These amendments come into force today, 13 July 2007. The amendments effectively expand the scope of what is included within the term 'wages'. This is very important in the context of calculating the sums due upon termination, as well as maternity leave pay, holiday pay and annual leave pay. The aim is to capture commissions as part of an employee's wages. Given that commissions form a significant part of the remuneration for employees in several industry sectors (and in many cases commissions form the majority of the employee's pay), this particular change is likely to have a significant impact upon many employers.

The drafters of the Employment Ordinance intended that 'wages' should include contractual commissions (as distinct from gratuitous or discretionary commissions), regardless of how they are calculated, and the definition of 'wages' in the Ordinance is correspondingly broad. However, in practice it was generally accepted that commissions are not included in the calculation of an employee's wages. Obviously, this has the effect of minimising any amount which became payable by reference to the employee's wages, such as payments in lieu of notice of termination. In Lisbeth Enterprises Limited (trading as Philip Wain) v Mandy Luk [2006] 1 HKLRD 1005, this practice was challenged by two employees of a health club. The employees were entitled to commissions calculated on a monthly basis, depending on sales. The employees' annual leave pay and holiday pay was calculated by reference to their basic salaries, which were a fraction of their usual commissions. The case eventually ended up in the Court of Final Appeal, which held that no commission is to be included in the calculation of annual leave pay or holiday pay. This was on the basis that commission lacked the certainty required by the Ordinance (the Court indicated that commissions that accrue and are calculated on a daily basis might be considered to be wages for the purposes of calculating annual leave pay and holiday pay, but did not decide this point). The employees therefore failed.

New formulation of 'wages'

The Labour Department reacted to the decision in Lisbeth by proposing to amend the manner in which annual leave pay and holiday pay, as well as other statutory entitlements such as maternity leave pay and termination payments, are calculated. This is the approach taken in the new amendments. In each case, the employee's wages are determined by reference to the daily or monthly average (depending on the type of statutory entitlement) of the wages earned by the employee over the preceding 12 months. Periods during which the employee did not receive their 'full wages' due to (for instance) sickness, holiday or leave, are ignored for the purposes of calculating the average.

In the case of calculation of wages payable in respect of notice periods expressed in months, then the wages are calculated by reference to the monthly average of the wages earned in the previous 12 months. There is no formula for calculating the monthly average wages.

Where it is 'impracticable' to calculate the employee's average wages, they are calculated by reference to an employee in the same trade or occupation and at the same work in the same district during the 12 month period preceding the relevant date. This provision will no doubt prove troublesome in practice.

The likely effects of these amendments will vary from employee to employee, and not all employees will benefit. An employee who relies upon commissions will clearly benefit, and employees like those in Lisbeth whose remuneration is largely commission-based will be substantially better off. However, an employee on a regular salary who received a pay rise during the relevant 12 month period may find that, averaged out over 12 months, their wages due on termination are actually lower than they would have been prior to the amendments. There will also be issues for employees who seek to pay out their notice period, who may be unable to ascertain what their average monthly wage should be, because they do not have access to the relevant information. Employers should review the terms of their employees' remuneration to ensure that they comply with the amended legislation.