Key Takeaways

  • Hong Kong’s Employment (Amendment) Ordinance 2007, commonly referred to as the 713 Ordinance, introduced the 12-month average wage methodology for calculating relevant statutory employment entitlements.
  • The calculation generally uses an employee’s average daily or monthly wages over the 12 calendar months preceding the applicable specified date.
  • Certain periods and wages must be disregarded when calculating average wages.
  • Errors in applying the methodology can result in historical underpayment of statutory entitlements and potential back pay exposure.
  • Businesses that discover historical payroll issues should assess the scope, review relevant records, recalculate affected payments and establish an appropriate remediation process.
  • RSM Hong Kong Advisory can support businesses with Hong Kong payroll compliance reviews, historical back pay assessments, recalculations and remediation.

 

Table of Contents

 

What Is the Hong Kong 713 Ordinance?

The Employment (Amendment) Ordinance 2007, commonly known as the 713 Ordinance, introduced the 12-month average wage methodology for calculating statutory employment entitlements under the Employment Ordinance (Cap.57). In practice, paying an employee’s basic salary correctly does not necessarily mean that their statutory entitlements have been calculated correctly.According to the Hong Kong Labour Department’s guidance on 12-month average wages, relevant statutory entitlements are calculated based on an employee’s 12-month average wages, with applicable periods and wages excluded under the “disregarding provisions”.

The methodology is particularly relevant for employers whose remuneration structures include variable components, such as commission or other payments that may form part of wages under the Employment Ordinance.

 

Which Statutory Entitlements Use the 12-Month Average Wage?

The 12-month average wage methodology applies to relevant statutory entitlements under the Employment Ordinance, including:

  • Statutory holiday pay
  • Annual leave pay
  • Sickness allowance and related provisions
  • Maternity leave pay and related provisions
  • Paternity leave pay
  • End-of-year payment
  • Payment in lieu of notice
  • Long Service Payment and Severance Payment
  • Certain further sums relating to non-compliance with reinstatement or re-engagement orders

The Labour Department’s detailed guide to calculating relevant statutory entitlements provides further details and calculation examples.

The exact calculation and reference date depend on the statutory entitlement involved. Employers should therefore avoid applying a standard formula across every type of statutory payment.

 

How Is the 12-Month Average Wage Calculated in Hong Kong?

At a simplified level:

Average Daily Wage (ADW) = (Total wages in the 12-month period – Wages for Non-Full Pay Leave) / (Total days in the period – Number of Days of Non-Full Pay Leave)

The relevant statutory entitlement is generally calculated based on the employee’s average daily or monthly wages during the 12 calendar months preceding the applicable specified date. If the employee has been employed for less than 12 months, the shorter employment period is generally used.

However, the calculation is not simply a matter of adding up an employee’s annual wages and dividing by 365 days.

 

Identify the relevant calculation period

The employer must first identify the statutory entitlement being calculated and its applicable specified date.

For example, the specified date for statutory holiday pay may differ from that for annual leave pay or payment in lieu of notice.

The Labour Department’s 12-Month Average Wages Calculator provides guidance on the relevant calculation periods and specified dates.

 

Determine the relevant wages

The employer must identify the remuneration that should be included in the calculation.

Under the Employment Ordinance, wages can include remuneration, earnings, allowances, commission, overtime pay and other payments that fall within the statutory definition of wages, subject to the applicable provisions. The objective of the 2007 amendments was to ensure that wage components falling within the statutory definition, including commission and allowances, are reflected in calculating the relevant entitlements.

Employers should therefore not automatically assume that statutory entitlements can be calculated using basic salary alone.

 

Exclude applicable periods and wages

Certain periods must be disregarded when calculating the average wage. These include specified periods during which an employee is not paid wages or is not paid the full amount of wages.

The corresponding wages paid for those periods must also be disregarded.

The Labour Department’s calculation guide provides detailed guidance on the applicable disregarding provisions.

 

Apply the average wage

Once the applicable average daily or monthly wage has been determined, it is applied to the relevant statutory entitlement.

