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Legal Update

Should Commission Be Included In Calculating 'Wages' For Entitlements Under The Employment Ordinance?

26 July 2004
Mayer Brown JSM Legal Update

Summary

The recent Court of First Instance decision of Laing & Others v Lisbeth Enterprises Limited trading as Phillip Wain International (Labour Tribunal Appeal No. 133/2003) has confirmed that "wages" for the purposes of calculating annual leave pay and statutory holiday pay includes contractual commission. As the term "wages" is used to determine other entitlements under the Employment Ordinance ("EO") (such as wages in lieu of notice, long service pay, severance pay, sickness allowance, etc) the application of the decision will also extend to those entitlements.

Full Update

Facts

Ms Mandy Luk (the second Claimant) worked as a consultant in a beauty and health club for ladies owned and run by Lisbeth Enterprises Limited ("Lisbeth"). Under her contract of employment, Ms Luk was entitled to a monthly basic salary of $5,600 and (among other things) commission on sales made by her in accordance with a scale set out in the contract (amounting to an average of in excess of $50,000 per month).

Ms Luk was paid annual leave pay and holiday pay calculated by reference only to her basic salary. The Labour Tribunal found that Lisbeth had rightly not taken Ms Luk's commission into amount in calculating annual leave pay and statutory holiday pay. Ms Luk appealed to the Court of First Instance.

The Relevant Provisions In The EO

The EO provides that :

  • "Holiday pay shall be a sum equivalent to the wages which the employee would have earned on a full working day" (s.41(1)),
  • "Annual leave pay shall be a sum equivalent to the wages which the employee would have earned if he had worked everyday during a period of annual leave" (s.41C(1)),
  • "Where, pursuant to the terms of his contract of employment or the terms of any other agreement or for any other reason, an employee is paid his ordinary wages in respect of any holiday, annual leave...the employee shall not, in addition to such ordinary wages, be entitled to be paid holiday pay, annual leave pay...as the case may be" (s.42),
  • "Wages" (among other things) is defined to include all remuneration including commission but does not include "any commission which is of a gratuitous nature or which is payable only at the discretion of the employer" (s.2(1)) (i.e. it may cover "contractual commission").

The Arguments And The Findings

Lisbeth raised four main arguments in the Court of First Instance.

First, Lisbeth argued that "the wages which the employee would have earned" for the purposes of ss.41(1) and 41C only referred to Ms Luk's basic salary under her contract of employment. This was because commission would only be earned "if and when sales were made" by Ms Luk and "payment was made by the relevant customer". As Ms Luk did not work on her statutory holiday or during her annual leave, there was no question of Ms Luk making any sales, and still less, of any customers making payment in respect of any sales.

The Court rejected this argument on the basis that the definition of "wages" in s.2(1) is defined to include commission that is contractual in nature "unless the context otherwise requires". The Court found that in the context of Ms Luk, "wages" was not required to be defined to exclude commission.

Lisbeth's second argument was that Ms Luk had been paid her "ordinary wages" (i.e. her basic salary) in respect of her statutory holidays and annual leave and therefore she should not be entitled to an additional payment of holiday pay or annual leave pay on top of her ordinary wages pursuant to s.42. The Court rejected this argument on the basis that there was no justification in interpreting "ordinary wages" (which is not defined) in s.42 to mean "basic wages" in Ms Luk's contract of employment. The Court said Lisbeth's argument overlooked the definition of "wages" in s.2(1) which included commission. The clear intention of s.42 is to avoid double payment. On the facts, the Court found that Ms Luk's basic salary was not her "ordinary wages" under s.42.

Lisbeth's third argument was that Ms Luk's contract of employment only required it to pay Ms Luk's "full salary" (which Lisbeth took to mean basic salary) during her annual leave. The Court found that "full salary" paid under the contract of employment was not Ms Luk''s "ordinary wages" under s.42 and therefore that section did not apply. Further, if the contract of employment had the effect of only requiring Lisbeth to pay Ms Luk's basic salary during her annual leave, it would fall foul of s.70 which provides that any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by the EO shall be void.

Lisbeth's final argument was that because Ms Luk had never complained about or protested at the method of calculating holiday pay and annual leave during her years of employment, there was either an implied agreement relating to the calculation of holiday pay and annual leave or an estoppel preventing Ms Luk from asserting her strict legal rights regarding holiday pay and annual leave pay. The Court confirmed the Labour Tribunal's finding that there was no such implied contract and even if there was, it would fall foul of s.70. The Court found that there could be no estoppel as any failure to complain about the method of calculating holiday pay and annual leave pay by Ms Luk would have been caused by or contributed to by the misleading representation made by Lisbeth about her strict legal rights.

Based on the above, the Court disagreed with the conclusion of the Labour Tribunal which held that Ms Luk had been paid her "ordinary wages" and therefore could not claim any additional holiday pay or annual leave pay on top. The appeal was allowed.

Implications Of The Decision

While the findings of the Court in the Lisbeth case is perhaps unsurprising given the clear words used in the definition of "wages" in s.2(1), the decision does reinforce the position that an employer is required to include contractual commission in the calculation of entitlements by reference to "wages" under the EO, in particular, annual leave pay and statutory holiday pay. The other entitlements under the EO that are calculated by reference to "wages", other than those mentioned under the Summary above, include: wages in lieu of notice, long service pay, severance pay, sickness allowance, maternity leave pay and the protection from having deductions made from wages.

The Lisbeth case did not touch on what amount of contractual commission should to be included in calculating holiday pay and annual leave pay. The Court merely accepted that Ms Luk's commission averaged in excess of $50,000 per month.

Subsequent Development 

Holiday Pay And Wages ... The Plot Thickens! (05 Sep 2005)

The Phillip Wain Case - The Final Chapter (13 Mar 2006)

For further information, please contact:

Name: Duncan A. W. Abate
Position: Partner
Phone: +852 2843 2203
Fax: +852 2103 5066

Name: Hong Tran
Position: Registered Foreign Lawyer
Phone: +852 2843 4233
Fax: +852 2103 5070

Name: Anita W. C. Lam
Position: Solicitor
Phone: +852 2843 4536
Fax: +852 2103 5158

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