Structural Changes & Complying with the Average Daily Wage Calculation Method
2020 has caused many businesses to restructure their operations. Structural changes may result in the termination of employees, meaning many businesses will need to calculate the payment in lieu of notice. It is therefore essential for businesses to know how to do the calculations correctly.
Since the introduction of the Employment (Amendment) Ordinance 2007, employee’s statutory entitlements must be calculated on the basis of their 12-month Average Daily Wage (ADW).
ADW calculation is a high-risk area and there has been an increasing level of audit activity in regards to whether businesses are compliant with the ordinance. Companies found underpaying are facing penalties, reimbursing employees, and hurting their reputation.
The purpose of the Employment (Amendment) Ordinance 2007 (also known as the 713 Ordinance) is to ensure that all components of wages (defined under the Employment Ordinance) are included in the calculation of relevant statutory entitlements.
What Are the Relevant Statutory Entitlements You Must Calculate Based on ADW?
The relevant statutory entitlements include:
- Statutory Holiday Pay
- Annual Leave Pay
- Sickness Allowance
- Maternity Leave Pay
- 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
*Maternity leave will be extended by 4 weeks in Hong Kong by the end of 2020. To learn more, click here.
Calculating Relevant Statutory Entitlements & Determining the 12 Month Period
The calculation of relevant statutory entitlements should be calculated on the basis of the Average Daily Wages (ADW) earned by the employee in the preceding 12-months of the specified dates (See specified dates in the table below). If the employee has been employed for less than 12 months, the calculation will be based on the period of employment.
To avoid deflating the average wages and affecting the statutory entitlements, the calculation should exclude days and wages when the employee is not paid or not fully paid. Excluded days from the calculation should include:
- Employee taking leave provided under the Employment Ordinance:
- Rest Day
- Statutory Holiday
- Annual Leave
- Paternity Leave
- Sick Day
- Sick leave due to work injuries as provided under the Employees’ Compensation Ordinance
- Leave taken with the agreement of the employer
- The employee not being provided with work by the employer on any normal working day
Average Daily Wage Calculation Formula & Example Scenarios
The formula used to calculate ADW is:
(* Examples are from labour.gov.hk and are hypothetical situations to show how to calculate relevant statutory entitlements)
Scenario 1: Calculating 7-day annual leave pay
- Remuneration: Monthly-rated at $9,000 with paid rest days
- 12-month wages earned before the first day of annual leave: $108,000 including wages for services rendered and payments for leave
- Leave taken in the 12-month period: 71 days of
full pay leave comprising:
- 52 rest days
- 12 statutory holidays
- 7 days of annual leave
Periods and wages to be disregarded
- No period and sum have to be excluded because the employee is not paid less than his full wages for the leave taken in the 12-month period
Calculating annual leave pay on the basis of the 12-month average
- Calculating the average daily wages earned in the 12-month period:
- (108,000 – $0) ÷ (365 – 0 days) = $296
Final Calculation: 7 -day annual leave pay: $296 x 7 = $2,072
Scenario 2: Calculating 1-month payment 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 date on which notice of termination is 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 payment in lieu of notice on the basis of the 12-month average
- Calculating the average monthly wages earned in the 12-month period:
(a) No. of months included in the calculation –
- (365 – 15 days) ÷ 365 days x 12 = 11.5 Months
(b) The average monthly wages:
- (600,000 – 1,500) ÷ 11.5 (months) = 52,043
Final Calculation: 1- month payment in lieu of notice: $52,043
Partner with Payroll Professionals to Ensure Compliance
It is important for all businesses to be compliant with payroll regulations. You could severely damage your business’ reputation and employer brand if you underpay your employees. Payment calculations can get complicated especially if you are making large structural changes in your business. Outsourcing your payroll to a professional vendor would be a smart business move if you’re are looking to streamline your HR and make calculations easier.
Learn more about how Links International’s payroll outsourcing can streamline your business and help your business grow. If you would like to know more about calculating the Average Daily Wage contact our specialist payroll team now!
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Links International is an industry leader in innovative HR outsourcing with services such as payroll outsourcing, visa application, PEO/EOR Secondment, outplacement, recruitment and more! Contact us for more information on how we can help leverage your HR function.