Money Matter

Do "tips" constitute "wages"?

by Hong Tran, partner; and Andy Lau, trainee solicitor, Employment and Employee Benefits Group, JSM

Article exclusively contributed by Johnson Stokes & Master

Ms Lam began working as a tour guide for a travel agency in April 1997. Her contract of employment was terminated in February 2003, during SARS. She began proceedings via the Labour Tribunal and claimed against the travel agency for a number of entitlements under the Employment Ordinance (EO), amounting to a total of more than HK$150,000.

Ms Lam's salary was relatively minimal in comparison to the tips and service charges she received from the tours she conducted for the travel agency. It was accepted that, in the 12 months prior to Ms Lam's termination of employment, she had received a basic monthly salary of HK$2,200 and tips and service charges which varied from a few thousand to more than HK$10,000 a month.

The EO provides for payment of various statutory entitlements, most of which are calculated based on the "wages" of an employee.

The travel agency contended that gratuities and service charges were not part of Ms Lam's wages and her wages should be capped at the basic salary. Ms Lam asserted that the full amount of tips received by her, as well as the tour allowance payable for each trip by the travel agency should be included in her "wages" in calculating entitlements under the EO.

Narrow definition

The Labour Tribunal found that the tips were not payable as part of the employment arrangement but, instead, through a collateral agreement between employer and employee. As such they did not fall inside the "wages" category. Ms Lam appealed to the Court of First Instance.

The Court of First Instance considered that a key issue in determining whether the tips should be part of Ms Lam's wages was whether or not the travel agency recognised the tips as part of Ms Lam's wages. The Court found that the travel agency not only recognised the existence of tips, but had actively participated in the collection of the tips before every tour.

Evidence for appeal

The travel agency had also issued letters to credit card companies stating Ms Lam's total annual income including her tips received in the figures specified in such letters. Furthermore, the travel agency reported the total income of every tour guide including all the estimated tips in its records to the Inland Revenue Department.

The Court ruled in Ms Lam's favour. It determined that tips and service charges were part of Ms Lam's wages as they were, within the definition set out in the EO, "received by an employee in the course of and in connection with his employment which are paid or derived from payments made by persons other than the employer".

The Court's decision in this case has a far-reaching effect on the whole tourism industry and other sectors where collection of tips is common.

Q&A on tips and wages
Q1 What is the definition of "tips and service charges"?
A1 "Tips and service charges" is broadly defined in the EO. It covers sums of money received (directly or indirectly) by an employee in the course of and in connection with his or her employment, which are made by persons other than the employer and are recognised by the employer as part of the employee's wages.

Q2 Does the "tips and service charges" need to be set out in the written contract of employment for it to be "wages" under the EO?
A2 No. There is no requirement for the tips and service charges to be included in the written contract of employment as "wages".

Q3 Will the method of collection of tips and service charges make any difference to whether or not it is "wages" under the EO?
A3 No. The Court of First Instance's ruling in Ms Lam's case confirmed that it is irrelevant whether the tips were collected by an employee directly from the customers and was not paid into the company's account for redistribution. For different businesses such as restaurants or massage parlours, there may be different means of collection that are engaged as a consequence of the nature of the trade.

Q4 Can an employer contract out of his obligation to include tips and service charges in the calculation of wage-based entitlements under the EO?
A4 No. The EO makes void any provision of a contract of employment which seeks to reduce any rights, benefits or entitlements conferred by the EO on the employee.

Taken from Career Times 02 November 2007

(Last review date: 23 August 2013)

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

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