CATHAY PACIFIC AIRWAYS LTD v. KWAN SIU WA BECKY AND OTHERS

FACV No.5 of 2012

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 5 OF 2012 (CIVIL)

(ON APPEAL FROM CACV NO. 92 OF 2010)

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Chief Justice Ma :

A    INTRODUCTION

1.  A number of aspects of employment law relating to holiday pay and annual leave pay fall to be determined in this appeal.  The ordinance which has to be considered is the Employment Ordinance Cap 57 (“the EO”) as it stood prior to the Employment (Amendment) Ordinance 2007.  The particular provisions are the former ss 41 and 41C.  In the determination of the issues in the appeal, it will also be necessary to clarify the decision of the Court in Lisbeth Enterprises Ltd v Mandy Luk (2006) 9 HKCFAR 131.  Clarification of this decision is required, particularly in the light of the way the courts below (and other courts) have treated it.

2.  The EO was amended in 2007 following the decision in Lisbeth. Although the statutory provisions relating to holiday pay and annual leave pay have been amended (the amended ss 41 and 41C do not fall to be considered in this appeal), the old provisions (which I shall simply refer to in the remainder of this judgment as ss 41 and 41C) continue to apply to contracts of employment made prior to the 2007 amendments.  In the appellant’s application for leave to appeal, it was contended that over 4,000 other employees of the appellant were employed on the same or similar terms as the respondents and therefore await the result of the present appeal.  It is said that the judgment of this Court will be determinative of those cases.  It was for these reasons that the Appeal Committee granted leave on 23 February 2012 on three questions which reflected (as the appellant contends) the errors made by the Court of Appeal.

3.  These three questions were as follows:-

“1. The Court of Appeal erred in holding:

(1) that Line Duty Allowance (“LDA”), Ground Duty Allowance (“GDA”) and Duty Free Sales Commission (“DFSC”) should be included in the calculation of statutory holiday pay and statutory annual leave pay (under, respectively, s.41 and s.41C of the Ordinance[1]);

(2) that, where the contracts of employment provide for periods of annual leave in excess of those prescribed by the Ordinance, in the absence of provision to the contrary, the parties must be taken to have intended that the statutory rate of annual leave pay (under s.41C of the Ordinance) would apply to the excess contractual annual leave period;

(3) that Jenny Ho had worked overtime and in remitting to the Labour Tribunal the question of whether she earned overtime pay in such sum as to fall within the second limb of the exception to s.2(2) of the Ordinance, for the purpose of computing her statutory holiday pay under s.41 of the Ordinance.

4.  As can be seen, the questions arise from the decision of  the Court of Appeal in their judgment dated 17 March 2011, on appeal from the decision of Stone J dated 6 November 2009 (who had in turn heard an appeal from the decision of the Labour Tribunal dated 12 January 2009).

5.  Before dealing with the relevant statutory provisions and facts in the present case, I can quickly dispose of the third question relating to overtime.  It would appear that the discussion on the aspect of overtime and the order to remit to the Labour Tribunal came from the Court of Appeal entirely of its own initiative.  The appellant has appealed that order and the respondents now support the appellant’s position (they had adopted a neutral position in their written Case).  No question of principle arising, I am content to allow the appeal on this aspect and set aside the order to remit the question of overtime to the Labour Tribunal.

B    THE RELEVANT STATUTORY PROVISIONS

6.  As stated above, we are concerned in the present appeal with the EO prior to the 2007 amendments, and specifically with those provisions relating to holiday pay and annual leave pay.  The references made in this judgment to provisions in the EO refer of course to the old EO.  There are similarities in the present (post-2007 amendments) version, but, as I have said earlier, the current statutory provisions do not fall to be considered in this appeal.

7.  Part VIII of the EO is headed “HOLIDAYS WITH PAY”.  Section 39 sets out the 12 statutory holidays (such the Lunar New Year Holidays etc) to which every employee is entitled.  Section 40 provides that an employee who has been employed under a continuous contract of three months prior to a statutory holiday, will be entitled to holiday pay for that holiday.  The rate of holiday pay is dealt with s 41, this being one of the two provisions engaged in the present appeal:-

41    Rate of holiday pay

“(1) Holiday pay shall be a sum equivalent to the wages which the employee would have earned on a full working day. (Amended 41 of 1990 s.18)

(2)  Notwithstanding subsection (1), where an employee is employed on piece rates or where the daily wages of an employee vary from day to day, the holiday pay shall be a sum equivalent to the average daily wage earned by the employee, and for the purposes of this subsection the average daily wage shall be the average of the daily wages earned by the employee on each day on which he worked during every complete wage period, comprising not less than 28 days and not more than 31 days, immediately preceding or expiring on the holiday or first day of the holidays.”

8.  Part VIIIA of the EO deals with “ANNUAL LEAVE WITH PAY”.  Annual leave is the leave which an employee is entitled beyond the statutory holidays, rest days and maternity leave.  Section 41AA provides that, just as in the case of statutory holidays under s 41, an employee (who has been employed under a continuous contract of not less than 12 months) should be entitled to be paid for each day of annual leave. A formula is provide in s 41AA setting out the number of days of paid leave to which an employee is entitled, ranging between seven and fourteen days, dependent on the number of years of service.  I would observe here that the EO sets out the minimum period of annual leave pay to which an employee is entitled.  Individual employers may (and often do) allow more annual leave, as the appellant has done in relation to the respondent, but employers cannot go below the statutory minimum.

