Money Matter

When to include commission in calculating entitlements

by Hong Tran, Solicitor, Employment and Employee Benefits Group, Johnson Stokes & Master

Article exclusively contributed by Johnson Stokes & Master

In the case of Lisbeth Enterprises Limited v Mandy Luk, the Court of Final Appeal clarified the types of commission that should be included when calculating statutory holiday and annual leave pay.

Under her contract of employment, beauty consultant Ms Luk was entitled to a basic monthly salary of HK$5,600 and sales commission which averaged HK$50,000 per month. The amount of commission was determined by reference to a scale based on monthly sales. If, for example, these were less than HK$100,000, the rate of commission was 2.5 per cent. When total sales exceeded HK$100,000, commission was paid at 3.5 per cent. Ms Luk's statutory annual leave pay and statutory holiday pay was calculated on the basis of her monthly salary. Sales commission was not included.

Both the Court of First Instance and the Court of Appeal decided in favour of Ms Luk and said her commission should be included. This was mainly because the definition of "wages" in the Employment Ordinance (EO) expressly includes commission. However, the Court of Final Appeal overturned these decisions.

In the EO, the formula for working out statutory holiday pay and annual leave pay refers to the "wages which the employee would have earned" on a full working day or during a period of annual leave. Where the wages vary from day to day, the leave pay should be calculated by reference to the daily wages earned by the employee.

While the EO does include contractual non-discretionary commission in the definition of wages, commission is not included if the context of the relevant provision of the EO requires otherwise.

The Court of Final Appeal therefore needed to consider whether the formula in the EO for calculating holiday pay constituted a context which did not require Ms Luk's commission to be included. In particular, they had to decide whether her entitlement to commission amounted to daily wages.

They determined that, in order to be considered daily wages, a payment or benefit must "at least accrue and [be] calculated on a daily basis". Ms Luk's entitlement to commission was not daily wages since the percentage of commission, and therefore the final amount, could not be calculated until the end of the month. While her commission might be said to accrue on a daily basis, it varied and was calculated depending on total monthly sales.

As a consequence, commission of this type should be excluded from the definition of wages for the purposes of calculating statutory annual leave pay and statutory holiday pay. However, commission that accrues and is calculated on a daily basis would still be considered as wages and must be included in the calculation.

The decision clarifies that where an employer pays a benefit each month, and the amount depends on factors which cannot be determined on a daily basis, this benefit need not be taken into account when calculating statutory holiday or annual leave pay. However, the position remains unclear concerning benefits paid monthly, but which accrue and are calculated on a daily basis.

So, contractual commission which can be determined by reference to each day's sales, even if it is paid monthly, could still be held to fall within the formula for calculating statutory holiday and annual leave pay.

Q & A on calculating pay for statutory holidays and annual leave
Q1 When is an employer required to include commission in the calculation?
A1 If commission accrues and is calculated on a daily basis, then it must be included in the calculation of statutory annual leave and holiday pay. For example, if the commission structure gives the employee a flat fixed percentage of sales, which can be calculated each day, this should form part of the calculation.

Q2 What is the difference between contractual commission and commission of a discretionary or gratuitous nature?
A2 Generally, commission of a gratuitous nature is payable only at the discretion of the employer. There is no guarantee the employee will receive it, even after performing well. For contractual commission, there is effectively a promise to pay if certain objectives are achieved.

Q3 Should contractual commission be included in calculating other wage-based entitlements under the EO, such as wages in lieu of notice or pay statutory long service, severance, maternity leave, or sickness allowances?
A3 While these entitlements are calculated by reference to "wages", each provision has a unique wording and formula. Therefore, it should not be assumed that the Lisbeth decision can be applied in the same manner in calculating other entitlements.

Taken from Career Times 28 April 2006

(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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