by Li Chung Nam, Associate Solicitor

Most employers may well understand that wages include contractual commission as defined under the Employment Ordinance (Cap. 57) (the “Ordinance”). Some employers may have never thought of the issue as to whether or not commission has to be included in working out the statutory holiday pay and/or annual leave pay. As employees may simply assume that they are only entitled to holiday pay and annual leave pay based on their “basic” salary, they may never realise or complain about the method of calculation of those payments.

Commission Defined

Commission is a contingent payment. An employee has to find his own source of customers and/or complete a sale transaction and most importantly, only when the customers make payment to the employer company does commission become payable as a contractual reward to the employee.

The Law

Sections 41 and 41C of the Ordinance provide that holiday pay and annual leave pay shall be a sum equivalent to the wages which the employee would have earned if he had worked during the respective period of holiday and annual leave (“fixed salary situation”). Where an employee is employed on piece rates or where the daily wages of an employee vary from day to day, the holiday pay and annual leave pay shall be a sum equivalent to the average daily wage earned by the employee, i.e. the average of the daily wage of the employee on each day he worked in the last month, comprising not less than 28 days and not more than 31 days, immediately preceding or expiring on the first day of the holidays or the annual leave respectively (“unfixed salary situation”).

Prospective Arguments for Employers

An employee who is contractually entitled to both a basic salary and commission may arguably not be able to rely on either the fixed salary situation or the unfixed salary situation to include commission into the formula of calculating holiday pay and annual leave pay. As the employee may make no sales during full working days, the employer should not be out of pocket for contingent commission while making those payments.

Section 42 of the Ordinance also provides that if an employee is paid his “ordinary wages” in respect of any holiday or annual leave, the employee shall not, in addition to such ordinary wages, be entitled to his holiday pay or annual leave. The issue then is whether or not an employee who received holiday pay and annual leave pay based on his basic salary can be regarded as having been paid his “ordinary wages”, this is unfortunately not expressly defined in the Ordinance.

Case Study

The above arguments were put forward by an employer in the recent case of Liang & Ors v Lisbeth Enterprises Ltd [2004] 3 HKC 548, a Labour Tribunal Appeal case heard at the Court of First Instance. In accordance with the contract entered into between the parties, the employee’s basic salary was HK$5,600.00 and she was additionally entitled to commission. She was only given holiday pay and annual leave pay by reference to her basic salary only, while her average monthly income was over HK$50,000.00 most of which was contractual commission.

The Court held that commission should be taken into account when calculating the employee’s holiday pay and annual leave pay. By enacting sections 41 and 41C, the legislature provides specific provisions to cater for two common types of unfixed salary situations in which a worker’s remuneration is not fixed, i.e. employment on piece rates and daily fluctuating wages. They provide a statutory formula for working out the holiday pay and annual leave pay in the above mentioned two specified types of unfixed salary situation to settle all possible arguments. This does not mean that apart from these two types of unfixed salary situations, other types of situations in which the employees’ wages are contingent or fluctuating in nature are not covered by the sections.

The Court also explained that the employee who was only paid remuneration calculated by reference to her basic salary only had not been paid her “ordinary wages”. There is no justification in construing “ordinary wages” as equating with or limited to “basic salary” or “fixed wages”. “Ordinary wage” which is not defined in the Ordinance, should be construed as “wages” that an employee would have earned under normal circumstances in the ordinary course of her employment.

The Excuse of Silent Acceptance

One may argue that if an employee had never complained about the method of calculating holiday pay and annual leave pay (until her employment contract was terminated), there was an implied agreement in regard to the calculation method which prevented the employee from asserting her legal rights under sections 41 and 41C.

This argument was rejected by the Court because mere silence and inaction of the employee as to the method of calculation during her years of employment did not prevent the employee from later asserting her legal rights. Furthermore, it would be unfair and inequitable to prevent an employee from exercising her statutory and legal rights against the employer when her silence was actually caused by the misleading representation made to her by her employer.

Practical Problems to be faced by Employers

Applying the principles from the above case, “wages” as defined under the Ordinance include all remuneration, earnings, traveling allowances, attendance allowances, attendance bonus, commission, overtime pay, tips and service charges which are capable of being expressed in terms of money, payable to an employee in respect of work done under the contract of employment. All these need to be included in working out the holiday pay and annual leave pay and must be made by reference to the average daily wage earned by the employee during a month immediately preceding the first day of holiday or annual leave.

An employment contractual clause which restricts the above method of calculation is void as it will seek to reduce the protection and benefits conferred by sections 41 and 41C in terms of calculating holiday pay and annual leave pay.

Employers who are unaware of their employees’ statutory entitlement or believe that they can rely on contractual clauses or silent acceptance of their employees may have to in the future, if challenged, compensate their employees with an unexpected lump sum payment when terminating employment contracts.