9.  Section 41C provides for the rate of annual leave pay (this is the other provision directly engaged in the present appeal):-

41C    Rate of annual leave pay

“(1) Annual leave pay shall, subject to subsection (2), be a sum equivalent to the wages which the employee would have earned if he had worked every day during the period of annual leave.

(2)  Where an employee is employed on piece rates or where the wages of an employee vary from day to day, the annual leave pay shall be calculated by reference to the average daily wage earned by the employee, and for the purposes of this subsection the average daily wage shall be the average of the daily wages earned by the employee on each day on which he worked during every complete wage period, comprising not less than 28 days and not more than 31 days, immediately preceding or expiring on the first day of the annual leave or on the day on which the contract of employment terminates, as the case may be.”

10.  Sections 41 and 41C are virtually identical in wording.  Both sections will have to be analyzed in due course.  For the time being, I draw attention only to the definition of “wages”.  This is to be found in the definition section of the Ordinance: s 2.  Section 2(1) defines wages in the following way:-

“(1) In this Ordinance, unless the context otherwise requires -

….

“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-

(a) the value of any accommodation, education, food, fuel, light, medical care or water provided by the employer;

(b) any contribution paid by the employer on his own account to any retirement scheme;

(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)

(ca) any attendance allowance or attendance bonus which is of a gratuitous nature or which is payable only at the discretion of the employer;

(cb) any travelling allowance which is of a non-recurrent nature;

(cc) any travelling allowance payable to the employee to defray actual expenses incurred by him by the nature of his employment

(cd) the value of any travelling concession;

(d) any sum payable to the employee to defray special expenses incurred by him by the nature of his employment;

(da) any end of year payment, or any proportion thereof, which is payable under PartIIA;

(e) any gratuity payable on completion or termination of a contract of employment; or

(f) any annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer;”

It is a definition in very wide terms, restricted only by the situations enumerated in sub-paras (a) to (f) thereof.

11.  For the purposes of ss 41 and 41C, wages should be given their statutory meaning.  In Lisbeth, this Court also considered these same provisions.  Nothing in the judgment of the Court in that case suggests that the reference to wages in these sections would in any way exclude the statutory definition.  I shall return to that decision presently.  I must first deal with the facts of the present case germane to the two questions and the relevant statutory provisions.

C    THE RELEVANT FACTS RELATING TO THE QUESTIONS

12.  The appellant is Cathay Pacific Airways Ltd (“Cathay”).    The three respondents were at all material times employees of Cathay.  Where convenient to do so in this judgment, I shall refer to them as Ms Kwan (Kwan Siu Wa Becky), Ms Wu (Wu Yee Mei Vera) and Ms Ho (Ho Kit Man Jenny).  The respondents were apparently chosen as being representatives of particular classes of Cathay employees.  Ms Kwan joined Cathay in 1975 first as a Junior Flight Hostess.  She was promoted to Chief Purser on 1987 (later this title was renamed Inflight Services Manager).  Ms Wu joined in 1995 as a Cabin Attendant and was promoted to the position of Purser in 2000.  Ms Ho joined in 2005 as a Flight Attendant of the Inflight Services Department.

13.  Each of the respondents is paid a basic salary under her contract with Cathay.  The terms of the individual contracts for the respondents vary but have this feature in common: apart from the basic salary, provision is made for the payment of various allowances, bonuses and benefits.

14.  The first question on which leave to appeal was given relates to Line Duty Allowance (“LDA”), Ground Duty Allowance (“GDA”) and Duty Free Sales Commission (“DFSC”).  These allowances and commission are contractual.  The appellant’s written Case describes them in the following way:-

“24. LDA is essentially an allowance paid to cabin attendants for time spent while on flying duties. Time begins to run when the cabin crew reports for flying duty and finishes when the engine is turned off at the end of the final sector flown. LDA varies based on the flight that the cabin crew is rostered to operate and the length of time spent on the flight. LDA is calculated down to the minute. No two flights produce the same amount of LDA.

25. GDA is essentially an allowance paid to cabin attendants for time spent on the ground preparing to fly (such time being calculated from the time when the cabin attendants are required to report for duty until the time when the aircraft commences to move under its own power) and time spent on the ground immediately after landing. GDA is also calculated down to the minute.

26. DFSC is a commission paid to the cabin attendant based on the inflight duty free sales she has achieved.  DFSC is earned at a rate of 3.5% of each sale made. The commission is paid at the end of the month following the sale.  The commission is discounted by any late payment of bar cash, discrepancies, lost credit card payments etc.  There is also a system of incentives in the form of awards, an award being given to the top team with the best inflight sales performance and individuals receiving awards for top performance.  The awards are earned on a quarterly basis and made or paid 3 months after the end of each quarter.”

