CHUNG WO SANG FUTURE v. TAI LIN RADIO SERVICE LTD

HCLA 112/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 112 OF 2002

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO. 3888 OF 2002)

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J U D G M E N T

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1. The Defendant carries on a well-known retail business in electrical appliances. Its shops are manned by salesmen in its employ. The Claimant is one of them. Like others, he is paid a monthly "salary" or a "basic salary". On top, he receives commission in respect of goods that he sells on behalf of the Defendant. The narrow issue raised in this Labour Tribunal appeal is whether the commission constitutes the Claimant's contractual entitlement or is payable only at the discretion of the Defendant.

2. In the proceedings below, the Claimant sued the Defendant for outstanding annual leave pay, holiday pay, year-end pay and sickness allowance. There was no dispute that the Defendant had paid the Claimant various sums in respect of these items of payment, which were calculated according to the basic salary of the Claimant. But the Claimant argued that these payments should be calculated by reference not only to the basic salary, but also to his average commission. The Tribunal accepted the Claimant's argument, and with the exception of the claim for year-end pay (which the Tribunal held to be discretionary in nature), the Tribunal found in favour of the Claimant in respect of the other items of claim.

3. The Defendant now appeals to this court.

4. Under the Employment Ordinance (Cap. 57), sickness allowance, holiday pay and annual leave are all calculated by reference to the employee's "wages": section 35(1), section 41(1) and section 41C(1) respectively.

5. Section 2(1) of the Ordinance defines "wages" as follows:

" "wages" (工資), subject to subsections (2) and (3), means all remuneration, earnings, allowances including travelling allowances and attendance allowances, attendance bonus, commission, overtime pay, tips and service charges, however designated or calculated, 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, but does not include - (Amended 48 of 1984 s. 2; 76 of 1985 s. 2; 74 of 1997 s. 3)

...

(c) any commission which is of a gratuitous nature or which is payable only at the discretion of the employer; (Replaced 74 of 1997 s. 3)

..."

6. In a nutshell, if the commission of the Claimant in the present case "is of a gratuitous nature or ... is payable only at the discretion of the [Defendant]", it does not fall within the meaning of wages, and should not be taken into account in calculating sickness allowance, holiday pay and annual leave. Conversely, if commission is a contractual entitlement of the Claimant, it forms part of his wages and must be taken into account.

7. It thus becomes necessary and important to look at what the contract of employment between the Claimant and the Defendant, which is a standard-form contract, says. The contract of employment, dated 16 August 1993, reads as follows:

"	Date:	16 August 1993
	Name:	Mr Chung Wo Sang
	Dept:	Branch 433

Dear Mr Chung,

LETTER OF EMPLOYMENT

We are pleased to offer you the position of Experienced Salesm with our Company. This letter confirms that the terms of your employment shall be as follows:

1) Your employment commences on 16 August 1993 at the salary of HK$2,500.00 per month payable fully in arrears.

2) Please would you note that you will be required to serve a probationary period of three months. On satisfactory completion of probation, your employment will be confirmed. Your employment will be terminated at any time thereafter by either you or the Company [giving] each other one month written notice to that effect, or a sum equivalent to one month's salary in lieu of such notice. In such event, you will not be entitled to receive any bonus, allowance, overtime pay and commission that you would have earned unless the Company in its discretion decides otherwise.

3) During your employment, you may be paid the Chinese New Year Bonus at the sole discretion of the management. However, you will not be entitled to any bonus or part thereof unless you are in the employment with the Company at the date when the bonus is paid. Please note that all bonuses are entirely at the Company's discretion.

4) Your salary will be reviewed at January every year, but any adjustment in salary will be at the sole discretion of the Company.

5) After completion of twelve months continuous employment, you will be entitled to Seven (7) days of Annual Leave with full pay of salary. Such holiday shall be taken within the following period of twelve months. The time of the leave shall be taken at times convenient to and agreed by the Company. Annual leave may not be accumulated for more than one year without the consent of the management of the Company.

6) During your employment, you will devote yourself exclusively to the Company and will personally attend thereto at all times during usual business hours and during additional times as exigencies to the management of the business expect in cases through illness and accident, in which case you will be required to furnish medical certificate as proof of such illness.

7) During your employment and thereafter, you will not accept in the proper position to divulge to any personal and will use your best efforts to prevent any secret, transactions or affairs, finance of the Company or any of its dealings which may come to your notice during course of your employment. During your employment, you need to follow the instructions from time to time being given to you by the Company. Moreover, you are not to undertake outside employment with or without remuneration during the service with the Company without the prior written consent of the Company.

8) If during your employment you are guilty of any serious misconduct or breach of any of the terms of your employment or if you commit any act of bankruptcy, the Company may terminate your employment forthwith without any notice or payment in lieu of notice in which event you will not be entitled to claim any compensations or damages for or in respect of or by reason of such termination.

