prc-fin-006-payroll-monthly

---
name: prc-fin-006-payroll-monthly
description: Monthly payroll-processing SOP per HK Employment Ordinance — wages within 7 days of period end, 713 average-wage rule for leave/holiday pay, 15 statutory holidays for 2026. Use to run the monthly payroll cycle.
license: MIT
---

# FIN-006 — Payroll Processing (Monthly)

**Version:** 1.0 | **Effective date:** 2026-04-29 | **Owner:** FM | **Last reviewed:** 2026-04-29 | **Next review:** 2027-04-29

---

## 1. Purpose

This SOP governs the monthly payroll run at Profit Rise Consulting (PRC), ensuring that all staff are paid accurately, on time, and in full compliance with the Employment Ordinance (Cap. 57). Wages must reach employees no later than 7 days after the end of each wage period per [s.23 of the Employment Ordinance](https://www.labour.gov.hk/eng/legislat/content2.htm). Salary slips must be issued to all staff. The s.713 average-wage formula applies to holiday pay, sick pay, and termination payments. This SOP feeds directly into FIN-007 (MPF remittance) and FIN-009 (Employer's Return).

---

## 2. Scope

**In scope:**
- All full-time and part-time employees paid through the PRC payroll
- Basic salary, allowances, commissions, and overtime
- Statutory holiday pay (15 statutory holidays in 2026 per [Labour Department](https://www.china-briefing.com/news/hong-kong-statutory-and-general-holidays-2026/))
- Sickness allowance (80% of average daily wages), maternity/paternity pay computations
- Salary slips issuance
- Payroll records retention (7 years)

**Out of scope:**
- Partner drawings (MP/SP — separate drawings policy)
- Freelancer/contractor payments (processed via FIN-003 AP)
- MPF contribution remittance (FIN-007)
- Employer's Return filing (FIN-009)

---

## 3. Roles & RACI

| Task | MP | COO | HRL | FM | EM | LLM-OP |
|------|----|----|-----|----|----|----|
| Collect monthly payroll inputs | I | A | R | C | I | R |
| Verify headcount and leave records | I | I | A/R | C | C | R |
| Calculate gross pay and deductions | I | I | C | A/R | — | R |
| COO review and approval of payroll | I | A | I | R | — | — |
| Execute salary auto-pay | I | A | — | R | — | — |
| Issue salary slips | I | I | I | A/R | — | R |
| Post payroll to GL | I | I | — | A/R | — | R |
| Retain payroll records | I | A | I | R | — | R |

---

## 4. Definitions

| Term | Definition |
|------|-----------|
| **Wage period** | The period for which wages are payable — PRC default: calendar month (1st–last day) |
| **7-day rule** | Per [s.23 Employment Ordinance](https://www.labour.gov.hk/eng/legislat/content2.htm), wages must be paid within 7 days after the end of the wage period |
| **s.713 average wage** | Calculated as total wages in the preceding 12 months ÷ total days worked; used for annual leave pay, sick pay, statutory holiday pay, and termination pay |
| **Statutory holiday pay** | Employees under continuous contract entitled to 15 paid statutory holidays in 2026 at their average daily wage (s.713) |
| **Sickness allowance** | 80% of average daily wages for certified sick days exceeding a 1-consecutive-day threshold (2-day threshold for payment eligibility) |
| **468 rule** | Effective 18 January 2026: continuous contract if employed ≥4 weeks with ≥17 hrs/week OR ≥68 hrs/4 weeks ([Labour Department](https://www.labour.gov.hk/eng/news/EAO2025.htm)) |
| **Auto-pay** | Direct salary payment to employees via HSBCnet / FPS — PRC standard method |
| **Salary slip** | Written itemised statement of earnings and deductions given to each employee each pay period |

---

## 5. Inputs / Preconditions

- Employee master data current in `payroll_sys` (bank accounts, salary rates, start dates, leave balances)
- Leave records (annual, sick, maternity, paternity) approved and entered into `payroll_sys` for the month
- Any salary changes (new hires, promotions, increments) documented and COO-approved; changes submitted to FM by 20th of the month for inclusion in current cycle
- Statutory holiday calendar for 2026 loaded into `payroll_sys`
- MPF relevant income amounts confirmed (passed to FIN-007)
- Authority token for LLM-OP scoped to `FIN-006`
- Payroll processing initiated no later than BD-3 before the 7th of the following month (to ensure funds reach employees within the 7-day statutory window)