15.  LDA is relevant only to Ms Kwan and Ms Wu.  GDA and DFSC apply only to Ms Ho.

16.  Under the first question, a consideration of LDA, GDA and DFSC is relevant to the calculation of both statutory holiday pay (under s 41) and statutory annual leave pay (under s 41C).  Can they be taken into account?  The appellant says no, the respondents contend that they should be taken into account in the computation of statutory holiday pay and statutory annual leave pay.

17.  In relation to the second question, the particular feature common to all three respondents is that under their contracts of employment with the appellant, each respondent was entitled to more annual leave days than the statutory minimum.  Ms Kwan and Ms Wu were entitled to five weeks’ paid annual leave, Ms Ho to three weeks.

18.  The issue under the second question boils down to this: while the rate of annual leave pay applicable to the statutory period of annual leave (that is, the minimum period of annual leave required under s 41AA) will be governed by s 41C, what rate will govern the excess period (the amount of annual leave given by the employer beyond the statutory minimum)?  The appellant submits that in relation to the excess, the rate of pay should be referable to the basic salary.  The respondents contend that the rate of pay applicable to the excess is the same as for the statutory period of annual leave (because, if they are right in their submission under the first question that LDA, GDA and DFSC should be taken into account, this would entitle them to a larger amount of annual leave pay).

19.  A consideration of the second question will involve looking into the contracts of employment between the parties; the applicable rate of pay for annual leave in respect of this excess period will be determined according to the contract between the parties and not by reference to any statutory provisions.  The respondents contended that as a matter of contract, they ought to be paid at the same rate as that prescribed by s 41C.  On the other hand, the appellant submits that regarding Ms Kwan and Ms Wu, the effect of their contracts would impliedly suggest that they ought to be paid only at the basic salary rate for the excess period.  In relation to Ms Ho, the appellant submits that under her contract of employment, express provision has already been made for payment of her annual leave so that she is not entitled to the paid anything more for the excess period.  In relation to all three respondents, the appellant of course accepts that it will have to make payment in relation to the statutory period of leave according to ss 41 and 41C.

D    DETERMINATION OF THE FIRST QUESTION: RATE OF HOLIDAY PAY AND ANNUAL PAY UNDER THE EO

20.  Before applying ss 41 and 41C of the EO to the facts in the present case, I think it important first to set out the effect and meaning of these provisions (which, as observed earlier, are virtually identical and can therefore for present purposes be considered together):-

(1)  As a general approach to statutory interpretation, particularly where a piece of legislation deals with a subject matter which most people would expect to be dealt with in a common sense and purposive manner (and I would put holiday pay and annual leave pay in this category), the Court should aim to arrive at an interpretation that, as far as the wording of the legislative provision in question will allow, will accord with such common sense and which can be easily applied.  I mentioned this approach at the outset because I believe (as shown by the various judgments in the courts below and in other decisions), there has been some misunderstanding of the Lisbeth decision of this Court.

(2)  The objective of ss 41 and 41C is obviously to ensure that an employee will be paid for every statutory holiday or of annual leave, to which he or she is entitled.  As to the precise amount the employee is entitled to receive, the answer lies in ss 41(1) and 41C(1): for every statutory holiday or day of annual leave,  the pay should be an amount which the employee would have earned on a full working day (s 41(1) refers to “full working day” whereas s 41C(1) states “if he had worked every day”, but there is no material difference here).  This is of course to be taken as a notional working day because the employee of course does not actually work on the particularly day in question (whether it is a statutory holiday or a day out of the employee’s annual leave).

(3)  Where an employee merely earns a monthly salary without any additional allowances or other items which can make up an employee’s earnings (which is the most common situation), the calculation of this notional working day is straightforward.  As Mr Mark Strachan (for the appellant) stated (and this was not disputed by Mr Martin Lee SC for the respondents), one would simply take the annual salary of the employee and divide by 365 to arrive at the daily rate for the purposes of ss 41(1) and 41C(1).  This method (by reference to 365 days) is sensible as it avoids the complications arising from months in the year having different days (I leave aside any complications arising from leap years).  Weekends, statutory holidays and other leave days are included.  There is no reason to exclude such days from the calculation because employees on a monthly or annual salary are paid for such days even if they do not work on the particular day.  This is to be contrasted with the position of, say, most casual workers: these types of workers are generally engaged (and paid) on the days they actually work.

(4)  However, where an employee is employed on piece rates (this is not relevant in the present appeal) or where the daily wages of an employee vary from day to day, the calculation of the notional working day will involve more than just a straightforward division of the employee’s basic salary.  There are many situations in which an employee’s salary may vary from day to day.  For example, an employee may earn commissions over and above his or her basic salary or the employee may earn bonuses or tips: all such items (which can be included as part of an employee’s wage: see the definition of “wages” in s 2(1) of the EO (para 10 above)) will often mean that the wages of an employee may vary from day to day.  How then in such situations, is the notional working day under s 41(1) and 41C(1) to be ascertained?