9) During your employment, the Company shall be entitled from time to time to post you to work at any one of the Company's branches for such period as the Company may think fit and you shall obey such direction and/or order of the Company.

10) FOR FEMALE STAFF ONLY

You will be entitled to Maternity Leave of ten weeks which will be paid at two thirds of your monthly salary if you are employed in the Company continuously for a minimum period of 26 weeks. Maternity Leave normally begins four weeks before the expected date of confinement and ends of six weeks after the actual date of confinement. Doctor's certificate is required on the expected date of confinement before taking the Leave.

We welcome you into our Company and trust that your service with us will be to our mutual benefit. Kindly sign and r of this letter to Personnel Department signifying your acceptance of the terms and conditions stated above.

Yours faithfully,
For and on behalf of
TAI LIN RADIO SERVICE LTD.	Accepted By: CHUNG
	WO SANG
[Signature]	[Signature]	"

8. Apart from the written contract, it is also important to bear in mind a "Notice" in Chinese setting out the payment of commission. It was dated 24 August 1994 and was signed by the Claimant. It reads as follows:

"佣 金

門市部售貨員可享有售貨佣金，惟佣金多少不一，公司方面就市場之情況而定，並隨時重申[新]訂定佣金多少及更改計算佣金之方法，會計部於每月二十日前支付各售貨員其上月份應得之全部佣金，惟任何因被解僱或自動辭職者，將不獲考慮發給是項佣金。如有任何錯漏，售貨員應在收到佣金後七天內與會計部聯絡，如有顧客退貨或分期付款購貨之顧客未能履行合約等情況，公司方面將在認為需要時向有關之售貨員收回已支之佣金。

泰林無線電行有限公司
本人鍾和生明白及接受以上細則。
簽名：[簽名]
日期：24/8/94"

9. Although both sides said before the Tribunal that oral representations relating to payment of commission were made (in their respective favour), the Tribunal did not make any finding in favour of either party on the subject in question. All that the Tribunal said in relation to the system of commission is as follows:

" The Defendant sells electrical appliances and has a system of commission for the salesmen which is set out in a "Notice" to be signed by the salesmen. It begins by stating that every salesman is entitled to commission of sales. Then it provides that the amounts of commission are to be set by the management in its sole discretion. This discretion from time to time is in relation to:-

(a) the types of goods;

(b) a fixed sum of commission for certain goods;

(c) the method of calculation of commission, if not a fixed sum.

From time to time, a price list for the purpose of commission is issued to the salesmen from which the salesmen would know which types of goods carry commission and the fixed amounts or formula for calculation of the commission. Mr Ho Kam Yuen is the Sales General Manager and he confirms such was the system adopted in the past and it is still currently effective."

10. In respect of the employment contract, I agree with Mr Yuen SC, counsel for the Defendant, that the first thing to note is that the contract does not expressly provide for any contractual entitlement to payment of commission. Clause 1 sets out the employee's "salary" ( - it has been increased over the years), which is "payable fully in arrears". It does not refer to commission. Still less does it refer to any entitlement to payment of commission. The contrast between salary and commission cannot be ignored.

11. Clause 2 deals with probation, termination of contract, and, as it were, non-payment of various sums upon termination of contract. Clause 2 is the only place where "commission" is mentioned in the entire contract.

12. Probation is quite irrelevant here. Termination according to clause 2 may be effected by either party, by either one month's notice or "one month's salary in lieu of such notice". The payment in lieu of notice is by reference to the "salary" of the employee - a clear reference to the salary set out in clause 1 of the contract. In other words, if either party wishes to terminate the contract, either one month's notice has to be given, or a sum equivalent to the salary set out in clause 1 has to be paid. The payment in lieu does not comprise any other items of payment, apart from the salary mentioned in clause 1.

13. More importantly, the third sentence in clause 2 sets out specifically one consequence of termination of contract: "in such event" - in the event of termination, the employee "will not be entitled to receive any bonus, allowance, overtime pay and commission that [he] would have earned unless the Company in its discretion decides otherwise".

14. As I said, this is the only place where "commission" is mentioned. The sentence refers to "any ... commission". It suggests that the existence of commission is a possibility, rather than a certainty. Furthermore and perhaps more importantly, it sets out that in case of termination, there would be no entitlement to commission "unless the Company in its discretion decides otherwise". What is certain about the last sentence in clause 2 is that in case of termination, payment of any commission would be at the absolute discretion of the Defendant. What it does not say for certain is that during the currency of the employment, there is an entitlement to commission payment. I accept that on the one hand, this (an entitlement to commission) is a possible interpretation or possible underlying assumption of this part of clause 2. But on the other hand, it is also consistent with the view that this part of clause 2 is really there to dispel any possible doubt that there is any contractual entitlement to commission in the particular case of termination.

