Money Matter

Pay daze

by Duncan Abate, partner; Hong Tran, senior associate, Employment and Employee Benefits Group Johnso

Article exclusively contributed by Johnson Stokes & Master

The relevant sections of the Employment (Amendment) Ordinance (hereafter the "Amendment Ordinance") came into force on 13 July 2007 to ensure that all components of "wages" as defined under the Employment Ordinance (EO) are included in the calculation of relevant statutory entitlements. The changes proposed to the Amendment Ordinance will impact most employers in Hong Kong.

The Amendment Ordinance came into being due to the Court of Final Appeal's decision in the Laing v Lisbeth Enterprises case in 2006. The case had thrown spotlight onto problems in relation to what types of commission should be included in the meaning of "wages" when calculating certain statutory entitlements, such as holiday and annual leave pay.

As a result of the unresolved problems raised in the Lisbeth case, the Labour Department saw the need to amend the EO.

Under the Amendment Ordinance, the calculation of statutory annual leave pay, holiday pay, payment of wages in lieu of notice, payment deemed "end-of-year payment", maternity leave pay and sickness allowance would be modified.

Mode of calculation

Instead of using the daily average wages earned by the employee in the preceding wage period (comprising not less than 28 days and not more than 31 days), under the Amendment Ordinance the statutory benefits would be determined by averaging the daily or monthly wages earned in the preceding 12 months (or shorter period if the employee commenced work within such 12 month period).

The advantage of such method is that it would avoid the need to do any calculation of "daily" wages (enabling monthly commission to be included) and create a smoothing mechanism (addressing part of the complaints made by employers that by only looking back one month under the relevant sections of the EO it led to unequal treatment).

Points to note

Each of the relevant formulas in the Amendment Ordinance for calculating the wage-based entitlements refers to an "impractical provision". Such provision states that where it is "impracticable" to calculate the daily or monthly average wages of an employee then 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. As the meaning of the impracticable provision is not sufficiently clear, it will be a dangerous provision to rely on.

For an employee who has been employed for less than 12 months, his daily average wages or monthly average wages will be determined by reference to the shorter period.

Each of the relevant statutory benefits can be set off 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".

The ordinary wages defence which provided a defence to employers who paid employees their "ordinary wages" under section 42 of the EO has been repealed. Employers will now have to rely on the set off provision as mentioned in this paragraph.

Whilst employers will inevitably have the information necessary to calculate the daily or monthly wages in their systems, it is unlikely that the information would be available to the employee. Thus, it would be difficult for the employee to buy out his notice period.

Q&A on the calculation of wages
Q1 In calculating the "daily average of wages earned by an employee", should all periods in the preceding 12 months or just those periods worked be included?
A1 In determining the "daily average wages", an employer should not include any period during which the employee has not worked and is not paid his wages or "full wages". So the periods that may be excluded in calculating the daily average of wages include leave under the EO (ie, maternity leave, rest day, sickness day, holiday or annual leave), sick leave due to work injuries as provided under the Employees' Compensation Ordinance, or leave taken with the agreement of the employer, and periods where the employee is not provided with work on any normal working day.

Q2 What is the meaning of "full wages" as referred to in the Amendment Ordinance?
A2 The Labour Department has confirmed that whether an employee is paid "full wages" will depend on the terms of his employment contract and the definition of wages under the EO. Therefore, there is no fixed definition for "full wages" and it will vary according to the facts of each individual case.

Taken from Career Times 27 July 2007

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor

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