(5)  The answer lies in ss 41(2) and 41C(2).  As those subsections make clear, the wage that an employee would have earned on the notional full working day is arrived at by taking an average of the daily wages earned by the employee “on each day on which he worked during every wage period.”  The term “wage period” refers to that period comprising not less than 28 days and not more than 31 days immediate preceding or expiring on the relevant holiday or first day of the holidays (in relation to s 41), or immediately preceding or expiring of the first day of the annual day (where annual leave pay is concerned.  I ignore in this context the reference to the position where a contract of employment terminates.  The reference to 28 days and 31 days is clearly a reference to the different number of days in different months.

(6)  The term “on each day on which he worked during every wage period” means, in the case of a monthly employment, each day of the relevant wage period; as we have seen in the case of an employee who is simply paid a basic monthly salary, an employee is paid for each day of the period, notwithstanding that he or she may not actually be working on certain days (for example during weekends or during statutory holidays).  It would be odd indeed, not least from a common sense point of view, if, in the case of a monthly employment, it were to be thought that an employee would only be paid for those days he or she actually worked in the month.  Employees engaged on monthly basis (which all three respondents were) are generally to be treated as being paid for each day of that month.

(7)  A simple example may help in the understanding of how ss 41and 41C, operate in practice.  Take an employee, ‘X’ I shall call this person, who earns $30,000 a month as a basic salary.  X works five days a week.  X also earns commission on top of his basic salary but the amounts so earned vary from day to day.  What would be his statutory holiday entitlement for July 2 this year (the day after HKSAR Establishment Day)? Section 41(2) is applicable in view of the fact that his daily wages vary.  The wage period (from June 1 (midnight) – July 1, the day preceding July 2 holiday) is 30 days.  As we have seen, A’s basic monthly wage is $30,000, but he also earned, say, $15,000 as commission over that period.  The calculation of his statutory holiday pay (for July 2) is accordingly $45,000 ÷ 30 = $1,500.  If on the other hand, X earned no commission but merely the basic monthly salary of $30,000, his entitlement would be: $360,000 (his annual salary) ÷ 365 = $986.

(8)  I should also add this.  The above analysis of ss 41 and 41C, is I believe consistent with common sense, taking into account for the purposes of computing a daily wage all amounts which properly come within the statutory definition of wages in s 2(1) of the EO.  Nothing in ss 41 or 41C suggests any other approach.

21.  Applying this analysis of ss 41 and 41C to the facts of the present case, I am of the view that LDA, GDA and DFSC clearly fall to be taken into account in the calculation of statutory holiday pay and statutory annual leave pay:-

(1)  The nature of these allowances and commission (see para 14 above) is such that they fall within the definition of “wages” in s 2(1) of the EO.  The statutory definition of “wages” is, as we have seen, in wide terms and, in its express reference to allowances and commission, will cover LDA, GDA and DFSC.  Mr Strachan accepted that LDA, GDA and DFSC came within the definition of “wages” under the EO, but advanced a number of submissions to which I shall have to return.

(2)  As LDA, GDA and DFSC by their nature were not amounts of money that were earned by the respondents on every working day, it follows from this that the respondents’ daily wages varied from day to day.  This was common ground.  Sections 41(2) and 41C(2) are therefore applicable.

(3)  Under these provisions, the applicable rate of holiday pay or annual leave pay (as the case may be) would consist of the average daily wage calculated using the formula set out in these provisions.  In the case of the respondents, this would involve taking the basic monthly salary of each respondent, adding to this salary any applicable DFA, GDA and DFSC and then arriving at the average daily wage by dividing these sums by the number of days in the relevant wage period.

22.  Mr Strachan raised 4 arguments to suggest that LDA, GDA and DFSC should not be taken into account in the computation of holiday pay and annual leave pay.  As I understood them : -

(1)  First, as a matter of construction, ss 41 and 41C could only be read as applying to basic salary and could not cover additional payments such as LDA, GDA or DFSC.  Reliance was placed on that part of  the judgment in Lisbeth where it was said (in para 23 at 142A-B) in the context of ss 41(2) and 41C(2) that “the term ‘daily wages’ applies only to wages in the sense of salary”.

(2)  Secondly, LDA, GDA and DFSC lacked what Mr Strachan referred to as the “requisite quality of dailiness”, meaning that the “average daily wage” referred to ss 41(2) and 41C(2) could only refer to wages that “accrued and are calculated on a daily basis”.  None of the two allowances nor DFSC had this quality as they did not accrue nor were they calculated on a daily basis.  Reliance was again placed on the judgment in Lisbeth where at para 24 (at 142B-D), it was said:-

“24. What then would supply the requisite quality of dailiness? Wages may not have to be paid on a daily basis before they can be regarded as “daily wages”. But I do not see how wages can be so regarded unless they at least accrue and are calculated on a daily basis. Subject therefore to the possibility that ss.41(2) and 41C(2) can be read to cover contractual commission accruing and calculated on a daily basis in amounts varying from day to day, those subsections do not cater for commission. It follows that holiday pay and annual leave pay form a context which requires that the word “wages” be read as excluding commission save possibly for commission accruing and calculated on a daily basis in amounts varying from day-to-day.”