---

## 6. Procedure

1. **Collect monthly payroll inputs.**
   - Actor: LLM-OP (data collection); HRL (leave records); EM (overtime/commission approvals)
   - System: `payroll_sys`, `doc_store`
   - Input: Time and attendance records; approved leave requests; approved overtime/commission forms; new hire / termination notifications from HRL
   - Output: Payroll input file assembled in `payroll_sys` with: employee ID, name, base salary, days worked, approved leave (type and days), overtime hours approved, any one-off allowances or deductions
   - Decision: IF any new hire started mid-month THEN prorate salary from start date. IF any employee terminated THEN calculate final pay including accrued annual leave encashment (s.713) and confirm termination date with HRL.
   - On failure: If leave records incomplete by BD-5 before pay date, HRL notified immediately; FM processes known data and flags outstanding items for manual adjustment.
   - Log: Payroll input collection timestamp and employee count in `audit_log`.

2. **Verify headcount and statutory holiday adjustments.**
   - Actor: FM (or LLM-OP under FM authority)
   - System: `payroll_sys`
   - Input: Employee roster; 2026 statutory holiday calendar
   - Output: Headcount confirmed; statutory holidays in the month identified (from [2026 calendar](https://www.china-briefing.com/news/hong-kong-statutory-and-general-holidays-2026/)); holiday pay added for each continuous-contract employee; substitution dates noted (e.g., Ching Ming 5 Apr falls Sunday → substituted 7 Apr Tue)
   - Decision: IF a statutory holiday falls within an employee's certified sick leave THEN the statutory holiday is not counted as a sick day — recalculate. IF employee did not work their normal working day before or after the statutory holiday (not due to approved leave) THEN they may not be entitled to that holiday pay — FM confirms with HRL and Employment Ordinance s.36.
   - On failure: If holiday pay calculation ambiguous, FM consults HRL and, if needed, Labour Department guidance. Documents decision.
   - Log: Holiday pay calculation notes per employee in `audit_log`.

3. **Calculate s.713 average wage for special payments.**
   - Actor: FM
   - System: `payroll_sys`, `accounting_sys`
   - Input: Employee wage history (12 months); days worked in prior 12 months
   - Output: Average daily wage per employee (total wages ÷ days worked); used for: annual leave pay, sickness allowance (80% × average daily wage × eligible days), maternity/paternity pay, statutory holiday pay — all loaded into payroll run
   - Decision: IF employee has <12 months' service THEN use available full months. IF wages varied significantly (e.g., commission-heavy month) THEN FM validates s.713 result against prior month and flags to COO if materially different (>15%).
   - On failure: If `payroll_sys` does not auto-compute s.713, FM uses approved Excel template at `doc_store:/templates/payroll/s713_calculator.xlsx` and uploads result manually.
   - Log: s.713 average wages for each eligible employee in `audit_log`.

4. **Compute gross pay, deductions, and net pay.**
   - Actor: FM (or LLM-OP under FM authority)
   - System: `payroll_sys`
   - Input: All inputs from steps 1–3; approved expense reimbursements (if bundled with payroll from FIN-005)
   - Output: Payroll register showing per employee: gross pay, MPF employee deduction (5% of relevant income, max HK$1,500 — passed to FIN-007), any authorised deductions, net pay; total employer MPF liability computed (passed to FIN-007); total payroll cost (gross + employer MPF) computed
   - Decision: IF an employee's monthly relevant income < HK$7,100 THEN no employee MPF deduction; employer still contributes 5% of actual wages (per [MPFA rules](https://www.mpfa.org.hk/)). IF relevant income > HK$30,000 THEN cap MPF contribution at HK$1,500/side.
   - On failure: If payroll calculation produces an outlier (net pay ≠ prior month ± expected variance), FM investigates before proceeding. Do not process a payroll run with unexplained variances > 10% per employee.
   - Log: Payroll register file saved to `doc_store:/finance/payroll/<YYYY-MM>/payroll_register_<YYYY-MM>.xlsx` and hash recorded in `audit_log`.

