Asia Pacific
HR Connect Asia Pacific: Impact of Statutory Minimum Wage (SMW) in Hong Kong

By Jowie Yu, Talent & Organizational Consulting Practice Leader and Surina Wong, Consultant

In this article

 

About the Survey

Aon Hewitt conducted a quick Hot Topic survey shortly before the MWO came into force in Hong Kong, aimed at obtaining the latest viewpoints, concerns, and actions related to the implementation and impact of the legislation. Data was collected in April 2011 through a brief online questionnaire, with valid responses received from 41 organizations that spanned over 14 industry groupings:

  • Business Services
  • Electronics/Electrical Technology
  • Entertainment/Theme Park
  • Government
  • Owned/Statutory Body
  • Hospitality/Restaurants
  • Information Technology
  • Manufacturing
  • Non-Government Organization (NGO)
  • Others
  • Personal Care
  • Property/Construction
  • Retail
  • Transport/Storage/Logistics
  • Utilities/Resources

For more information on the survey, please contact Surina Wong at +852.2917.7967.

In Hong Kong there has been increasing concern about a widening wealth gap among citizens, which has resulted in a significant number of workers who cannot sustain a living, even with full-time employment. Many countries, such as, Australia, Canada, Japan, New Zealand, the United Kingdom and the United States have sought to address this issue by instituting Statutory Minimum Wages (SMW).

A Minimum Wage Bill in Hong Kong was first introduced into the Legislative Council in July 2009. Its intent was to provide employees a wage floor to sustain a living and to narrow the prevalent wage gap, without significantly impacting economic growth and competitiveness.

The Minimum Wage Ordinance (MWO, Chapter 608 of the Laws of Hong Kong) was eventually passed by the Legislative Council in July 2010; it came into force on Labor Day, 1st May, 2011. This legislation has been the cause of heated debates in Hong Kong. Those favoring SMW see this as a way to protect grassroots employees from receiving excessively low wages.

It is believed that by raising their wages, this category of employees will have greater purchasing power and a better standard of living. However, others suggest that this law could have an adverse impact on the labor market, particularly on employment opportunities for this group of vulnerable workers, as well as on the overall economy. (In Japan, for example, research on the impact of the minimum wage1 reveals that this legislation could have a measurable negative impact on employment, especially for female employees.)

A potential increase in labor and business costs also was anticipated, especially for business sectors employing large numbers of the affected low-paid workers. This additional burden, if passed on to consumers through price increases, would impact both Hong Kong's economic growth and its market competitiveness. Moreover, some aspects of the legislation lack clarity, such as the definition of recognized working hours, which adds to the confusion of employers and HR practitioners.

Aon Hewitt conducted a quick Hot Topic survey shortly before the MWO came into force in Hong Kong, aimed at obtaining the latest viewpoints, concerns, and actions related to the implementation and impact of the legislation. A total of 41 organizations, from both public and private sectors, participated in the study.

Overall perceived level of impact of the SMW

Findings from this survey indicate that, in general, employers do not perceive a significant level of impact from the SMW. However, companies with more employees tend to perceive a greater impact than those with less than 1,000 employees.

Different challenges and repercussions were anticipated with the introduction of the SMW, with greater perceived impact on business processes/operations (e.g., HR system reconfiguration), followed by people practices (e.g., employment contract terms may have to be reviewed in order to meet the requirement), and financial (e.g., salary adjustment and additional cost of setting up new software/hardware). Additional remuneration to bring the affected wages up to minimum wage compliance is comparatively small, which may reflect that it has already been budgeted in advance.

There are other cost factors, such as rental rates for business premises, that yield significantly higher financial impact on these organizations. Hence, the financial impact derived from the SMW, when compared to other fixed costs, is relatively less significant.

Unclear areas on minimum wage legislation

Since the launch of the legislation, both employers and employees have expressed different concerns over the SMW. Among the organizations we have surveyed, nearly 90% of them expressed concerns regarding the clarity and understanding of the legislation, in fact, 63% indicated this was their top concern. Among all categories of ambiguities on SMW, employers rated "Definition of Work Hours" and "Entitlement/Calculation" as the top two areas where they have experienced considerable confusion.