15. This latter interpretation is supported by the fact that this part of clause 2 refers not only to commission but "bonus", which according to clause 3 (particularly the last sentence thereof) is "entirely at the Company's discretion". In other words, so far as bonuses are concerned, the situation is entirely covered by clause 3. The inclusion of "bonus" in the last part of clause 2 is really to double-bolt, as it were, the situation regarding termination, i.e. in case of termination, no bonus whatsoever is payable unless the employer in its discretion decides otherwise.

16. I accept that the phrase "that you would have earned" in the last sentence of clause 2 would seem to suggest that in the absence of termination, the employee would "earn" bonus, allowance, overtime pay and commission, in the normal course of event. This suggests a contractual entitlement to these payments. But again the difficulty with this reading in favour of a contractual entitlement is that this part of clause 2 applies not only to commission, but also to bonus, which is specifically said to be entirely at the employer's discretion according to clause 3. In any event, the use of the word "earned" is just one of the many factors that one needs to bear in mind in finding out the true nature of any payment of commission in the present case.

17. As mentioned above, clause 3 deals specifically with Chinese New Year bonus and bonuses in general. They are payable at the discretion of the employer. (In fact, that was the reason why the Tribunal below rejected the Claimant's claim in respect of year-end payment.) That clause 3 may be used in favour of an argument for a discretionary commission has been discussed above. On the other hand, one could also argue for a contractual entitlement in respect of commission by contrasting the specific provisions in clause 3 relating to Chinese New Year bonus and other bonuses, which are expressly said to be discretionary in nature, with the total absence of any reference to the nature of commission in the contract. One could also argue that the draftsman of the contract certainly knows how to use "at the sole discretion" and "at the Company's discretion", if the intention of the parties requires the use of these phrases. Indeed, "at the sole discretion of the Company" is also used in clause 4 dealing with adjustment of salary.

18. All this is quite true. But at the end of the day, after surveying the contract clause by clause and as a whole, the one thing that stands out from the rest is the lack of any specific reference to the employee's entitlement to payment of commission, unlike its entitlement to salary, and unlike a female employee's entitlement to maternity leave set out in clause 10 of the standard form employment contract (which of course does not apply to the Claimant in the present case).

19. But in the context of the present case, one needs to consider the Chinese Notice relating to commission as well. In my judgment, the opening sentence in the Notice ("可享有") does not necessarily refer to a contractual entitlement to commission. Literally, it means that the employee "may enjoy" payment of commission, and the Notice goes on to set out how and under what circumstances commission would be paid. First, it says that the amount of commission varies, and is to be determined by the employer according to market conditions; the employer may at any time revise the amount of commission and the method of calculating commission. Secondly, it sets out the date of payment of commission - on or before the 20th day of each calendar month in respect of the previous month's commission. The use of the words "應得" suggests some sort of entitlement. Thirdly, in clear echo of the latter part of clause 2 in the employment contract, the Notice goes on to say that in case of termination or resignation, the employee would not be "considered for payment of commission" ("將不獲考慮發給是項佣金"). The use of the words "考慮" goes towards neutralizing the previous use of the words "應得" in respect of payment of commission. Furthermore, the fact that commission is not payable upon termination or resignation goes some way towards illustrating the true nature of the commission. If the commission is earned as a contractual right, one would have thought that termination or resignation should not have any effect on the employee's entitlement to its payment, particularly when termination of the contract by the employer need not be for cause. Yet both clause 2 and this part of the Notice refer to non-payment of commission in case of termination of contract, unless the employer otherwise in its discretion decides.

20. The rest of the Notice deals with calculation and repayment of commission, which is more or less neutral so far as the present issue is concerned, except that the employer retains the right to demand repayment of commission in case the goods sold have been returned or the customer fails to honour his or her instalment payment commitment - again the matter is at the discretion of the employer.

21. I have already set out the Tribunal's factual findings relating to the operation of the system of commission in the present case. The very limited findings relating to how the system works in practice, in my judgment, are no doubt relevant by way of background, but do not throw any real light on the true nature of the commission payment.

22. Bearing everything in mind, including the background facts and the documentary evidence, as well as the general circumstances of the case, I am of the view that on balance, the commission payment here is merely a discretionary payment. It is not a contractual entitlement. The factors favouring a discretionary commission outweigh that for a contractual entitlement. This is sufficient to dispose of the appeal.

23. But there is a further ground against the Claimant's claim. In New Bright Industrial Company Ltd v. Wong Sau Chi [1995] 2 HKC 357, a Labour Tribunal appeal, the court had to deal with a similar question in respect of various items of payment, amongst which was an "over limit bonus". The relevant part of the late Jerome Chan J's judgment (at pp. 364H-365F) is reproduced below:

"Over limit bonus

The bonus was provided in the 'Special terms' in the following terms:

OVBN is designed to encourage employees to work positively. Piece-rated calculation method is not adopted by the company. Therefore, even the employees fail to achieve the basic quota, the company will not deduct their wages. The company manufactures over tens of different products everyday. The quantity, style and difficulty of each product vary, so as the amount of bonus obtained by the employees everyday.

