Underpaying Employees? It Could Cost You More Than You Think – The Importance of EAO 2007

In Hong Kong’s dynamic business landscape, compliance with regulatory changes is paramount for both startups and multinational companies. The introduction of the Employment (Amendment) Ordinance 2007 (EAO 2007) or 713 Ordinance in 2007 marked a significant shift, aiming to enhance corporate governance and transparency. 

This legislation plays a crucial role in Hong Kong’s labour law framework, ensuring that employees’ statutory entitlements are calculated based on their average daily wage (ADW) over the preceding 12 months. This approach protects employees from potential income deflation due to variations in their pay over time.

Despite being in effect for over 15 years, some companies remain unclear about their obligations, particularly regarding calculating employees’ statutory entitlements. This lack of understanding exposes businesses to potential penalties for non-compliance and reputational damage. In this article, we examine critical aspects of the regulations and guide how employers can ensure compliance with the legislation.

Key Provisions of EAO 2007/713 Ordinance

The 713 Ordinance or EAO 2007 covers several statutory entitlements that must be calculated based on the 12-month average wage. These entitlements include:

• Holiday pay
• Annual leave pay
• Sickness allowance
• Maternity leave pay
• Paternity leave pay
• End-of-year payment
• Payment in lieu of notice
• Compensation for unreasonable and unlawful dismissal

These provisions apply to all employees covered under the Employment Ordinance, whether monthly, daily, or piece-rated workers.

Compliance and Common Pitfalls

Ensuring compliance with the 713 Ordinance is critical to avoid legal repercussions. Common mistakes include miscalculating the ADW by including non-counting periods or failing to update payroll systems to reflect the latest legal requirements. Businesses must regularly review their payroll practices to align with the ordinance.

Calculating Average Daily Wages Correctly

The correct method to calculate statutory entitlements in Hong Kong is based on the Average Daily Wage (ADW). The formula for ADW is as follows:

ADW = (Total wages earned in a 12-month period – Earnings for days with less than full wages) / (Days in the 12-month period – Days with less than full wage)

If an employee has been employed for less than 12 months, the calculation period is adjusted accordingly. The key aspect of this calculation is the exclusion of days when the employee received less than their full salary, such as during annual leave, sick leave, or other similar situations. This ensures the ADW reflects a more accurate and fair representation of the employee’s earnings.

For certain statutory entitlements, such as payment in lieu of notice, the calculation may use the average monthly wage instead of the ADW. The principle remains similar. For example, consider an employee with the following scenario:

• Base salary: HKD 30,000 per month
• Total wages over the past 12 months: HKD 500,000 (including commissions)
• 20 days of half-pay leave taken

The 20 days of half-pay leave should be excluded from the calculation, which adjusts the applicable period to 11.34 months:

Applicable months = [(365 – 20 days) / 365 days] x 12 = 11.34 months

The HKD10,000 earned during the 20 days of half-pay leave (calculated as 50% of 20/30 days of HKD 30,000) is disregarded.

Therefore, the average monthly wage is:

Average monthly wage = (HKD500,000 – HKD10,000) / 11.34 months = HKD43,210

This is the amount owed to the employee as payment in lieu of notice.

Practical Tips for Employers

To integrate the 713 Ordinance into your business operations:

• Integrate Wage Calculations into HR Systems:
  • Utilising HR software can automate the calculation of average wages, reducing the risk of errors and ensuring compliance with the ordinance. 
• Regular Training and Updates:
  • Regularly train HR personnel on the latest amendments and best practices related to the ordinance. Keeping staff informed helps prevent common pitfalls in wage calculations.
• Audit and Review Processes:
  • Periodically audit payroll processes to ensure accuracy and compliance. This includes reviewing the methods used to exclude non-counting periods and verifying that all entitlements are calculated correctly.
• Seek Legal Advice:
  • For complex cases, especially those involving commission-based employees or disputes over entitlements, seek advice from employment law professionals.

Impact on Business Operations

The 713 Ordinance influences various aspects of business operations, particularly in HR and payroll management. Accurate ADW calculations are essential not only for legal compliance but also for maintaining employee trust and satisfaction. By adhering to the ordinance, businesses can avoid disputes and promote a fair working environment.

Where To Next?

Understanding and complying with the EAO 2007 is essential for businesses operating in Hong Kong. For startups, it presents an opportunity to build trust and streamline operations, while for multinational companies, it reinforces the importance of robust compliance frameworks.

InCorp Hong Kong offers a suite of services tailored to help businesses navigate the complexities of the EAO 2007. Our expertise in corporate secretarial services, compliance management, accounting, and regulatory advisory ensures businesses can achieve and maintain compliance effortlessly. Additionally, we can help calculate any backpay owed to employees, providing a comprehensive solution to meet your regulatory obligations.

Please visit the Hong Kong Labour Department’s website for further reading and assistance.