5. **COO review and approval.**
   - Actor: COO — ESCALATE TO HUMAN (mandatory approval before payment)
   - System: `payroll_sys`, `email`
   - Input: Payroll register from step 4
   - Output: COO approval (email confirmation or e-signature on payroll register); any corrections noted and applied by FM
   - Decision: IF COO is unavailable, MP approves as backup per GOV-003 §6. Payroll must not be released without at least one senior approval (COO or MP).
   - On failure: If COO and MP both unavailable (extreme circumstance), FM holds payroll and notifies both via phone; processes as soon as approval received, ensuring 7-day rule is still met. If 7-day deadline is at risk, FM calls Labour Department's hotline to document good-faith effort.
   - Log: Approval timestamp and approver identity in `audit_log`.

6. **Execute salary payment via auto-pay (HSBCnet / FPS).**
   - Actor: FM — ESCALATE TO HUMAN (FM physically initiates; system requires two-factor authentication)
   - System: HSBCnet / FPS (external); `secrets` (credentials); `payroll_sys`
   - Input: Approved payroll register; employee bank account details from `payroll_sys`
   - Output: Net salary credited to each employee's bank account; payment batch reference number recorded; all payments confirmed in bank confirmation report
   - Decision: IF any individual payment is rejected by bank (incorrect account number) THEN FM immediately contacts employee for correct details; re-initiates within same business day to preserve 7-day compliance. IF total payroll EFT > HK$100,000 THEN MP + COO co-sign required at banking level per GOV-003 §5.
   - On failure: If HSBCnet unavailable, use FPS as fallback. If both unavailable, FM contacts HSBC relationship manager; if payments cannot process before 7-day deadline, FM documents and escalates Tier 3 to MP + COO.
   - Log: Bank batch reference number, total amount paid, and execution timestamp in `audit_log`.

7. **Issue salary slips to all staff.**
   - Actor: LLM-OP (or FM)
   - System: `email`, `payroll_sys`, `doc_store`
   - Input: Confirmed payroll register
   - Output: Individual salary slip emailed to each employee's PRC email address; slip shows: employee name, period, gross pay, itemised deductions (MPF, other), net pay, year-to-date totals. Copies saved to `doc_store:/finance/payroll/<YYYY-MM>/slips/<employee_id>_<YYYY-MM>_slip.pdf`
   - Decision: IF employee requests hard copy THEN ADM prints and delivers in sealed envelope. IF employee is on leave when slip is issued THEN slip is held and delivered on return (or emailed to personal address only if employee has consented per PDPO DPP3).
   - On failure: If email delivery fails, FM retries within 4 hours; logs delivery failure and alternative method in `audit_log`.
   - Log: Salary slip dispatch timestamp and confirmation for each employee in `audit_log`.

8. **Post payroll to GL.**
   - Actor: FM (or LLM-OP under FM authority)
   - System: `accounting_sys`
   - Input: Confirmed payroll register; bank payment confirmation
   - Output: GL journal: Debit Salaries & Wages (and other pay elements by code), Debit Employer MPF, Credit Bank, Credit MPF Payable; journal posted and approved; payroll GL reconciles to payroll register total
   - On failure: If journal fails or totals do not reconcile, FM escalates Tier 1 to FM + ITL; does not mark payroll as "Posted" until reconciled.
   - Log: GL journal reference and payroll period in `audit_log`.