The learned presiding officer did not specifically consider this item of bonus in his written reasons. There is, therefore, no finding at all as to the scheme of operation of this bonus. There is, likewise, no finding as to the nature or effect of this bonus. There has not been any investigation carried out at the trial in respect of this claim.

The first issue to determine is the nature of this bonus. Was there any contractual right to the bonus? Or was it merely wholly gratuitous? The contract specified what the employer would not do, ie to deduct wages for failure to achieve the basic quota. It did not stipulate that an achievement of work over and above the basic quota would 'entitle' the employee to the bonus. The purpose was said to encourage positive working attitude. The difficulty of specifying a fixed formula or any uniform basic quota, due to varying style and difficulty or different products, was expressed. It appears that the working of the scheme was left very much to the unilateral decision of the employer. He could set however high a basic quota as he liked making payment of the bonus illusory. He could fix the rate of the bonus (which was not based on any piece-rated calculation) at whatever amount he liked. In short, even if there was a contractual obligation to pay the bonus, the employer could make payment of it wholly illusory and unattainable in reality. It, therefore, appears that it is unlikely there was ever any intention to bind the employer to an obligation to pay the bonus. It is more likely than not that it was a mere expression of an intention to give a bonus when the employer decided to make one, and in a manner and amount as he liked. It is, therefore, more probable than not that payment of the bonus was gratuitous."

24. In my judgment, the present case bears similarities to the over limit bonus in New Bright. The working of the commission system is left very much to the unilateral decision of the employer. The goods or types of goods that would attract payment of commission are determined by the employer. The amount of commission, or the method of calculating the amount, is also determined by the employer. Moreover, the employer can change all this at any time. If the goods are returned, or if the customer fails to honour his or her instalment payment commitment, the employer may decide whether to ask for refund of any commission already paid to the employee in question. Furthermore, if the employer decides for whatever reason to terminate the employee's contract, it need not pay the employee any commission that has been "earned" (used in a neutral sense here) but that has not been paid. In those circumstances, it is really up to the employer to decide how much commission it wishes to pay its employees. If it wanted to, it could render the whole system of commission payment illusory given its absolute control relating to what goods or what types of goods that would attract payment of commission and how much commission would be paid. I can easily think of examples in which the payment of commission may be rendered illusory in practice.

25. Of course, commercially speaking, the commission system makes goods sense, and is, no doubt, designed to benefit not only the employees but also the employer, in terms of promoting sales in general and promoting the sale of those goods that require promotion in particular. Payment of commission enhances to a great extent (particularly given the relatively small salary) the diligence or incentive of the employees in selling the goods of the Defendant. Likewise, commercially speaking, it may well not be sensible or wise to withhold payment of commission in case of termination (after all, according to clause 2, the employer may in its discretion decide to make payment of commission in case of termination). Morale of the staff would have to be taken into account. Speaking generally, there are obviously many commercial considerations here. But one must not mix up commercial considerations of this kind with contractual entitlement, nor should one confuse the expectation - no matter how reasonable or legitimate - of the employees with their contractual entitlement, if any. In my judgment, what is of importance here is the employer's right and discretion, not as a matter of commercial reality, but as a matter of law, regarding payment of commission.

26. In my judgment, based on the same reasoning that persuaded the court in respect of the over limit bonus in New Bright, the present commission payment arrangement is no more than a system at the discretion of the employer. As such, it does not fall within the statutory definition of "wages".

27. For these reasons, I am of the opinion that this appeal must be allowed.

28. Given my conclusion, I need not express any view on the further arguments of Mr Yuen to the effect that the commission has to be actually (but not merely notionally) earned, and his complaint regarding over-payments to the Claimant.

29. In conclusion, I make the following order:

(1) the appeal be allowed;

(2) the relevant part of the order of the Labour Tribunal that is under appeal be set aside;

(3) the Claimant's claim in respect of outstanding annual leave pay, holiday pay and sickness allowance be dismissed.

30. As regards costs, any claim for costs in respect of the proceedings in the Labour Tribunal should be dealt with by the Labour Tribunal upon application. As for the costs of this appeal, I make an order nisi that the Claimant pay to the Defendant the costs of this appeal, such costs to be taxed if not agreed. Unless either party applies to vary this costs order nisi within 14 days after this judgment is handed down, the same shall become absolute after the expiry of the 14-day period.

31. I also direct that this judgment be orally interpreted by the court interpreter to the Claimant when it is handed down. (If the time is not convenient to the Claimant, he should contact the Court Registry for the making of an alternative arrangement.)