Annual leave entitlement is a complex area of employment law. Calculation of annual leave entitlements and annual leave pay gives rise to protracted disputes, sometimes resulting in significant amounts. Issues mostly manifest upon termination of the employment relationship.
As an employer in Hong Kong, you should consider whether your employment terms properly reflect your firm’s policy on annual leave entitlements and whether they are compliant with Hong Kong law. This is the time to check that you are not at risk of facing significant claims for untaken annual leave.
This article equips you with the nuts and bolts of effective annual leave entitlement provision for employees, in the form of questions & answers.
Please note that this article does not, and is not intended to, constitute legal advice, and should not be relied upon as such. Slotine can help you draft valid and enforceable employment contracts and annual leave policies in Hong Kong. Please contact us if you wish to learn more about this.
ANNUAL LEAVE FRAMEWORK- KEY TERMS
How much annual leave is an employee entitled to by law?
The Hong Kong Employment Ordinance (Cap. 57) (EO) provides for a maximum of 14 annual leave days after nine years of continuous employment with the same employer. The statutory annual leave entitlement increases incrementally year after year:
- after working for one year: seven days annual leave entitlement;
- after working for three years: eight days annual leave entitlement;
- after working for four years: nine days annual leave entitlement;
- after working for five years: ten days annual leave entitlement;
- after working for six years: 11 days annual leave entitlement;
- after working for seven years: 12 days annual leave entitlement;
- after working for eight years: 13 days annual leave entitlement;
- after working for nine years or more: 14 days annual leave entitlement.
Can an employer grant annual leave entitlements to their employees that are more generous than the minimum entitlement under Hong Kong law?
The answer is positive, bearing in mind there is absolutely no legal obligation for an employer to grant contractual annual leave. The amount of contractual annual leave depends on negotiation between the employer and employee, considering various factors such as market practice for that position in the relevant industry. Foreign employers or employees might consider the standards in their country of origin as a point of reference.
How do you differentiate between statutory annual leave and contractual annual leave?
Annual leave granted by the employer in addition to the minimum statutory annual leave entitlements should be considered as contractual annual leave, so long as this difference is made clear in the employment agreement.
For instance, if an employee is entitled to 20 annual leave days in their first year of service, depending on the drafting of the contract, seven days may be considered as statutory annual leave and the remaining 13 days may be held as contractual annual leave.
Why is the distinction between statutory annual leave and contractual annual leave important?
If the employment contract makes a clear distinction between contractual and statutory annual leave entitlement, then the contractual annual leave may be governed by the contractual terms only, and not by the provisions of the EO. This allows for greater flexibility in the rules governing the contractual annual leave.
Statutory annual leave is strictly regulated under the EO. For instance, statutory annual leave cannot be forfeited: a clause restricting an employee from carrying over accrued but untaken statutory annual leave would be void and unenforceable. In certain circumstances, employers may make a payment in lieu of accrued but untaken annual leave. However, this is usually a costly option.
For contractual annual leave, the contractual rules may originate from:
- the employment contract;
- the staff handbook;
- company / group policies.
TAKING ANNUAL LEAVE
When can an employee start taking annual leave?
According to the EO, statutory annual leave shall be taken in the subsequent leave year following the year in which it accrues.
For example, when statutory annual leave is accrued between 1 January 2023 and 31 December 2023 (accrual year), under the EO, employees are allowed to take the accrued leave between 1 January 2024 and 31 December 2024 (the year following the accrual year).
However, it is not unusual for employers to allow their employees to take annual leave (statutory or contractual) within the same year it is accrued. For example, when annual leave is accrued between 1 January 2023 and 31 December 2023 (accrual year), employees are allowed to take the accrued leave between 1 January 2023 and 31 December 2023 (the same year as the accrual year).
Can an employee ever be required to take statutory annual leave?
After the accrual year has finished, an employer can require an employee to take their statutory annual leave on specified dates by providing at least 14 days of notice, unless a shorter notice period has been agreed upon between the employer and the employee.
If an employee objects to taking the accrued but untaken statutory annual leave when requested to do so, an employer can make a payment in lieu of that statutory annual leave only in limited circumstances:
- if the employee has ten or more days of accrued and untaken statutory annual leave within a leave year: subject to the employee’s consent, the employer may make a payment in lieu of the days in excess of ten days;
- if the employer, in breach of the EO, has failed to grant statutory annual leave in the year following the accrual year: the employee may take their accrued leave or request a payment in lieu. If an employer provides its employee adequate opportunity to take statutory annual leave but the employee chooses not to take such leave, the employer will be considered as having granted statutory annual leave and the employee is not entitled to request a payment in lieu.
Since statutory annual leave cannot be forfeited, untaken leave must be rolled over to the following years and the amount of payment in lieu of annual leave due by the employer upon termination can be significant.
Is there a maximum amount of statutory annual leave an employee can take at a time?
Under the EO, if the employee so requests his employer:
- if an employee is entitled to statutory annual leave not exceeding ten days: the employee may request to take their annual leave on consecutive days, except for three days that may be taken non-consecutively;
- if an employee is entitled to statutory annual leave exceeding ten days: the employee may request to take up to seven days consecutively, and the balance may be taken non-consecutively.
Nevertheless, the employer has no right to require the employee to split their annual leave.
What happens if an employee gets sick while on statutory annual leave?
If an employee falls sick before the commencement of their statutory annual leave, the sick leave days will not be counted as part of the annual leave taken by the employee. However, if an employee falls sick after their annual leave has already commenced, the period of sickness will count towards their statutory annual leave entitlement.
ANNUAL LEAVE AND EMPLOYMENT TERMINATION
Upon termination of employment, can an employer request an employee to take their statutory annual leave during the notice period?
Once notice of termination has been given by either the employer or the employee, the employer cannot request the employee to take their remaining statutory annual leave during the notice period. However, the EO does not prevent the employee from electing to take annual leave during their notice period.
What happens to untaken annual leave upon termination of employment?
According to the EO, accrued statutory annual leave that has not been taken must be paid by the employer upon termination. This amount is part of the final payments which must be paid within seven days of the last employment day.
However, where the employee is summarily dismissed before the end of the leave year, the employer is not required to pay for pro-rata accrued but untaken annual leave which was accrued within the year of termination itself.
The rules are usually similar for contractual leave, subject to forfeiture of untaken annual leave.
Upon termination of employment, how is payment in lieu of accrued but untaken statutory annual leave calculated?
Payment in lieu of statutory annual leave is calculated based on the employee’s average daily wages over the past 12 months prior to termination. The calculation of average daily wages is strictly determined by the EO.
Upon termination of employment, what happens if an employee has taken statutory annual leave in excess of their entitlement?
As statutory annual leave is calculated on a pro-rata basis, an employer is entitled to deduct excess statutory annual leave taken by an employee from that employee’s final wages (subject to the provisions of the EO on wage deduction limits).
CHECKS FOR EMPLOYERS
- Do you have an annual leave policy? What is your leave year?
- Do you grant contractual annual leave to your employees in excess of statutory annual leave entitlement?
- Do the contractual terms governing annual leave clearly distinguish between statutory annual leave and contractual annual leave?
- How do you share and communicate your annual leave policy with your employees?
If you need help or advice regarding annual leave entitlements and policies, get in touch with us today.
