Key Points:

  • Statutory entitlements calculated on the basis of employees’ 12-month average wages
  • In computing average wages, periods and wages falling under “disregarding provisions” excluded
  •  Wages established by terms of employment contracts
  • Employers and employees should keep proper records for calculating statutory entitlements

On August 22, 2006 the Labour Advisory Board agreed on a new proposal to be put to the Legislative Council in Hong Kong (“Legco”). Under the new proposal, the calculation of annual leave pay, holiday pay and several other statutory benefits would be modified so that instead of using the daily average wage earned by the employee in the preceding wage period, the benefits would be determined by averaging the wages earned in the preceding 12 months. This would avoid the need to perform any calculation of ”daily” wages (thereby enabling a monthly commission to be included) and also would create a streamlining mechanism. The proposals were incorporated into the Employment (Amendment) Ordinance 2007, which was passed by Legco and announced on May 11, 2007. This legislation went into effect on July 13, 2007.

The new changes will affect the manner of calculation of benefits and payments in the following areas:

  • Payment of wages in lieu of notice and damages for wrongful termination of contract;
  • Deemed “end of year payment”;
  • Maternity leave pay;
  • Sickness allowance;
  • Holiday pay; and
  • Annual leave pay.

Some of the major changes are listed as follows:

1. “Daily average wages” and “monthly average wages”

Each of the relevant statutory benefits will need to be determined by reference to the ”daily average of the wages earned by the employee” over the preceding 12 months.

2. The “impractical provision”

Each of the relevant statutory provisions states that where it is “impractical” to calculate the daily or monthly average wages of an employee, the amount may be calculated by reference to the wages earned by a person who was employed in the same trade or occupation and at the same work in the same district during the relevant 12-month period.

3. “Disregarding Provisions” – deduction for other payments

Each of the relevant statutory benefits can be reduced by amounts paid by the employer to the employee in respect of the period of maternity leave, sickness allowance, holiday pay or annual leave pay ”pursuant to his contract of employment or any other agreement or for any other reason.”

4. Period of fewer than 12 months

Where an employee has been employed for a period of fewer than 12 months, the daily or monthly average wages are determined by reference to that shorter period.

5. Application to contracts entered into before the commencement date of the new legislation

  • For employment contracts entered into before the commencement date, the Employment (Amendment) Ordinance 2007 is applicable under the following situations:
  • If maternity leave pay, sickness allowance, holiday pay or annual leave pay are payable by an employer to an employee in respect of a wage period, and the last day of the wage period falls on or after the commencement date.
  • If the due date of the end of year payment (or proportion of it) payable by an employer to an employee falls on or after the commencement date.
  • If the relevant statutory entitlements are payable upon termination of the contract and the date of termination falls on or after the commencement date.

In conclusion, this new legislation will affect all employers in Hong Kong (including expatriates with Hong Kong employees) and every employer in Hong Kong should amend its payroll systems for calculating pay for each of the items identified above. Should it fail to do so, it runs the risk of committing an offense. The manner of calculation of benefits and payments in its original employment contacts may need to be reviewed carefully to avoid inconsistency with the new legislation.