- Statutory holiday
- Annual leave
- Maternity leave
- Paternity leave
- Sick days
- Sick leave due to work injuries as provided under the Employees’ Compensation Ordinance
- Leave taken with the agreement of the employer (no pay leave)
- A normal working day where the employee is not provided with work by the employer
How to Calculate the Average Wage in Hong Kong According to E(A)O 2007
Under the Amendment Ordinance, the 12-month average wage should be calculated as follows.
To put it more simply, the 12-month average wage is the eligible wages divided by the total days for these wages (depicted below). With this figure, the employers can then calculate the pay due.
Example: Calculating 1-Month Wages in Lieu of Notice
- Basic pay at $6,000 per month
- Contractual commission accrued and calculated on a monthly basis according to a sliding scale
- 12-month wages earned before the day on which notice of termination was given: $600,000 including basic pay and commission
- Leave taken with less than full wages in the 12-month period: 15 days of half-pay study leave (i.e. 50% of basic pay) at $1,500
Periods and wages to be disregarded
- 15 days of study leave with half pay at $1,500
Calculating 1-month wages in lieu of notice on the basis of the 12-month average
- The number of months included in the calculation:
- Average monthly wage
1-month wages in lieu of notice:
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Severe consequences of not complying
Not properly calculating and reinstating employees may result in expensive penalties such as having to pay a further sum amounting to 3 times the employee’s average monthly wages. On top of this, employers may also be subject to a ceiling of $72,500 on and any monetary remedies payable to the employee as ordered by the Labour Tribunal.
Accurate reporting and payroll calculations
The 713 Ordinance is now over 10 years old and can sometimes be overlooked. However, the consequences of doing this may be high. Keep yourself informed and updated of the latest amendments to avoid legal penalties.
Stay compliant the easy way
There are many professional HR outsourcing services in Hong Kong that can help you take care of your payroll needs. Parking your payroll needs with a professional agency can also help minimise costs and streamline your function. Check our professional price listing.
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