(3)  The third point was that nothing in the two sections permitted a situation in which both a basic salary and additional payments such as LDA, GDA or DFSC could be taken into account.  This was essentially the same point as the first argument, but the particular submission here proceeded on the assumption that ss 41(1) and s 41C(1) operated separately and alternatively to ss 41(2) and 41C(2).  According to Mr Strachan, sub-section (1) applied to the situation where there was a basic salary without any additional payments; here, the basic annual salary could simply be divided by 365.  Subsection (2) could not apply to cover situations where payments such as LDA, GDA and DFSC existed, because if it did, an approach inconsistent with that adopted for sub-section (1) situation would be created, in that the relevant sums would be calculated by reference, not to 365 days (which would cover days in which the employee did not work such as weekends etc) but only the days that the employee actually worked.  The point was presumably that in order to achieve consistency, only a basic salary could be taken into account under ss 41 and 41C.

(4)  Finally, calculating holiday pay or annual leave pay by reference to LDA, GDA and DFSC was unworkable.  This argument proceeded on the assumption that it was very difficult, if not impossible, to know which days the respondents could be said to have been working for the purposes of ss 41(2) and 41C(2).  Paras 63 and 64 of the appellant’s written Case puts it in the following way:-

“63. LDA, GDA and DFSC are not earned every day in any particular wage period. So should the whole month immediately preceding the holiday/the first day of annual leave be counted as working days for the Respondents? Or should only those days on which the Respondents were required to perform duties (in air and on ground) be counted as working days? Should only those days on which Becky Kwan and Vera Wu are required to perform air duties (but not on the ground) be counted as their working days (as LDA is payable for time in the air)? Should only those days on which Jenny Ho is required to perform duties on the ground (but not in the air) be counted as her working days (as GDA is payable for time on the ground preparing to fly etc)? Similar questions arise from the fact that DFSC, also, is earned only spasmodically.

64. Similarly it is unclear whether the days on which the Respondents were scheduled for “stop over in outports” or “standby duties” should be counted as working days.”

23.  In my view, none of these arguments can be supported.

24.  For the argument set out in para 22(1) above, it simply ignores that plain words contained in the definition of “wages” in s 2(1) of the EO.  Wages can encompass much more than just the basic salary.  The sentence relied on by the appellant from the judgment in Lisbeth (at para 23) is not authority for the proposition advanced.

25.  As for the argument in para 22(2) above, this requires a little more discussion of the Lisbeth decision.  The particular paragraph in the judgment (para 24) relied upon by Mr Strachan, cannot, in my view, be taken in isolation.  I cannot for one moment believe that sight had been lost either of the wide meaning of “wages” in s 2(1) of the EO, or, more important, of the precise wording of ss 41(2) and 41C(2) and their effect.  As analyzed above, the purpose of these subsections is to enable the wages that an employee would have earned on the notional working day to be computed, and the way the computation is made is through the averaging exercise set out in those provisions.  There is no question (much less any necessity) to require in addition, on a daily basis, what wages or items which go towards such wages (such as commission or allowances) actually accrued or whether a calculation could be made.  As mentioned above, the exercise is an averaging exercise taking into account all the wages earned by the employee during the relevant wage period.  The exercise simply does not require any inquiry to what happened on a daily basis.

26.  For my part, I do not think it is either helpful or desirable to introduce the term “dailiness” into ss 41 and 41C.  Of critical importance in my view is the need to look at the actual wording of these provisions and discover their true intent and effect (as I have attempted to do in para 20 above).  With respect, this was all I think was intended to be said in para 24 of the Lisbeth.   However, insofar as it may be thought that the said passage did introduce an additional requirement of accrual and calculability on a daily basis (the element of “dailiness”), I would take this opportunity to say that such a view is wrong.  In my judgment, from now, one ought to discard the use of the term “dailiness” altogether.

27.  I have earlier mentioned the reliance placed on the Lisbeth decision  by the courts below.  It is clear that the courts regarded the dailiness factor as an additional requirement of ss 41(2) and 41C(2): see for example the judgment of Stone J at paras 63 and 64; the judgment of the Court of Appeal at paras 17 to 24 and 71. Other cases have similarly applied the dailiness factor.  See for example the decision of the Court of Appeal in Lam Pik Shan v Hong Kong Wing On Travel Service Ltd [2008] 3 HKC 578.  As I have observed in the previous paragraph, it is wrong to regard Lisbeth as being authority for the proposition that there is this additional requirement of dailiness.

28.  The third argument (in para 22(3) above) proceeds on the wrong assumption ss41(1) and 41C(1) involve alternative and different situations to that covered by ss 41(2) and 41C(2).  Quite the contrary.  Both ss(1) and (2) must be read together in the way described in para 20 above.  No inconsistency in approach is involved in the way that the provisions should be construed together.  Whether the applicable wages comprise only a basic salary or where there are additional payments to be considered as well, there is simply no real difficulty in applying ss 41 and 41C in the way set out in para 20 above.

29.  As for the fourth point (para 22(4) above, once the meaning of “on each day on which he worked” in ss 41(2) and 41C(2) is properly understood (see para 20(6) above), the difficulties highlighted by the appellant disappear.

