13 March 2006
This case has taken more twists and turns than a bowl of spaghetti! However, we are now at the end of the journey. This update considers the decision of the Court of Final Appeal and the current position facing employers.
We do not propose to restate the facts of this case other than to remind you that the employees were contractually entitled to commission on sales. The percentage of such commission was determined by reference to a scale depending on monthly sales (so, for example, if sales were less than $100,000 only a 2.5% commission was payable, whilst if sales were $100,001 then 3.5% commission was payable). The question being determined by the courts was whether this commission should be taken into consideration when determining holiday pay and statutory holiday pay under the Employment Ordinance ("EO").
Both the Court of First Instance and the Court of Appeal had decided in favour of the employees on this point (i.e. that the commission should be included). This was primarily on the basis that commission was expressly included in the definition of "wages" in the EO. Further details of these judgments are contained in our earlier Legal Updates "Should Commission Be Included In Calculating 'Wages' For Entitlements Under The Employment Ordinance? (26 Jul 2004)" and "Holiday Pay And Wages . . . The Plot Thickens! (05 Sep 2005)". The case progressed to the CFA.
Court Of Final Appeal Decision
The Court Of Final Appeal ("CFA") (Bokhary PJ giving the leading judgment) has overruled the lower courts. In short, the CFA decision is that this specific type of commission (where the percentage, and therefore amount, cannot be finally determined until the end of the month) cannot be considered to be "daily wages" for the purposes of sections 41(2) and 41C(2) EO. As a consequence, commission of this type should be excluded from the definition of "wages" for the purposes of calculation of holiday pay and statutory holiday pay.
The CFA determined that in order to fall within "wages" for the purposes of sections 41 and 41C EO a payment or benefit must "at least accrue and [be] calculated on a daily basis". In the Lisbeth case the sales may be said to accrue on a daily basis, but the commission did not as it varied depending on the total monthly sales. Bokhary PJ therefore concluded that the employees' "commission accrued and was calculated on a monthly basis".
What, then, does this mean for all those employers who have been panicking about having to make huge back payments to staff in relation to holiday pay and statutory holiday pay? Well, the position has become clear in parts and hazy in others.
It is clear that where you pay a benefit monthly the amount of which depends on factors which cannot be determined on a daily basis, such benefits will not need to be taken into account when calculating holiday pay or statutory holiday pay. However, the position is unclear in relation to benefits which may be paid monthly, but which may be capable of accruing and being calculated on a daily basis.
So, contractual commission which is capable of being determined on a daily basis by reference to sales on that day, even if paid monthly, could (note, not will!) be held to fall within 41(2) and 41C(2).
To further stir the pot, Bokhary PJ states, somewhat cheekily we suggest, that "Perhaps the term "daily wages" applies only to wages in the sense of salary"!
The CFA did not express a view on the meaning of "ordinary wages" for the purposes of section 42 EO as they did not need to.
The fact that the earlier judgments have been overturned means that they now cease to be a firm precedent for any future cases. So, we have no firm guide on what will fall within sections 41(2) and 41C(2) as "daily wages". We do however have a clear guide to what falls outside 41(2) and 41C(2) in limited cases. This is possibly good news for lawyers and for some employers, but cannot be said to be good news for all employers.
The Saga In Relation To Commissions Continues! (25 Aug 2006)
For further information, please contact:
Name: Duncan A. W. Abate
Phone: +852 2843 2203
Fax: +852 2103 5066
Name: Hong Tran
Phone: +852 2843 4233
Fax: +852 2103 5070