The findings suggest that there are many controversies and much confusion over the definition of work hours and payment calculations. Employers (and many employees) feel they only know the background and the facts of the legislation, but don't feel they have a clear understanding of the detailed mechanism of minimum wage calculation, eligibility and work hour tracking, etc. 

Unclear areas on SMW 

Impact of SMW on the organization process

Among different kinds of processes, HR process (e.g., payroll) and administration process (e.g., time tracking) were ranked by employers as the top two areas that would receive the most significant impact. As a result, HR would be subject to greater pressure on executing and monitoring payment calculations and administrative procedures.

This is further supported by 77% of the responding companies anticipating "somewhat significant" or "significant" changes in their new system implementation. Process re-engineering and restructuring employment by reducing working hours and revamping work processes may also be considered by employers as a way to cope with the SMW. Workload management was also cited as an area that is expected to undergo significant changes due to the legislation.

Types of changes to be implemented 

Financial impact of SMW on organizations

Financial challenge is also an issue that employers face in the course of implementing SMW requirements. This could take the form of salary adjustments, additional costs of setting up or upgrading the existing systems, etc.

A potential increase in labor and business costs was anticipated (especially for small and medium-sized enterprises and business sectors employing a large number of low-paid workers). Salary budget, operation cost and administrative cost are expected to be the top three financial areas most affected by the legislation, according to the responding employers.

Impact of SMW on HR functional areas

In terms of HR actions taken or expected to be taken to cope with the change, results show that HR may adjust the use of flexible/part-time working practice and the use of temporary/contract staff. For example, companies tend to utilize internal trainers rather than spending extra budget on training. With the minimum wage coming into effect, only 20% of the participating companies indicated that they are "likely" or "somewhat likely" to adjust employees' base salaries in order to comply with the legal requirements. It is also noteworthy that responding companies are more likely to adjust the entitlement and payment for overtime work with respect to MWO enforcement. 

Among all HR functions, Compensation and Benefits is expected to be the most affected by the SMW.  Eighty percent of the companies said they are "likely" or "somewhat likely" to revise employee contracts and/or handbooks; yet they did not rank HR Due Diligence as the top affected functional area. HR may actually need to review the employment terms (such as the definition of "work hours", whether rest days and meal breaks are paid, etc.) and employee contracts before undertaking other actions.

Impact of SMW on HR Functional Areas 

Impact of SMW on the employment market

Increased business costs may force small enterprises that employ large numbers of low-paid workers to leave the market, hence lay-offs may follow. Job displacement, in particular for the more vulnerable workers with lower education, lower skills, or higher in age, might occur in the labor market after the legislation is in effect. From the employers' perspective, older employees, teen employees and low-skilled employees are likely to the most adversely impacted among all employee groups. 

An increase in unemployment may possibly take place, especially among the low-skilled/low-paid population. As expected, half of the responding organizations perceive a potential increase in the overall unemployment rate in Hong Kong.

Closing

It is right that employers need to adjust the salary and benefits of the low-wage employees in order to be in compliance; it is also an opportune time for employers to review their policies and to pay attention to the overall employment experience. According to Aon Hewitt Best Employers in Hong Kong 2011 study2, there are indeed other important factors apart from pay and benefits that drive employee engagement. Employers may need to take factors such as work/life balance, leadership, career opportunities, and other people practices into consideration when endeavoring to engage employees as well as drive the overall business performance.

All statements in this document do not represent legal advice. Professional legal advice should be sought from legal counsel.

Contact us

For more information about the survey or Aon Hewitt can help you with your human resources issues in Hong Kong, please contact either of the following consultants:

Jowie Yu, tel: +852.2917.7938

Surina Wong, tel: +852.2917.7967


Notes

1 D. Kawaguchi & K. Yamada. The Impact of The Minimum Wage on Female Employment in Japan.  Contemporary Economic Policy, Vol. 25, 1, pp.107-118, January 2007.
2 Aon Hewitt Best Employers in Hong Kong 2011 study.

HR Connect Asia Pacific Home

Subscribe to HR Connect Asia Pacific