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Legal Update

The Minimum Wage Ordinance - The Devils in the Detail

11 October 2010
Mayer Brown JSM Legal Update

When it comes to legislation, especially legislation introducing brand new concepts, the old maxim that the "devil is in the detail" rings truer than ever.

With the Provisional Minimum Wage Commission having submitted their report and the inevitable politicking about the initial wage level having quietened down slightly, this now gives us the opportunity to examine the detail of the legislation and try to tempt out those pesky devils!

We set out a couple of them below. There will be more.

Devil #1 - The monthly paid employee

"I have an employee who works 180 hours a month. I pay him a monthly wage of $6,000. Even if the statutory minimum wage is $33 per hour (which I hope it won't be!) I will be OK won't I? After all 180 x $33 is $5,940.00."

Unfortunately the answer is "No" - you will not be ok!

A large proportion of employees in Hong Kong receive a monthly wage. They have contracts which set out what hours they are expected to work and in return they receive a specified amount each month. Typically such an employee will not receive additional amounts on a statutory holiday (even where the statutory holiday falls on a day when the employee is not required to work - e.g. a Saturday) as the employer will, quite rightly, say that the monthly wage covers any statutory holiday pay.

In short, employers have adopted the stance that where an employee is paid monthly wages then those wages are spread across the month as a whole. The employee therefore gets paid on every day, whether or nor he works on that day. This approach has been accepted and endorsed by the Labour Department in, for example, the determination of "daily average wages" for the purposes of the Employment Ordinance.

So, what's the problem?

The problem is that the Minimum Wage Ordinance (MWO) states that any payment made to an employee in a wage period for any time that is not "hours worked" by the employee must not be counted as part of the wages payable in respect of the wage period (section 6(2) MWO).

This means that any payment made in respect of a day off (e.g. a Saturday and Sunday) cannot be included in the "wages" for that period.

Let's look at an example.

An employee earns $6,000 per month. He works 8 hours per day, 5 days a week with Saturday and Sunday off. In November 2010 there are 30 days, 8 of these are weekend days and 22 are "work" days. So, in that November this employee (who, we will assume, works no overtime and does not take leave in that month) will work 176 hours (22 x 8). These are his "working hours" for the purposes of the MWO.

In order to determine compliance with the MWO, we now need to calculate how much "wages" have been paid to the employee.

The starting point will, of course, be the $6,000 paid to the employee for that November. However, section 6(2) MWO requires us to exclude that part of the employee's wages paid for weekends (because these are days on which the employee does not work). So, there are 30 days in November - this means he gets $200 per day ($6,000 divided by 30). In turn this means that we must exclude $1,600 ($200 per day x 8 weekend days) for MWO purposes. This means the "countable" wage for MWO purposes for this employee for November 2010 is only $4,400.

Let's assume a statutory minimum hourly wage of $28 per hour (why not!). The minimum wage payable to the employee for November will be $4,928 (176 x $28). But the employer has only paid $4,400! He has to pay a further $528.

What can employers do?

Employers may try and ensure that the monthly wages are only paid for the days the employee works. This would then mean that there is no pay for the weekends and so no pay to be ignored. There would be no $1,600 deduction in the above example. Attractive though this sounds, there are two major issues with this:

  1. it is a change in contract and would almost certainly require the consent of the employee, and
  2. it may lead to employers needing to pay additional amounts where a statutory holiday falls on a day an employee is not otherwise required to work (e.g. a Saturday).

As a final point (and without wishing to be overly dramatic) the actual problem for employers who pay monthly may be far worse. Wages are not just spread across days, but are also spread across hours within days. So, if the wage of an employee on a particular day can be split into 24 (to give an hourly wage), then section 6(2) MWO could operate to require each employer to ignore the wages paid for any hour during which the employee is not working. Assuming employees only work one-third of a day, this means that two-thirds of each day's wages will need to be ignored. In the above example, this would mean that only $1466.66 ($4,400 x 1/3) of the $6,000 could be included! Too scary to contemplate?

Devil #2 - Overtime pay

"My employees often work overtime. So long as I pay them overtime pay which is at least equal to the statutory minimum hourly wage, I'm going to be OK aren't I?"

Not necessarily. Read on.

Common sense dictates that, in determining whether an employer has complied with its obligations under the MWO, the hours worked in a particular period should be compared with the wages paid relating to those hours.

Unfortunately, at least in relation to many employers' overtime arrangements, this may not be possible unless they change their payroll practice - See explanation below.

Most employers who pay overtime have an arrangement (understood and consented to by their employees) that the overtime pay earned for overtime hours worked in, say, January will be paid in the February payroll. This works well as it gives time for the employers to calculate the overtime pay (including for days after the January payroll) and simplifies payroll administration generally.

Arrangements of this type are rarely questioned by employees and, provided they are genuine arrangements for a legitimate business interest, the courts have recognised and approved them. In particular, the courts have determined that such pay structure does not breach section 23 of the Employment Ordinance (EO) (which requires wages to be paid within 7 days of the end of the wage period in which they are payable). In doing this, the courts determined that these types of wages should be treated as being payable in respect of the month in which they were paid, rather than the month in which they were earned.

This welcome and pragmatic approach by the courts does, however, lead to problems when doing the hours worked/wages paid calculation for the MWO. The reason is that the way the MWO is structured is that it looks at the hours worked in a wage period and the wages payable in respect of that wage period. So, this leads to a mismatch between the wage period in which the overtime hours are included and that in which the overtime pay is included.

This may be easier to explain through an example.

An employee works 10 hours overtime in January. In accordance with established practice and with the agreement of the employee, the overtime pay is paid with the February payroll - let's say on February 25.

In this situation, the overtime hours worked will, quite rightly, be included in the January assessment for MWO purposes. However, the overtime pay, because it is "payable in respect of February", will be included in February assessment.

Can an employer do anything about this?

It may be tempting for employers to try to recategorise the overtime payment made in February as "payable in respect of" January. This would then marry up the hours and the pay. However, in order not to fall foul of section 23 of the EO, the overtime pay would need to be paid no later than 7 days after the end of the month in which the overtime was worked. This would probably mean that the employer will need to arrange a new payroll run in the first few days of each month especially for overtime pay.

For inquiries related to this Legal Update, please contact:

Duncan Abate ( )

Hong Tran ( )

Learn more about our Hong Kong office and Employment & Benefits practice.

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