30.  It is clear that the courts below had difficulties in dealing with this Court’s judgment in Lisbeth.  The key, in my view, is really to bear in mind at all times the true meaning and effect of the relevant statutory provisions.  Lisbeth, on its facts, involved the question of commission earned by an employee: in that case, the commission earned by a beauty consultant at a health and beauty club for selling beauty products to customers.  On the facts of the case, it would appear that the commission payable to the employee was changeable by the employer without notice (see para 4 of the judgment at 135D) and that commission simply could not be calculated for the purposes of ss 41 and 41C (hence the emphasis on unworkability in the judgment).  I am inclined to treat the decision of Lisbeth as a case decided really on its own particular facts.  It is certainly not an authority for the proposition that commission, even if calculated on a monthly basis, is excluded from the definition of “wages” for the purposes of ss 41 and 41C.  Such a conclusion would be contrary to the definition of “wages” in the Ordinance.

31.  Additionally, I would like to draw attention to the passage in the judgment in Lisbeth in which there is some discussion about the qualifying phrase at the beginning of the definition section of the EO (s 2(1)) “unless the context otherwise requires (see paras 16-18 of the judgment).  I have already briefly mentioned this aspect in para 11 above.  The conclusion in Lisbeth appears to be that the commission in that case did not come within the statutory definition of “wages” by reason of this qualifying phrase.  I take this opportunity to stress that, in my view, these qualifying words in s 2(1) can only refer to the context of the Ordinance itself; in other words, the definitions contained in the definition section will apply to the other provisions in the Ordinance unless in the context of the Ordinance itself, a different meaning should be given.  It should not be thought that these qualifying words, which are common in most definition provisions in a statute, are of any application outside the confines of the relevant statute.  Of course, provisions in a statute may or may not be applicable to any given set of facts, but this is simply construing the effect of the relevant statutory provision and then applying it.  A definition provision may itself have to be construed, and where, a set of facts do not come within a statutory definition, this will be a consequence of construing the definition clause rather than because of the qualifying words “unless the context otherwise requires.”

32.  In Lisbeth, this Court held that the commission earned by the beauty consultant did not come within the definition of “wages” in s 2(1) of the EO.  This was because, as I have said earlier in para 30 above, the commission simply could not be calculated and such commission was in any event under the contract of employment in that case changeable by the employer without notice.  This may have added to the difficulties in calculating commission and may well even have taken the commission outside the definition of “wages” in s 2(1) (any commission that is of a gratuitous nature or which is payable only at the discretion of the employer is excluded from the definition of wages; see para (c) to the statutory definition: para 10 above).  In other words, on analysis, the payments received by the beauty consultant were not the type of commission that constituted wages at all or even if they did, they could not be calculated.

33.  The first question falls to be answered in the following way: LDA, GDA and DFSC are to be included for the purposes of calculating statutory holiday pay and statutory annual leave pay under ss 41and 41C of the EO.

E       DETERMINATION OF THE SECOND QUESTION: THE EXCESS PERIOD OF ANNUAL LEAVE

34.  As observed above, the determination of this question which relates to what I have called the excess period (that is, the period of annual leave beyond the statutory leave period), is wholly dependent on the true construction of the relevant contracts of employment between the appellant on the one hand and the respondents on the other.

35.  In relation to Ms Kwan and Ms Wu, the determination of the second question can be disposed of shortly.  Both Ms Kwan and Ms Wu’s contracts provide for an entitlement to annual leave and that such leave should be “paid leave” : see cl 16(A) of the Cathay’s Conditions of Service (1986 version) in the case of Ms Kwan, cl 12(A) of Cathay’s Conditions of Service (1993 version) in the case of Ms Wu.  Nothing in these contracts makes a distinction between statutory leave and excess, much less a distinction in the rate of payment for such leave and any excess period of leave.  The contractual intention can therefore be assumed to favour the same rate of pay irrespective of whether such relates to the statutory annual leave or to the contractual annual leave.

36.  Mr Strachan submitted that the contracts of employment (of Ms Kwan and Ms Wu) impliedly provided that there should be different computations of leave pay as between statutory leave and the excess period.  We were not taken to any provision in the contracts that remotely suggested this result; as shown above, quite the contrary. Additionally, reliance was placed on concepts such as the parties having contracted on the basis of the law as it previously stood and estoppel by convention.  It is sufficient to say that they were not sustainable arguments and in fairness, not really pursued before us.

37.  Accordingly, for Ms Kwan and Ms Wu, they are entitled to be paid for the excess period at the same rate of annual leave pay under s 41C of the EO.  

38.  Different considerations, however, apply to Ms Ho.  In her case, it was submitted by Mr Strachan that she was in any event not entitled to any annual leave pay by reason of the fact that she had already been paid under her contract of employment in relation to such leave.

39.  Here, it becomes necessary to examine the terms of her employment with the appellant.  The applicable conditions of service in her case are the 2003 version.  Under these Conditions:-

(1)  Ms Ho’s salary was calculated by reference to what was called the Minimum Guaranteed Flying Pay (“MGFP”) (cl 3.1), which, according to the Notes to the Conditions meant 70 “block hours” a month.

(2)  The term “block hours” in the contract comprised not only the hours of actual working time but also so-called credits.  Such credits included the time used, for example, attending training courses or the time taken up by various duties (these were called work credits).  Other credits included leave credits and, in the context of the present case, they are important:  these are the credits given in respect of items such as annual leave.

