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Holiday & Leave


Article exclusively contributed by Woo Kwan Lee & Lo

Clarifying the calculation of holiday pay

by Bucky Chan, Partner, Litigation Department, Woo Kwan Lee & Lo

Rather than taking the full annual leave and statutory holidays to which they are entitled under the law, workers in Hong Kong will often ask their employers to compensate them instead with payment in lieu of time off. Sometimes, these requests are the result of heavy seasonal workloads or a shortage of manpower, and employment legislation has tried to provide a fair formula for calculating appropriate compensation.

Sections 41(2) and 41C(2) of the Employment Ordinance (EO) deal with this issue. They stipulate that, in general, holiday pay or annual leave pay shall be a sum equivalent to the wages which the employee would have earned on a full working day, or if he had worked every day during the period of annual leave.

However, a problem may arise in the definition of "wages" and whether it refers only to basic salary or includes also such things as housing allowance, bonuses and commission. In theory, the employer could save money by structuring the income package to have a low basic salary and high commission or allowances, if the latter items were not part of the wages. Alternatively, the inclusion in the calculation of commission that would have been earned might leave the employer facing unexpected expenses.

The recent Court of Final Appeal case of Lisbeth Enterprises Limited v Mandy Luk considered whether commission should be included in the calculation of holiday pay or annual leave pay. The legislation says that contractual commission rather than commission of a gratuitous or discretionary nature will be included as wages under section 2 of the EO.

In this case, the employee was a beauty consultant who recommended courses of treatment and exercise packages to customers. Besides a basic salary, she received commission on sales. This was calculated on a percentage scale, which depended on the volume of sales she made each month. Ms Luk complained when the employer excluded her commission when calculating annual leave and holiday pay. On average, commission accounted for more than 90 per cent of her total remuneration, so excluding it from the calculation made a significant difference.

Initially, the Labour Tribunal ruled that the commission should not be included, but, on appeal, the High Court said it should be and the Court of Appeal later confirmed this by a majority decision. However, the Court of Final Appeal (CFA) unanimously held that the commission was not to be included in the calculation of the holiday and annual leave pay.

Their logic was that the lower courts had incorrectly interpreted the meaning of "wages" in section 2 of the EO. In fact, wages includes commission "capable of being expressed in terms of money, payable to an employee in respect of work done or to be done under his contract of employment." It does not include "commission which is of a gratuitous nature or which is payable only at the discretion of the employer."

The commission payable to Ms Luk was provided for under her employment contract but was calculated on a monthly basis. The CFA was of the view that the calculation of holiday pay under section 41(2) is by reference to wages earned by the employee on a daily basis. The context required that the word "wages" be read as excluding commission except when it accrued and was calculated on a daily basis.

In other words, commission accrued and calculated on a daily basis could be included in the calculation of holiday and annual leave pay, but commission accrued and payable on a monthly basis could not be. Consequently, Ms Luk, whose commission was calculated on a monthly basis, lost the case.

Q & A on inclusion of commission in holiday pay and annual leave pay
Q1 What should an employee do in order to ensure that holiday or annual leave pay will be calculated by taking contractual commission into account?
A1 This CFA decision said clearly that commission other than that accrued and calculated on a daily basis will not be included in the calculation of holiday or annual leave pay. According to this decision, it appears that for employees whose remuneration packages include a high proportion of commission, it may be necessary to convince their employers to accrue commission on a daily basis. Of course, the practicality of this will vary from business to business.

Q2 Does the above decision extend to other earnings and allowances classified as "wages" in section 2 of the Employment Ordinance?
A2 Yes. So far as holiday and annual leave pay are concerned, other earnings and allowances, if accrued and calculated on a daily basis, will be included in the calculation. For example, an attendance bonus would be included in the calculation of annual leave pay because it is paid for attending work every day.


Taken from Career Times 12 May 2006

(Last review date: 23 August 2013)


Disclaimer: The opinions expressed in this article are those of the contributor

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