Correctly and accurately calculating annual leave and annual leave pay in accordance with the Employment Ordinance can be complex – a senior Global HR Counsel once described it as being “by far the most complicated part of Hong Kong employment law”.
Issues regarding accrued annual leave entitlements usually only become apparent on termination, when the employer has to calculate an employee’s accrued untaken leave entitlement.
The reason for the complexity is due to there being numerous components to the leave entitlement, namely:
- Statutory Annual Leave: This is granted by the Employment Ordinance and accrues in one holiday year to be taken in the next. After the first year, an employee is entitled to seven days’ leave, increasing with length of service to 14 days. Statutory annual leave must be calculated and paid in accordance with the employee’s average daily wages and not simply with reference to basic salary. Statutory annual leave is very strictly governed by the Employment Ordinance and the rules cannot be reduced by policy or agreement. A failure by the employer to grant such leave or ensure that statutory leave is taken at the correct times are technically criminal offences.
- Contractual Annual Leave: Employers often grant more annual leave than the statutory minimum. The portion of annual leave that is in excess of the statutory minimum is often referred to as contractual annual leave. While an employer is generally free to determine (i) how contractual annual leave accrues, (ii) when it may be taken, (iii) the rate of pay and (iv) whether or not it can be forfeited, often they do not apply any strict or clear rules. The default position is that this additional annual leave shall be treated in the same way as statutory annual leave and governed accordingly.
- Rolled Over Annual Leave: Often employers allow employees to roll over annual leave from one holiday year to the next, subject to certain limits and conditions. While an employer is free to determine whether or not contractual annual leave can be rolled over, forfeited or paid in lieu, such freedom does not apply to statutory annual leave.
- Notional Annual Leave: Notional annual leave confuses both employers and employees and is often not included when calculated annual leave entitlements on termination, resulting in underpayments. Notional leave arises because employees accrue the statutory portion of their annual leave entitlement in one holiday year to be taken in the next.
The Employment Ordinance provides that an employee is entitled to be paid in lieu of accrued untaken notional leave if the employee has been employed for at least three months of a holiday year. As with statutory annual leave, an employee’s right to notional annual leave cannot be reduced by contract or agreement.
Leave entitlements, contractual leave conditions and the inevitable ad hoc arrangements that are made with individual employees mean that every case is different and always changing and the timing of any departure can substantially affect the amount of leave that must be paid out on termination.
Due to the complexity of calculating annual leave, employers often use their own internal formula or a broad-brush approach. These approaches should be viewed with caution. Departing from strict statutory and contractual rules can lead to over-payments or, more seriously, under-payments that are then litigated in the Labour Tribunal.
Tomorrow we will look at the avenues of redress that employee and employers have against each other when things go wrong.
Our team at Hugill & Ip has extensive experience in dealing with Employment matters – so if you need further advice on these subject and other topics discussed, get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