---

## 7. Outputs / Deliverables

| Deliverable | Storage location | Retention |
|-------------|-----------------|-----------|
| Approved payroll register | `doc_store:/finance/payroll/<YYYY-MM>/` | 7 years ([IRD s.51C](https://www.ird.gov.hk/eng/tax/bus_rke.htm)) |
| Salary slips (per employee) | `doc_store:/finance/payroll/<YYYY-MM>/slips/` | 7 years |
| Bank payment confirmation | `doc_store:/finance/payroll/<YYYY-MM>/` | 7 years |
| GL journal entries | `accounting_sys` | 7 years |
| s.713 average-wage workings | `doc_store:/finance/payroll/<YYYY-MM>/` | 7 years |
| MPF deduction summary (to FIN-007) | `payroll_sys` | 7 years |

---

## 8. Edge cases & error handling

| Condition | Detection | Action | Escalate to |
|-----------|-----------|--------|-------------|
| New hire joins mid-month | HRL notification by 20th | Prorate salary from start date; enrol in MPF within 60-day window (FIN-007); issue first salary slip | Tier 1 → FM + HRL |
| Employee terminates — final pay | HRL cessation notice | Calculate outstanding salary + untaken annual leave encashment (s.713) + any severance (if applicable); pay within 7 days of termination; file IR56F ≥1 month before cessation date (FIN-009) | Tier 1 → FM + HRL |
| Bank rejects employee salary transfer | Bank error notification | FM contacts employee for correct details; re-initiates within same business day; confirms receipt before marking as paid | Tier 1 → FM |
| Overpayment discovered | Post-payroll GL review | FM notifies employee in writing; recovery by deduction from next salary (with employee written consent) or repayment within 30 days | Tier 2 → COO |
| Salary data changed without approval (system unauthorised edit) | FM audit check on payroll register vs prior month | Stop payroll; investigate source of change; if unauthorised access suspected, escalate immediately | Tier 3 → COO + MP + CO |
| Payroll system unavailable on processing day | System outage notification | FM uses Excel backup template; processes manually; notifies ITL and COO; ensures 7-day rule met | Tier 2 → COO + ITL |
| Employee claims sickness allowance without medical certificate for ≥2 consecutive days | HRL review | Reject sick pay claim for uncertified days; advise employee to provide certificate; sick pay only for certified days | Tier 1 → HRL |

---

## 9. Escalation triggers

- **Tier 1 → FM + HRL:** New hire mid-month; employee termination final pay; bank transfer rejection; uncertified sick leave.
- **Tier 2 → COO:** Payroll overpayment requiring recovery; payroll system unavailable on processing day; total payroll variance >10% vs prior month unexplained.
- **Tier 3 → MP + COO:** Payroll data unauthorised change detected; 7-day statutory payment deadline at risk; payroll release without required dual approval.
- **Tier 4 → MP + external counsel:** Confirmed payroll fraud; suspected internal theft of payroll funds.

---

## 10. KPIs & quality checks

| KPI | Formula | Target | Frequency |
|-----|---------|--------|-----------|
| Payroll on-time rate | Payrolls paid by day 7 of following month ÷ total monthly payrolls | 100% | Monthly |
| Payroll error rate | Payrolls requiring correction after processing ÷ total processed | < 1% | Monthly |
| Salary slip issuance rate | Slips issued ÷ active employees | 100% | Monthly |
| s.713 calculation errors | Cases requiring manual s.713 correction | 0 | Monthly |
| Unauthorised payroll changes | Count of changes without documented approval | 0 | Monthly |

---

## 11. References & revision history

- [Employment Ordinance Cap. 57 — s.23 (7-day rule), s.713 (average wage), s.36 (holiday pay)](https://www.labour.gov.hk/eng/legislat/content2.htm)
- [Labour Department — 2026 Statutory Holidays](https://www.china-briefing.com/news/hong-kong-statutory-and-general-holidays-2026/)
- [Labour Department — 468 Rule effective 18 Jan 2026](https://www.labour.gov.hk/eng/news/EAO2025.htm)
- [IRD — Record Retention 7 years (s.51C)](https://www.ird.gov.hk/eng/tax/bus_rke.htm)
- [MPFA — MPF contribution caps](https://www.mpfa.org.hk/)
- GOV-003 §5 — Authority limits (payroll > HK$100K: MP+COO co-sign); §6 — Backup roles
- GOV-005 — Escalation Matrix
- GOV-007 — LLM Operator's Manual
- FIN-007 — MPF Contribution Remittance
- FIN-009 — Employer's Return Filing

| Version | Date | Author | Approver | Change |
|---------|------|--------|----------|--------|
| 1.0 | 2026-04-29 | COO | MP | Initial release |