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Legal Update

Court of Final Appeal Rules on Calculation of Annual Leave Pay

1 November 2012
Mayer Brown JSM Legal Update

Summary

The Court of Final Appeal (CFA) has delivered its judgment in the important case of Kwan Siu Wa, Becky & Ors v. Cathay Pacific Airways Limited (26 September 2012). The decision potentially impacts numerous employers in Hong Kong. The CFA decided that where an employer provides more annual leave days than required under the Employment Ordinance and does not distinguish between statutory annual leave and any contractual excess leave, then the employer runs the risk of having to pay annual leave pay in accordance with the statutory rate of annual leave pay for all annual leave granted, including the contractual excess.

The CFA also clarified the formula for calculating statutory holiday pay and annual leave pay under the statutory regime that existed prior to the commencement of the Employment (Amendment) Ordinance in July 2007.

Background

The three respondents in the CFA were cabin crew who had claimed “shortfalls” in statutory holiday pay and annual leave pay. They alleged that Cathay Pacific should have included certain variable allowances and commission in the calculation of statutory holiday pay and annual leave pay under the pre-Employment (Amendment) Ordinance formula.

The two main issues before the CFA were:

  1. Where the contract of employment provides for periods of annual leave in excess of those prescribed under the Employment Ordinance (i.e., contractual annual leave), in the absence of provision to the contrary, should the parties be taken to have intended that the statutory rate of annual leave pay applies to the excess contractual annual leave?
  2. Should the allowances/commission be included in calculating statutory holiday pay and annual leave pay? 

When should the parties be taken to have intended that the statutory rate of annual leave pay applies to the excess contractual annual leave?

The CFA held that this issue turns on the true construction of the relevant contract of employment.

  1. The First and Second Respondents

    The First and Second Respondents were employed under contracts of employment that provided, in respect of annual leave, for "paid leave". The CFA held that nothing in the First and Second Respondents' contracts of employment makes a distinction between statutory leave and contractual annual leave. The Chief Justice said: "The contractual intention can therefore be assumed to favour the same rate of pay irrespective of whether such relates to the statutory annual leave or to the contractual annual leave". Bokhary PJ and Chan PJ went further and said "In the absence of any term providing for some other rate, the parties obviously ought to be taken to have intended that the statutory rate of annual leave pay under s 41C (the "statutory rate") would apply to any period of annual leave pay in excess of those prescribed by the Employment Ordinance..."

    The CFA held that the First and Second Respondents were entitled to be paid for the excess period of contractual annual leave at the same rate of annual leave pay under the Employment Ordinance.
  2. The Third Respondent

    As to the Third Respondent she was entitled under her contract of employment to a monthly salary which was calculated based on the number of her flying hours in the month and certain “credit” block hours allocated for other non-flying work-related duties and authorised leave. Relevantly for each day of annual leave the Third Respondent was credited with 3.25 block hours. The CFA held that the Third Respondent had effectively been paid for each day of her annual leave in the form of "leave credits", and she is not entitled as a matter of contract to any further payments in respect of the excess contractual annual leave. 

Lessons for employers

Employers should take care when drafting contracts of employment. If an employer wants to calculate contractual annual leave pay differently from the statutory annual leave pay, then it should clearly state the rate of contractual annual leave pay in the contract of employment.

For existing employees, employers should review their obligations in respect of annual leave to determine if they are complying with their current contractual obligations.

For inquiries related to this Legal Update, please contact Hong TranDuncan Abate or your usual contacts with our firm.

Authors

  • Hong Tran
    Partner
    T +852 2843 4233
  • Duncan A. W. Abate
    T +852 2843 2203

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