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Legal Update

Employers Face Major Changes To The Manner Of Calculation Of Certain Statutory Benefits

7 May 2007
Mayer Brown JSM Legal Update

Summary

The Employment (Amendment) Bill received final Legco approval on 2 May 2007. The changes proposed to the Employment Ordinance will impact all employers in Hong Kong. The big question is what should employers do now?

Full Update

Background

The Employment (Amendment) Bill has come about due to the Court of Final Appeal decision in the Laing v Lisbeth Enterprises case, details of which case can be found at:

The Phillip Wain Case - The Final Chapter (13 Mar 2006)

The Court of Final Appeal held that "commission" payments which were not capable of being determined on a daily basis should not be included in the definition of "wages" for the purpose of calculation of certain benefits under the Employment Ordinance. The Labour Department took exception to this decision and undertook to change the Employment Ordinance in order to "remedy" the position.

In the months following the Lisbeth decision the Labour Department took soundings from various employer and employee groups in order to consider how changes to the statutory definition of wages should be made. 

What will the new legislation do?

It will change the manner of calculation of benefits/payments in the following areas of the Employment Ordinance:

  • 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.
Each of the changes broadly follow the same format. They provide that in calculating the amount which should be payable to an employee in respect of a period of work or in lieu of a period of notice, the employer should use the daily or monthly average of the wages earned by the employee over the preceding 12 months period (or shorter period if the employee commenced work within such 12 month period). This is materially different from the current legislation which, generally, only looks at the previous wage period.

What does this mean for employers?

This will impact all employers in Hong Kong. It will even impact those who do not have employees on variable wages or who do not pay commission who may have thought (with some justification) that they could ignore the Lisbeth decision.

In short every employer will have to consider amending its payroll procedures in order to ensure compliance with the new provisions.

Are there any concerns with the new provision?

Yes, many. The Administration, in responding to questions raised by interested parties in Legco committee meetings, described the legislation as "outline principles". This is an accurate description. The legislation fails to deal with a number of fundamental questions which every HR manager will be asking when they consider the new legislation. For example:

  • should the 12 month rolling average be determined on a calendar day or working day basis?
  • what does "full pay" mean?
  • what happens when an employee moves from part time to full time and vice versa?
When will I need to change my systems?

It is likely that the legislation will come into force in July this year. So, employers are being given less than 2 months to understand how the changes will impact them and to change their systems to comply.

What will JSM do?

We will produce a full note on the new legislation shortly. This will be distributed through our email legal update service.

For further information, please contact:

Name:
Position: Partner
Phone: +852 2843 2203
Fax: +852 2103 5066

Name:
Position: Senior Associate
Phone: +852 2843 4233
Fax: +852 2103 5070

Name:
Position: Senior Associate
Phone: +852 2843 4536
Fax: +852 2103 5158

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