(3)  Credits, whether work credits or leave credits, are converted into block hours.  Crucially, in the case of Ms Ho, each day of annual leave equated to 3.25 block hours (under para 2 of the Notes to the Conditions, this conversion to block hours was directly referable to “Paid annual leave”).

(4)  We are told that Ms Ho was in fact paid for the 70 hours MGFP irrespective whether or not she actually worked or earned any credits.

40.  From this analysis of her contract of employment, it can readily be seen that Ms Ho would effectively have been paid for each day of her annual leave (in the form of leave credits, at 3.25 block hours a day).  And the evidence before us does show that she has actually been credited in this way for her annual leave.  Accordingly, I agree with Mr Strachan when he submits that, in relation to the excess period, Ms Ho cannot be entitled, as a matter of contract, to any further payments.  Mr Lee was unable to counter this argument except to say that double-recovery by Ms Ho of annual leave pay in respect of the excess period, was somehow acceptable.  I cannot agree with this submission.

41.  Accordingly, for Ms Ho, I am of the view that she is not entitled to be paid any annual leave pay in respect of the excess period.

F    CONCLUSION

42.  To summarise, the three questions should be answered in the following way:

(1)  Question 1: LDA, GDA and DFSC should be included for the purposes of calculating statutory holiday pay and statutory annual leave pay under ss 41 and 41C of the EO.

(2)  Question 2:-

(a) The respondents, Ms Kwan and Ms Wu, are entitled to be paid for the excess contractual annual leave period at the same rate of annual leave pay under ss 41C of the EO.

(b) The respondent, Ms Ho, is not entitled to be paid any annual leave paid in respect of the excess period.

(3)  Question 3: the order of the Court of Appeal remitting the question of overtime (in the case of Ms Ho) should be set aside.

43.  Accordingly, the appellant’s appeal should be allowed in part.  As to costs, these should be dealt with by way of written submissions, as to which the parties should seek the directions of the Registrar.

Mr Justice Bokhary PJ and Mr Justice Chan PJ:

44.   This appeal between an airline and three cabin crew members in its employ raises a number of points of employment law.  It affects the position of the airline and all its cabin crew members like these three.  Cathay Pacific Airways Ltd (“Cathay”) is the appellant airline.  The respondent cabin crew members are: Ms Becky Kwan, an Inflight Service Manager; Ms Vera Wu, a Purser; and Ms Jenny Ho, a Flight Attendant. They each brought a claim against Cathay in the Labour Tribunal.  Those claims were heard together.  On 12 January 2009 the Labour Tribunal (Pang Ka Kwong, Esq) gave its decision on liability.  That decision generated an appeal to the High Court by Cathay and cross-appeals to that court by Ms Kwan, Ms Wu and Ms Ho.  On 6 November 2009 the High Court (Stone J) allowed the appeal and dismissed the cross-appeals.  Ms Kwan, Ms Wu and Ms Ho then appealed to the Court of Appeal against the whole of the High Court’s decision.  On 17 March 2011 the Court of Appeal (Tang Ag CJHC and Le Pichon and Cheung JJA) reversed Stone J’s decision in so far as he had allowed Cathay’s appeal and affirmed his decision in so far as he had dismissed Ms Kwan, Ms Wu and Ms Ho’s cross-appeals.

Leave to appeal on three questions

45.   Leave to appeal to this Court was granted on three questions.  Each involves the Employment Ordinance, Cap. 57, as it stood prior to the amendments made by the Employment (Amendment) Ordinance 2007.  All the references in this judgment to sections will be to those of the Employment Ordinance prior to those amendments. 

46.   Those amendments were passed after this Court’s decision in Lisbeth Enterprises Ltd v. Mandy Luk (2006) 9 HKCFAR 131.  Having regard to the reliance placed on that case by Mr Mark Strachan for Cathay in the present appeal, it is necessary to state the pivotal point in that case.  And it is convenient to do so at once.  Among the words defined by s.2, the interpretation clause, is the word “wages”.  But, as is common with interpretation clauses, the section makes the meanings which it provides subject to what the context might otherwise require.  The commission in the Lisbeth Enterprises Ltd case was of a special nature.  So much so that including it in the calculation of statutory holiday pay or statutory annual leave pay would be unworkable.  So the context required that wages do not include commission of that nature when it comes to such calculation.  That is the point on which the Lisbeth Enterprises case turned.

47.   The first of the three questions on which leave to appeal was granted concerns two types of allowance and one type of commission paid by Cathay to its cabin crew members.  Should such allowances and commission be included when calculating statutory holiday pay due under s.41 and statutory annual leave pay due under s.41C?  The two types of allowance concerned are Line Duty Allowance (“LDA”) and Ground Duty Allowance (“GDA”).  As for the type of commission concerned, it is Duty Free Sales Commission (“DFSC”).  The nature of LDA, GDA and DFSC may be taken from paras 24-26 of Cathay’s printed case which read:

“24. LDA is essentially an allowance paid to cabin attendants for time spent while on flying duties. Time begins to run when the cabin crew reports for flying duty and finishes when the engine is turned off at the end of the final sector flown. LDA varies based on the flight that the cabin crew is rostered to operate and the length of time spent on the flight. LDA is calculated down to the minute. No two flights produce the same amount of LDA.

