Everything You Need to Know About Average Daily Wage (ADW) for SMEs in Hong Kong

Have you ever found yourself confused by all the complex terms and guidelines in calculating employee leave pay? Well, you’re not alone. When our company, Talenox, first expanded into the Hong Kong market, we really struggled with this aspect. We realised that one critical element that often causes confusion is the Average Daily Wage (ADW). 

The ADW is essential for ensuring fair and accurate compensation for your employees, but understanding it and getting the calculations right can be tricky. In this guide, we’ll break down everything you need to know about ADW, why it matters, and how Talenox, a user-friendly HR software, can make this task a breeze for your business. 

Understanding Average Daily Wage (ADW)

Definition of ADW

The Average Daily Wage (ADW) is a crucial metric used to calculate employee earnings and leave entitlements in Hong Kong. It is created to protect employees against unfair practices such as wage fluctuations. As such, it calculates the average of an employee’s wages over a period, either a set number of days or, typically over 12-months. This average is then used to determine the pay for leave days and other entitlements.

For simplicity’s sake, the formula for ADW you’ll usually see online is: 

ADW = Total Earnings in the Past 12 Months / Total Number of Days Worked in the Past 12 Months

Importance of ADW in Payroll Calculation

ADW plays a pivotal role in ensuring that employees receive fair and accurate compensation for their leave days. It serves as the basis for calculating paid leave, holiday pay, and other entitlements, making it an essential component of payroll management.

Legal Requirements for ADW in Hong Kong

In Hong Kong, the Employment Ordinance stipulates that employers must calculate the ADW of their employees to determine leave pay, holiday pay, and other entitlements. The law mandates that the ADW should be calculated based on the average earnings over the 12 months preceding the leave or holiday.

Factors Affecting ADW Calculation

Several factors can affect the calculation of ADW, including:

• Overtime pay
• Bonuses and commissions
• Allowances and tips
• Any other earnings paid or payable by the employer to the employee

Common Mistakes in ADW Calculation

Despite its importance, calculating ADW can be prone to errors. Common mistakes include:

• Incorrectly including or excluding certain types of earnings
• Miscounting the number of days worked
• Failing to update the calculation period regularly

Role of ADW in Leave Management

ADW and Paid Leave

ADW is integral to calculating paid leave, ensuring that employees are compensated fairly during their absence from work. This includes annual leave, maternity leave, paternity leave, and sick leave.

Calculating ADW for Different Types of Statutory Entitlements

Different types of leave may require slightly different calculations of ADW. 

The relevant statutory entitlements shall be calculated on the basis of the average daily (or monthly) wages earned by an employee in the 12­-month period preceding the specified dates as stipulated by the Amendment Ordinance. If an employee is employed for less than 12 months (calendar months), the calculation shall be based on the shorter period (i.e. suppose an employee commenced employment on 5 July 2007, his period of employment will be less than 12 calendar months before 4 April 2008 (i.e. Ching Ming Festival). His holiday pay for 4 April 2008 shall therefore be calculated on the basis of his average daily wages earned in the period 5 July 2007 and 31 March 2008.)

Periods and Wages to be Disregarded in ADW Calculations

Previously, some employers had tried to reduce/deflate their employees’ salaries to reduce the amount of statutory entitlements given to them (i.e. leave days). To counter this act, the government put in place a new formula. As such, one has to identify the following situations as stipulated by the Amendment Ordinance under which an employee is not paid his wages
or full wages and then exclude the periods together with the wages paid to the employee for such periods:

1. The employee’s taking any of the following leave:
   • leave provided under the EO (i.e. rest day, statutory holiday, annual leave, maternity leave or sickness day);
   • sick leave due to work injuries as provided under the Employees’ Compensation Ordinance; or
   • leave taken with the agreement of the employer;
2. The employee not being provided by the employer with work on any normal working day.
3. The employee not being provided by the employer with work on any normal working day.

Case Studies: ADW in Real Leave Scenarios

Case Study 1: Annual Leave

John, a marketing manager, takes a 7-day annual leave.

Details:

• Remuneration: Monthly-rated at $9,000 with paid rest days
• 12-month wages earned before the first day of annual leave: $108,000 including wages for services rendered and payments for leave
• In the 12-month period: 71 days of full pay leave comprising ­52 rest days + 12 statutory holidays + 7 days of annual leave

Periods and wages to be disregarded:

•  No period and sum have to be excluded because the employee is not paid less than his full wages for the leave taken in the 12-month period

Calculating annual leave pay on the basis of the 12-month average:

• ADW = 108,000 — 0 ($) / 365 — 0 (days) = $296 
• 7-day annual leave pay : $296 x 7 = $2,072

Case Study 2: Sickness Allowance

Emma, a cybersecurity manager, takes sick leave. 

Details:

• Remuneration: Monthly-rated at $10,000 with paid rest days
  • 12-month wages earned before the first sickness day:
  • $120,000 including wages for services rendered and payments for leave
• In the 12-month period: 71 days of full pay leave comprising ­52 rest days + 7 days of annual leave + 12 statutory holidays

Periods and wages to be disregarded:

•  No period and sum have to be excluded because the employee is not paid less than his full wages for the leave taken in the 12-month period

Calculating sickness allowance on the basis of the 12-month average:

• ADW = 120,000 – 0 ($) / 365 – 0 (days) = $329
• 4-day sickness allowance = $329 x 4/5 x 4 = $1,053

Talenox: Simplifying Your Calculations

Overview of Talenox HR Software

Talenox is an intuitive HR software designed to streamline payroll and leave management processes for SMEs. It offers comprehensive features that make ADW calculations easy and accurate.

ADW Calculation Features in Talenox

Talenox automates the ADW calculation process, ensuring compliance with legal requirements and reducing the risk of errors. Key features include:

• Automated ADW calculations based on employee earnings
• Integration with payroll and leave management systems – we’ll take into account all types of leave!
• Real-time updates and reports

Benefits of Using Talenox for ADW Calculations

By using Talenox, SMEs can benefit from:

• Increased accuracy in payroll and leave calculations
• Reduced administrative burden
• Enhanced compliance with local regulations
• Improved employee satisfaction

Leveraging Technology to Reduce Errors and Avoid Fines

Accurate ADW calculations are essential for compliance with Hong Kong’s labour laws. Failure to calculate ADW correctly can lead to legal penalties and disputes with employees. By using technology to calculate your ADW calculations, it reduces the likelihood of errors made, ensuring that your company’s payroll is processed accurately and efficiently.

Talenox offers a powerful solution to automate your ADW calculations, reducing the risk of errors and compliance issues. By leveraging Talenox, you can save precious time, avoid fines, and gain some recognition for your accurate work. Now, we know it’s not fun to receive warning letters and statements from the governing bodies. What are you waiting for? Try Talenox today.