Payroll processing in Hong Kong requires a thorough understanding of local laws, labor laws and cultural sensitivities.
It is crucial for businesses to keep proper procedures when dealing with payroll and today we will discuss the key elements of the Hong Kong payroll process and the administrative best practice.
The legal framework for payroll processing in Hong Kong is well defined, following strict standards to ensure compliance and is transparent. Understanding these frameworks is important for businesses doing business in Hong Kong to comply with them accurately and efficiently discharge from compensation obligations.
Here are the key features of the legal framework when it comes to wage management and employment in Hong Kong.
Internal Revenue Department (IRD): The IRD is the main tax collection agency in Hong Kong. Employers must make sure they comply with all the requirements as set by the IRD, especially when it comes to employee payroll & taxes. This involves deducting the correct amount of tax from employees’ salaries and paying it to the IRD in a timely manner.
Employment Ordinance: The EO is the main law governing employment relationships in Hong Kong setting out the rights and obligations of employers and employees including minimum wage, working hours and terminations. On the other hand, the salary payment date is set out and also safeguard worker from being discriminated against in the workplace.
Let’s start with when you hire a new employee onboard in Hong Kong and you are required to comply with legal requirements. The laws are put in place to protect employees from unfair treatment and their rights are safeguarded. Employers are required to:
Reporting to IRD. Report any new jobs or terminations to the IRD. The Hong Kong Internal Revenue Department (IRD) requires employers to file Form IR56E with the IRD within three months of hiring a new employee in case he or she is liable for tax. Employers will be penalized or fined for not submitting or submitting after the deadline.
Provide a written employment contract. A written employment contract should be provided to the employee to avoid disputes and protect both parties interests. The employment contract should cover the terms of employment including salary, benefits, working hours and probation and termination clause. The contract can be in English or Chinese and signed by both the employer and the employee.
The components of salary are the various parts that make up an employee’s compensation which are divided into three main categories: basic salary, allowances and benefits.
- Base Salary: Base salary before any allowance, benefit or reduction.
- Benefits and compensation: These may include transportation, accommodations, and other specific benefits. Typical annual or semi-annual compensation should also be considered.
- Mandatory Provident Fund (MPF): Mandatory savings plan for Hong Kong residents upon retirement. Both employers and employees are mandatory to contribute to this fund.
Deductions are amounts taken out of an employee’s paycheck before he or she receives a salary. The most common deductions from an employee’s salary in Hong Kong are:
- MPF contribution: Currently the mandatory contribution rate is 5% of an employee’s relevant income, depending on the size of the minimum income
- Payroll tax: Hong Kong taxes income from work, office, or pension.
The typical salary payment in Hong Kong is by month, with payment being made on the last day of the month. Some companies may prefer to use alternative payment cycles such as fortnightly or weekly, especially for part-timer or hourly employees. These typical wage structures often coincide with variable working hours and wage structures associated with such roles.
Documents that employers must keep and maintain which cover the records of employees’ payslips and other financial transactions and these records are important to facilitating accounting and bookkeeping and resolving disputes. The payroll records that employers need to keep are as below:
Salary records: These records should include the employee’s name, job title, salary, and deductions.
MPF contribution records: These records should include the employee’s name, contribution rate, and the amount of MPF contributions that have been made.
Leave records: These records should include the employee’s name, leave type, and the amount of leave that has been taken.
Bonus records: These records should include the employee’s name, bonus amount and the date the bonus was paid.
Deduction records: These records should include the employee’s name, deduction type, and the amount of the deduction.
Employers in Hong Kong are required to complete certain filing by the end of the year, including the filing of IR56B and MPF annual returns.
- IR56B: IR56B is an annual return filing. Mandatory to submit to the Internal Revenue Department (IRD) by the end of January each year. IR56B contains information about salaries and wages paid to employees and MPF contributions to them.
- MPF Annual Contribution: The MPF Annual Contribution is an annual declaration for each employee of MPF contributions. Those items must be submitted to the Mandatory Provident Fund Planning Authority (MPFA) by the end of March each year. MPF annual benefits include information on MPF contributions from employers and employees, as well as investment returns from MPF funds
Termination and Severance
Hong Kong has specific guidelines for notice periods, severance payments and overtime that employers must adhere to.
Notice Period: The Employment Ordinance (EO) stipulates a minimum period of notice for employers and employees upon termination of employment. The notice period depends on the length of service of the employee, but it can be longer if specified in the employment contract.
Severance payment: An employee who is terminated by employer without cause may be entitled to severance pay. Severance payment is calculated based on the employee’s salary and length of service, but it is capped at HK$390,000.
Long service payment: An employee who has been employed under a continuous contract for not less than five years is entitled to statutory long service pay where he/she is “dismissed”.The amount of long service pay is calculated by reference to the same formula as for severance pay. The maximum entitlement shall not exceed HK$390,000.
Outsourcing Payroll in Hong Kong with Fastlane
Fastlane Group stands out as the preferred payroll manager in Hong Kong for the following reasons.
Experience: Fastlane Group has over 10 years of experience in the payroll outsourcing business and we understand the landscape of the Hong Kong payroll system and can ensure that your company’s payroll is accurate and in compliance with the law.
Advanced Software Solutions: Fastlane Group uses the latest payroll software solutions to automate your payroll process and ensure minimal human errors.
Professionalism: Fastlane Group is committed to delivering professional outsourced payroll services
Payroll in Hong Kong can be complicated and time-consuming and get more tedious especially for businesses with a large number of employees. Not to mention if the foreign companies are not familiar with Hong Kong labor law and legal framework. If you are looking for a reliable and experienced payroll outsourcing partner in Hong Kong, Fastlane Group is a great choice. For more information on outsourcing payroll in Hong Kong for foreign companies, visit our website or contact us today.