Payroll Calculation: Legal Requirements, Formula & Tips (Hong Kong)
Payroll calculation can be daunting as there are a lot of very specific legal rules to follow, not to mention the hours, MPF, compensation and other deductions might vary from employee to employee. Looking for a simple yet effective guide for payroll calculation in Hong Kong? NewPages has prepared you the most comprehensive payroll calculation how-to guide.
What is Payroll Calculation?
In definition, payroll calculation refers to a series of highly regimented calculation processes conducted by an employer, with an aim to arrive at the sum equals to an employee’s net pay.
Be noted that net pay is differ from gross pay. Gross pay is the amount payable to an employee before deduction of taxes, contributions to a Mandatory Provident Fund Scheme (MPF) and other necessary payroll deductions, whereas net pay is the finalized take-home pay that has been calculated after deducting the aforementioned obligatory expenses.
In general, the payroll calculation is handled by the finance and HR department. With the advancements in technology, some companies have begun outsourcing or implementing an automated payroll system to ensure payroll calculation is done accurately and on time.
Hong Kong Regulations on Payroll Calculation
How to do Payroll Calculation?
With reference to the Hong Kong Labour Department, whether an employee is hired on a monthly, daily or piece-rated basis, his or her payroll should be calculated in accordance with one’s average wages in the 12-month period. If an employee is employed for less than 12 months, the payroll calculation shall then be adjusted to the shorter period.
When to do Payroll Calculation?
Since an employer must pay wages to an employee not later than 7 days from the end of the wage period according to The Employment Ordinance, the payroll calculation must be carried out beforehand to avoid any delays. Otherwise, an employer might face a fine of HK$350,000 and up to 3 years imprisonment.
What are the factors in Payroll Calculation?
Outlined by the Hong Kong Labour Department, there are several related statutory entitlements should be taken into account when calculating payroll:
- Base salary
- 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
- Further sum for non-compliance of an order of reinstatement or re-engagement for unreasonable and unlawful dismissal
Who should be responsible for Payroll Calculation?
Although the Hong Kong Government hasn’t made it loud and clear, it goes without saying that the responsibility of payroll calculation lies on employers. Employers can choose to tackle the payroll calculation process in-house, outsource to HR solutions providers or employ an one-stop payroll system, as long as the final payout is correct.
Payroll Calculation Formula
Depending on the company’s policy, payroll calculation in Hong Kong can be determined based on (1) Calendar Days or (2) Working Days.
Calendar Days Payroll Calculation
Scenario 1: No extra payroll addition or deduction
If the employee is a full-time, assuming there is no extra addition or deduction such as overtime pay or unpaid leave, the payroll calculation formula is as below:
Monthly Net Pay = Monthly Gross Pay – Employee’s Contribution to MPF
Be reminded that an employee does not have to contribute to the MPF during the first 30 days of employment, meaning his or her monthly gross pay is the same as the net pay in the first month.
Scenario 2: Extra payroll addition or deduction
Sometimes, companies may offer employees extra pay to reward their outstanding performance or reduce salaries due to several reasons. If that is the case, please amend to the below payroll calculation formula:
Monthly Net Pay = Monthly Gross Pay + Addition – Reduction – Employee’s Contribution to MPF
Scenario 3: An incomplete month of work
If the employee enters the company after the 1st day of the month, which marks an incomplete month of work, the payroll calculation formula shall then be adjusted as below:
Monthly Net Pay = Monthly Gross Pay * Calendar Days From the Start of Work / Total Calendar Days of that Month
For example, Page’s monthly salary is HK$15,000 and she started working at ABC Company on 16th July, her payroll calculation for the first month should be HK$15,000 X (16/31) = HK$7,742.
Working Days Payroll Calculation
Depending on the actual working days of each employee contract, the payroll calculation can produce slightly different figures. In 2023, there are a total of 247 working days for 5 days workers, 271 working days for 5.5 days workers and 295 working days for 6 days workers.
The payroll calculation formula based on working days is as below:
Monthly Net Pay = (Monthly Gross Pay * Days that Employee Actually Worked / Total Calendar Days of that Month) – Employee’s Contribution to MPF
Part-time Payroll Calculation
Unlike full-time roles, employees hired on a part-time or freelance basis require another formula for payroll calculation since there is no fixed amount of monthly gross pay.
The most commonly used payroll calculation formula is as illustrated:
Monthly Net Pay = Hourly Rate X Actual Working Hours – Employee’s Contribution to MPF
5 Tips to Flawless Payroll Calculation
When it comes to payroll calculation, one minor error can cost you big. NewPages has 5 useful tips to boost the calculation efficiency while eliminating unnecessary mistakes.
1. Get clear on the gross pay
As instructed by the above payroll calculation formulae, both gross pay and hourly rate are the determinative elements. Therefore, before calculating the payroll, it is of utmost essence to clarify the agreed salary and rate of every employee.
2. Prepare a list of payroll deductions
Under the MPF scheme, both employees and employers are obligated to contribute 5% of the individual’s salary to a combined maximum of HK$3,000 per month, meaning there will be at least 5% mandatory deduction from an employee’s monthly payroll, let alone other items such as absence from work and unpaid leave.
If you find keeping detailed records of attendance and leave taken is too consuming, a payroll system integrated with e-Leave feature can be a time-saver.
3. Plan a payroll calendar
Preparation is always key to success. To avoid any delayed salary payments, it is suggested to plan the payroll calculation in advance. Given that wages should be paid not later than 7 days from the end of the wage period, as stated by The Employment Ordinance, employers should better start calculating the payroll at least 1 week before the due date.
4. Double confirm the payroll calculation
After all the payroll calculations are done, print a preliminary payroll register and examine if the payroll is in line with the company’s budget and policies. Carefully verify the payroll numbers and correct all incorrectly reported amounts before actually finalizing the payroll. The payroll calculation confirmation job should be handed to knowledgeable people who have completed the process successfully many times before.
5. Outsource to automated payroll software
Payroll calculation is not necessarily to be done manually or in-house. To optimize time and effort, as well as minimize costly errors, an all-in-one payroll system can help businesses to conduct payroll calculation quickly, reliably and securely. Smart payroll system is not only good for businesses, but it also frees valuable manpower from mundane tasks so they can spend more time on planning and other business-forward initiatives.
Why Bother? Just Leave it to us!
Payroll calculation is one of HR’s most important tasks, however, it is also particularly complicated because there are so many moving parts to consider.
Instead of continuing the inefficient payroll calculation routine, it’s time to outsource tedious admin work and focus on productivity. NewPages offers the industry-leading payroll system which fits the demands of your company’s size and industry.