The calculation therefore depends on:

  • The employee’s remuneration structure
  • The applicable 12-month period
  • The statutory entitlement involved
  • Relevant disregarded periods
  • The employee’s employment history

 

Example: Why Basic Salary May Not Be Enough

Consider an employee who receives:

  • Basic salary: HK$30,000 per month
  • Annual commission: HK$120,000 (contractual, not discretionary)
  • Employment period: 12 months

If an employer calculates statutory holiday or annual leave pay using only the employee’s HK$30,000 basic salary, the resulting payment may not reflect the correct average wage if the commission forms part of the relevant wages.

Discretionary bonuses or commission of a gratuitous nature would be excluded. This is why each remuneration component should be assessed according to its actual contractual character rather than its label.

The employer would instead need to assess the employee’s relevant wages, determine the applicable disregarded periods and calculate the average wage in accordance with the Employment Ordinance.

This is a simplified example. Actual calculations depend on the employee’s remuneration structure, employment period, leave records and statutory entitlement. The Labour Department provides detailed calculation examples.

 

What Are the Common 713 Ordinance Compliance Issues

Historical payroll issues can arise when employers use processes that do not fully reflect the 12-month average wage requirements.

 

Calculating statutory payments based on basic salary only

  • Using basic salary or a standard daily rate without considering other remuneration that should be included may result in an incorrect calculation.

 

Incorrect treatment of commission

  • Commission may form part of wages under the Employment Ordinance, depending on the nature of the payment.

 

Failing to apply the disregarding provisions

  • Including periods or wages that should be disregarded can affect the resulting average wage.

 

Using the wrong reference period

  • Different statutory entitlements may have different specified dates. Applying a generic 12-month calculation without considering the relevant entitlement can therefore lead to errors.

 

Incomplete historical payroll records

  • Missing payroll, leave, attendance or remuneration records can make it more difficult to determine whether historical payments were calculated correctly.

 

The Labour Department’s Concise Guide to the Employment Ordinance provides guidance on the employment ordinance, including statutory entitlements and employment record requirements. 

 

What Happens If 713 Compliance Was Missed in Previous Years?

If an employer discovers that statutory entitlements were historically calculated using an incorrect methodology, the first step is to determine whether employees were underpaid and assess the extent of the issue.

While an individual difference may appear relatively small, applying the same error across multiple employees and payroll periods can create significant cumulative exposure.

 

Historical underpayments

  • The employer may need to determine the difference between the amount paid and the amount that should have been paid, subject to the applicable circumstances and legal requirements.

 

Wider exposure

  • The same methodology may have been used across multiple statutory entitlements.  Businesses should therefore establish whether the issue is isolated or systemic.

 

Employee relations

  • Historical corrections may require businesses to communicate with affected employees and manage back payments carefully.

 

Regulatory and legal risks

  • Non-compliance with the Employment Ordinance may expose employers to enforcement and prosecution risks, depending on the provision involved. The Labour Department’s Employment Ordinance guidance sets out relevant offences and penalties. Businesses should assess the specific legal implications of any identified non-compliance.

 

Why 713 Back Pay Projects Require More Than a Payroll Recalculation

Once a historical compliance issue affects multiple employees or payroll periods, addressing it can become a back pay project rather than a simple payroll correction.

A comprehensive review may require businesses to:

  • Reconstruct historical payroll information
  • Identify affected employees and periods
  • Review remuneration components
  • Determine the relevant statutory entitlements
  • Review leave and attendance records
  • Recalculate historical payments
  • Quantify potential underpayments
  • Establish a remediation plan


The exercise can become more complex where:

  • Payroll records span multiple years
  • Employees have changed roles or remuneration structures
  • Commission arrangements have changed
  • Employees have joined or left the organisation
  • Leave records are incomplete
  • Payroll and HR systems contain inconsistent information
  • Different payroll providers or processes have been used
  • The organisation has undergone restructuring or M&A activity

Historical 713 issues should therefore be approached as a structured payroll compliance and back pay project, supported by a clear methodology, documentation and reconciliation process.

 

How to Remediate a Historical 713 Compliance Issue

Conduct an initial compliance assessment

Review the organisation’s existing payroll methodology and determine how statutory entitlements are currently calculated.

 

Define the historical review scope

Determine which employees, payroll periods and statutory entitlements should be reviewed, and whether the issue is isolated or systemic.

