The Employment (Amendment) Ordinance 2007 (the Amendment Ordinance) came into effect in July 2007. It has changed the basis of calculation of certain statutory benefits (described in more detail below) to which employees are entitled under the Employment Ordinance.

Specifically, the Amendment Ordinance now requires these statutory entitlements to be calculated by averaging the wages earned by the employee during the 12 -month period immediately before the dates stipulated in the Amendment Ordinance. Contractual commissions are included in this calculation, regardless of whether the employee is paid on a daily, monthly or piecework basis. Under the new regime, employees whose commissions form part of their total earnings will benefit, as these commissions will now be included in the calculation of their statutory entitlements.

The Amendment Ordinance is a direct result of the controversial Court of Final Appeal (CFA) decision in Lisbeth Enterprises Ltd v Mandy Luk (2006). In its judgment, the CFA decided that commissions accruing and calculated on a monthly basis were not to be included in the calculation of holiday pay and annual leave pay, since the amounts of such commissions were uncertain and thus should not be included as “wages”.

The new regime

Following the controversy over the Lisbeth decision, the Labour Advisory Board submitted the Employment (Amendment) Bill 2006 to the Legislative Council with the aim of reversing the CFA’s decision.

The bill proposed that the calculation of certain statutory entitlements under the Employment Ordinance should be modified so that the benefits or payments were determined by averaging the wages earned in the 12 months preceding the relevant dates stipulated in the bill. The statutory entitlements included annual leave pay, holiday pay, sickness allowance (including the compensation payable by an employer for wrongfully dismissing an employee on sick leave), maternity leave pay (including the compensation payable by an employer for wrongfully dismissing a pregnant employee), end-of-year payments and wages in lieu of notice. Monthly commissions were also to be included. All these proposals were duly included in the Amendment Ordinance.

If an employee has been employed for less than 12 months, the calculation will be based on the shorter period. For the purpose of calculating average wages, any period (together with the relevant wages earned in that period) during which the employee did not receive full wages – for example, during sick leave or maternity or any leave taken with the agreement of the employer – must be disregarded.

As a result of these new methods of calculating statutory entitlements, employers now have to keep wage and employment records for 12 months instead of six months as previously required. This requirement will come into effect on 13 January 2008.

The Amendment Ordinance has also clarified another important point. Where a sum of money is paid to an employee in respect of maternity leave – or on account of sickness, or holiday or other annual leave – then any maternity, sickness, holiday or annual leave payment that is payable under the Amendment Ordinance will be reduced by the sum that has already been paid to the employee.

It should also be noted that the new methods of calculation under the Amendment Ordinance do not apply to the calculation of severance and long service payments. The amounts of these payments will continue to be based on the lesser of two-thirds of HK$22 ,500 and (i) two-thirds of an employee’s last full month’s wages (in the case of a monthly paid employee) or (ii) 18 days wages based on any 18 days chosen by the employee during his/her last 30 normal working days (in any other case) for each year of service. An employee may also elect to use his/her average wages in the last 12 months for calculation.

Notable features

As compared with the old regime, the Amendment Ordinance has the following notable features:

(1) All the statutory benefits (with the exception of end-of-year payments and payments in lieu of notice where the notice period is expressed in months) are to be determined by reference to the daily average of the wages earned by the employee over the preceding 12 months. Under the old regime, such benefits were calculated on the basis of the wages earned during the preceding month (in the case of maternity leave) or the wages which the employee would have earned if he or she had worked on the sickness day, holiday or annual leave day (in the case of the other entitlements).

(2) If it is impracticable to calculate the daily or monthly average wages of an employee, the Amendment Ordinance allows the payment to be calculated by reference to the wages earned by a person who was employed in the same trade or occupation and who did the same work in the same district during the relevant 12 -month period.

(3) If the employee has been employed for less than 12 months before the relevant date, the daily or monthly average wages will be determined by reference to that shorter period.

(4) In order to facilitate the calculation of average wages under the new regime, employment records must be kept for 12 months instead of six months as previously required.

(5) Any amounts paid by the employer under the employment contract in respect of maternity leave, sick leave, holiday or annual leave can be deducted from the statutory benefits payable under the Amendment Ordinance.