Hong Kong’s Employment (Amendment) Ordinance 2007 — commonly referred to as the 713 Ordinance — introduced the 12-month average wage method for calculating statutory entitlements. For employers and HR teams, understanding this correctly is essential to avoiding underpayments, particularly where employees receive commission, allowances, or other variable pay.
What is Hong Kong’s 12-Month Average Wage?
Hong Kong’s 12-month average wage refers to the average daily or monthly wages earned by an employee during the 12-month period immediately before the relevant date for a statutory entitlement. If the employee has been employed for less than 12 months, the calculation should be based on the shorter period instead.
Under the 713 Ordinance, this average wage approach is used to make sure statutory entitlements are calculated more fairly, especially where an employee’s earnings are not fixed each month.
This approach ensures statutory entitlements are calculated fairly — not just based on an employee’s latest basic salary, but across their full earnings history.
Calculating Statutory Entitlements Using the 12-Month Average Wages
The 12-month average wage 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
It applies to all employees covered by the Employment Ordinance – whether monthly-rated, daily-rated or piece-rated.
How Is the 12-Month Period Determined?
The 12-month period is measured immediately before the date on which the statutory entitlement becomes due. This reference date varies depending on the entitlement — for example, annual leave pay uses the first day of annual leave, while payment in lieu of notice uses the date up to which the payment is calculated.
Using the wrong reference date is one of the most common mistakes employers make, so it is important to confirm the correct start point for each entitlement type.
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:
Reference: Labour Department, The Government of the Hong Kong Special Administrative Region of the People’s Republic of China
Periods and Wages to be Disregarded
To avoid deflating the entitlement amount, certain periods must be excluded from the calculation — along with the wages paid during those periods. These include:
- The employee takes any of the following leave:
- 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)
- Leave provided under the Employment Ordinance
- A normal working day where the employee is not provided with work by the employer.
How to Calculate the 12-Month Average Wage
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
(The below example is referenced from the Labour Department – The Government of the Hong Kong Special Administrative Region of the People’s Republic of China)
In practice, the 713 Ordinance calculation is especially important for employers managing payroll manually or handling employees with fluctuating monthly income.
Assumptions
- Remuneration:
- Basic pay at HK$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: HK$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 HK$1,500
Periods and wages to be disregarded:
- 15 days of study leave with half pay at HK$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:
- HK$52,043
Common Mistakes Employers Make When Calculating Hong Kong’s 12-Month Average Wage under the 713 Ordinance
- Using basic salary only and leaving out commission or other wage components
- Failing to exclude periods where the employee was not paid full wages
- Including the wages paid for excluded periods in the formula
- Using the wrong reference date for the entitlement
- Confusing average daily wages with average monthly wages
- Applying a standard payroll formula without checking the Employment Ordinance requirements first
These risks are especially relevant for businesses with sales staff, variable pay structures, irregular attendance patterns, or manual payroll processes.
Why Accurate Records Matter?
Accurate wage and leave records are essential for calculating the 12-month average wage correctly. Employers should ensure payroll data, leave records, commission details, and attendance information are properly maintained so the calculation can be supported if questions arise later.
Because the 713 Ordinance relies on a historical wage review, accurate records are essential for showing how the calculation was reached and supporting compliance if challenged.
For companies with larger teams or more complex pay structures, reviewing payroll processes regularly can help reduce the risk of underpayment, disputes, or compliance issues.
Although the 713 Ordinance has been in place for many years, it is still highly relevant for employers in Hong Kong today. Overlooking the 713 Ordinance can lead to errors in statutory entitlement calculations, especially where employees receive variable pay or have excluded periods within the reference period.
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*Please note that all the information provided above is to be used as a general guideline. For more detailed information on Appendix 1 – A Guide to the Calculation of Relevant Statutory Entitlements on the Basis of the 12-Month Average Wages with Examples, please visit the official governmental websites: https://www.labour.gov.hk/eng/public/wcp/ConciseGuide/Appendix1.pdf.
Frequently Asked Questions About Hong Kong’s 12-Month Average Wage
1. Does the 12-month average wage apply to monthly-paid employees?
Yes. The calculation is not limited to daily-rated staff. It can also apply to monthly-rated employees when calculating relevant statutory entitlements.
2. Is commission included in the 12-month average wage calculation?
If the commission forms part of wages under the Employment Ordinance, it should generally be included in the calculation. This is one reason why employers with variable-pay employees need to be especially careful.
3. What if an employee has worked for less than 12 months?
In that case, the average wage should be calculated based on the shorter period of employment instead of a full 12 months.
4. What periods should be excluded from the calculation?
Periods in which the employee was not paid wages or was not paid full wages should generally be excluded, along with the wages paid for those periods. This may include certain leave periods and normal working days where no work was provided by the employer.
5. Is payment in lieu of notice calculated using the 12-month average wage?
It can be. The Labour Department provides examples showing how average monthly wages may be used for calculating 1-month wages in lieu of notice.
6. What is the 713 Ordinance in Hong Kong?
The 713 Ordinance refers to the Employment (Amendment) Ordinance 2007, which introduced the 12-month average wage method for calculating certain statutory entitlements under Hong Kong employment law.