 

Reconstruct historical payroll data

Depending on the scope, this may include payroll records, salary and remuneration information, commission payments, leave records, statutory holidays, employment dates and previous payroll adjustments.

Businesses can refer to the Labour Department’s Concise Guide to the Employment Ordinance for guidance on employment and wage records.

 

Recalculate affected entitlements

Recalculate the relevant statutory payments using the applicable 12-month average wage methodology, taking into account the relevant reference period, eligible wages and disregarded periods.

The Labour Department’s 12-Month Average Wages Calculator can be used as an initial reference tool, although the Department notes that accurate calculations depend on the employment terms and circumstances of the individual case

 

Quantify potential back pay

Compare the recalculated amount with the amount originally paid to determine the potential historical underpayment.

For larger employee populations, a structured reconciliation should be maintained to show how individual remediation amounts were derived.

 

Implement the remediation

  • Depending on the circumstances, remediation may include:
  • Making back payments to affected employees
  • Communicating the remediation
  • Reviewing related payroll implications
  • Maintaining supporting calculations and documentation
  • Updating payroll procedures

For significant or complex cases, businesses should consider obtaining appropriate legal and professional advice.

 

Strengthen payroll controls

Finally, businesses should address the underlying cause of the issue by reviewing payroll systems, calculation rules, data flows, approval processes and internal controls.

 

How RSM Hong Kong Advisory Can Support 713 Ordinance Compliance and Remediation

Whether you are addressing a historical 713 issue, reviewing your payroll processes or setting up operations in Hong Kong, having the right expertise can help you manage compliance risks with greater confidence.

RSM Hong Kong Advisory can support businesses at every stage. We assess payroll practices and identify potential gaps in the application of the 12-month average wage (ADW) methodology. Where issues are identified, we can support historical back pay reviews including recalculating affected entitlements, quantifying potential underpayments and developing a clear and documented remediation process. 

We can also help businesses strengthen their payroll systems and controls, or provide ongoing payroll support for organisations that are new to Hong Kong or have limited in-house payroll expertise.

 

Conclusion

A single miscalculated entitlement may appear minor, but when the same issue is repeated across employees and pay cycles, it can develop into significant back pay exposure. 

Identifying potential issues early enables businesses to understand the extent of their exposure, establish an appropriate remediation approach and strengthen their payroll processes going forward. 

Concerned about historical 713 compliance? Speak to RSM Hong Kong Advisory to discuss your payroll practices and potential back pay exposure. 

Frequently Asked Questions

The 713 Ordinance commonly refers to the Employment (Amendment) Ordinance 2007, provisions of which relating to the calculation of statutory entitlements took effect on 13 July 2007. It introduced the 12-month average wage methodology for calculating relevant statutory employment entitlements under Hong Kong’s Employment Ordinance.

The Hong Kong Labour Department provides official guidance on the methodology.

Relevant statutory entitlements are generally calculated based on an employee’s average daily or monthly wages during the 12 calendar months preceding the applicable specified date. Certain periods and wages must be disregarded when calculating the average. For employees with less than 12 months of service, the shorter employment period is used.

Businesses can refer to the Labour Department’s 12-Month Average Wages Calculator for further guidance.

Commission can form part of wages under the Employment Ordinance, depending on the nature of the payment and the applicable statutory provisions. Commission that is gratuitous or payable solely at the employer’s discretion is excluded from the definition of wages.

Employers should therefore review variable remuneration carefully rather than automatically calculating statutory entitlements based only on basic salary. The Labour Department’s guide to calculating relevant statutory entitlements provides further guidance.

The business should first assess the scope and cause of the issue. This may involve reviewing payroll and leave records, identifying affected employees and statutory entitlements, recalculating historical payments and quantifying potential underpayments.

Where underpayments are identified, the business should establish an appropriate remediation plan and review its payroll processes to prevent similar issues from recurring.

Yes. RSM Hong Kong Advisory can support businesses with potential 713 compliance issues, including reviewing payroll methodologies, analysing historical payroll data, identifying affected employees, recalculating statutory entitlements, quantifying potential back pay and strengthening payroll processes and controls.

For more information, get in touch with our professionals

Kate Chan
Senior Manager, Payroll and Accounting
Hong Kong