Employment Focus Week: Wages, Bonuses and Deductions

Employment Focus Week: Wages, Bonuses and Deductions

Employment Focus Week: Wages, Bonuses and Deductions 927 740 Adam Hugill
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The key protection provided to all employees under the Employment Ordinance is the right to receive payment for work done.

In this second instalment of Employment Focus Week we discuss how ‘wages’ should be calculated and paid and in what circumstances can an employer deduct money from employees.


What are “Wages”?

“Wages” are defined in the Employment Ordinance by what is included and what is not included. Including in the definition is all remuneration capable of being expressed in terms of money, payable to employees in respect of work done or to be done and includes: earnings, allowances including travelling allowances and attendance allowances, attendance bonuses, commissions, overtime pay, tips and service charges. (A note on overtime: To fall within the definition of wages, overtime pay must be of a constant character or the monthly average of the overtime pay over 12 months is equivalent to or exceeds 20% of the average monthly wages).

Certain payments are expressly excluded from the definition of “wages” and generally comprise gratuitous payments, expenses, the value of accommodation, education, food, fuel, medical care, contributions to retirement schemes and annual bonus / 13th month payments of a contractual nature.

Why Define “Wages”?

The Employment Ordinance uses the statutory definition of “wages” to protect certain payments and to define how certain statutory payments must be paid. Statutory payments such as payment in lieu of notice, maternity and paternity pay, paid sickness leave, annual leave and holiday pay are all calculated by reference to an employee’s “average daily wages”.

Average Daily Wages (“ADW”)

Average daily wages are calculated with reference to an average of the total “wages” earned by an employee during the preceding 12 months.

Calculating statutory payments correctly and in accordance with ADW is particularly important for employees whose remuneration includes variable compensation such as commissions, regular and substantial overtime or non-annual contractual bonuses. For employees earning such variable compensation, the requirement to pay statutory payments in accordance with average daily wages means that a new calculation needs to be made each month for each employee, with individual payment adjustments being made. It is very easy to ignore or get wrong!

It’s Criminal to be Late

Although the Employment Ordinance allows a wage period to be of any duration, traditionally payments are made either daily, weekly, fortnightly or monthly. In the absence of an agree wages period, one month should be assumed.

Wages should be paid at the end of the wage period and it is a criminal offence for wages to be paid later than seven days after they fall due. Egregious employers who fail to pay wages on time are regularly prosecuted by the Hong Kong Labour Department often resulting in fines and, exceptionally, with the imprisonment of the employer’s directors.

End of Year Payments

An “end of year payment” means any annual payment (whether described as “thirteenth month payment”, “fourteenth month payment”, “double pay”, “end of year bonus” or otherwise) or annual bonus of a contractual nature. Discretionary or gratuitous bonuses do not fall within the definition of “end of year payment”.

There is no statutory or automatic entitlement to an end-of-year. Therefore, the right to receive such a payment must be part of the employment contract. Unless otherwise states, an end of year payment will be one full month’s earnings (which is typically referred to as a 13th month payment) and is often paid at Chinese New Year.

Except in the case of 13th month payments, most contractual annual bonuses tend to be performance related with the amount payable being governed by a performance criteria / scoring matrix defined by the employer. It is, however, most common for annual bonuses to be expressed as being discretionary.

The laws surrounding discretionary annual bonuses are highly complex having been initially created by the UK’s Court of Appeal, House of Lords and Supreme Court and developed by the Hong Kong appellate courts. In a nutshell, discretion does not always mean discretion and the courts are prepared to look behind the wording of the employment contract to see how the bonus scheme actually operates in doing so, the courts recognise that in many compensation packages, especially those in the financial services sector, the base salary is the ‘sauce’, but the performance bonus is the ‘meat’.

On termination, an employee who has been employed for not less than three months (excluding any probation period) is entitled to receive a pro-rata annual bonus.

Unlawful Deductions

The Employment Ordinance strictly regulates the automatic deductions that an employer can make from an employee’s wages. These are: absence from work (without limit), loss or damage to equipment due to employee’s negligence (capped at HKD$300), meals and accommodation provided by employer, recovery of any advance or over-payment of wages, recovery of any loan, recover of any overpaid paternity leave pay, contributions to approved pension / thrift schemes, payments authorised by statute. Other deductions can only be made with the approval of the Commissioner for Labour (which is rarely granted).

In addition, if an employee terminates the employment without providing adequate notice or payment in lieu, an employer may deduct from any sum payable to an employee an amount equal to the balance of the notice period.

Tomorrow we will focus on maternity leave, paternity leave and sickness absence explaining the rights and protections provided under the Employment Ordinance, Sex Discrimination Ordinance and Disability Discrimination Ordinance.

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.

Adam Hugill

Adam advises on a wide range of contentious and non-contentious legal and commercial issues, with a special emphasis on employment law in Hong Kong and the Asia Pacific region.

All articles by : Adam Hugill
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