25. GDA is essentially an allowance paid to cabin attendants for time spent on the ground preparing to fly (such time being calculated from the time when the cabin attendants are required to report for duty until the time when the aircraft commences to move under its own power) and time spent on the ground immediately after landing. GDA is also calculated down to the minute.

26.  DFSC is a commission paid to the cabin attendant based on the inflight duty free sales she has achieved. DFSC is earned at a rate of 3.5% of each sale made. The commission is paid at the end of the month following the sale. The commission is discounted by any late payment of bar cash, discrepancies, lost credit card payments etc.  There is also a system of incentives in the form of awards, an award being given to the top team with the best inflight sales performance and individuals receiving awards for top performance. The awards are earned on a quarterly basis and made or paid 3 months after the end of each quarter.”

48.   Cathay had not included LDA, GDA and DFSC when calculating statutory holiday pay and statutory annual leave pay.  Nor had Cathay included the type of allowance called Outport Allowance (“OA”) which is paid as a pre-estimate of the costs of meals and services at layover ports.  Ms Kwan and Ms Wu who receive LDA and OA contended that LDA and OA should be included when calculating statutory holiday pay and statutory annual leave pay.  As for Ms Ho, she receives GDA, DFSC and OA.  And she contended that GDA, DFSC and OA should be so included.   Cathay contended that LDA, GDA, DFSC and OA should all be excluded.

49.   The Labour Tribunal held that LDA, GDA and DFSC should be included but that OA should be excluded. Cathay appealed to the High Court against the inclusion of LDA, GDA and DFSC. Ms Kwan, Ms Wu and Ms Ho cross-appealed against the exclusion of OA.  Both courts below held that OA should not be included.  And there is no appeal to this Court against such exclusion.  As far as LDA, GDA and DFSC are concerned, Stone J held that they should be excluded but the Court of Appeal held that they should be included.  Cathay appeals to this Court against such inclusion. Hence the first question, namely whether LDA, GDA and DFSC should be included.

50.   We turn now to state the second question on which leave to appeal to this Court was granted to Cathay. It is whether, where contracts of employment between Cathay and employees like Ms Kwan, Ms Wu and Ms Ho provide for periods of annual leave pay in excess of those prescribed by the Employment Ordinance, the parties must be taken to have intended that the statutory rate of annual leave under s 41C would apply to such excess periods.

51.   Ms Kwan, Ms Wu and Ms Ho contend, as they have throughout, that the statutory rate applies to excess periods while Cathay contends, as it has throughout, that the statutory rate does not apply to excess periods.  The Labour Tribunal held that the statutory rate applies.  Mr Justice Stone held that it does not.  The Court of Appeal held that it does.  Hence the second question, namely whether the statutory rate applies to excess periods.

52.   We now turn to state the third question on which leave to appeal to this Court was granted to Cathay. It is whether the Court of Appeal was right in finding that Ms Ho might have worked overtime and right in remitting to the Labour Tribunal the question of whether she had earned overtime pay in such sum as to fall within the second limb of the exception to s.2(2) for the purpose of computing her statutory holiday pay under s.41.

53.   This question arises in the following way.  Unlike Ms Kwan and Ms Wu who contend that they have not received all the statutory holiday pay due to them, Ms Ho contends that she has not received any statutory holiday pay at all.  She says that this is so because she was employed on an hourly basis and that hourly cabin crew members were not paid for days without duties which coincided with statutory holidays. Cathay, on the other hand, contends that Ms Ho has received her statutory holiday pay.  It says that this is so because she was employed on a monthly basis and her pay for any statutory holiday falling within any given month was therefore included in her salary for that month.

54.   The Labour Tribunal held that Ms Ho was employed on an hourly basis and has not received any statutory holiday pay at all.  Mr Justice Stone held that Ms Ho was employed on a monthly basis and that it is therefore incorrect to say that she has not received any statutory holiday pay at all.  The Court of Appeal shared Stone J’s view that Ms Ho was employed on a monthly basis and that it is incorrect to say that she has not received any statutory holiday pay at all.  Ms Ho does not appeal against that part of the Court of Appeal’s decision.  The third question arose because the Court of Appeal went on to find that she might have worked overtime, and they remitted to the Labour Tribunal the question of whether she had earned overtime pay in such sum as to fall within the second limb of the exception to s.2(2) for the purpose of computing her statutory holiday pay under the second limb of the exception to s.2(2).  Hence the third question, namely whether the Court of Appeal was right in so finding and ordering such remitter.

Complaint under the third question withdrawn

55.   No one had asked the Court of Appeal to order that or any other remitter.  Nothing had been said about a remitter during the hearing in the Court of Appeal.  It was ordered on the Court of Appeal’s own initiative.  In their printed case, Ms Kwan, Ms Wu and Ms Ho said that they adopted a neutral stance on the third question.  Just before the luncheon adjournment and before Mr Strachan addressed this Court on the third question, Mr Martin Lee SC for Ms Kwan, Ms Wu and Ms Ho was invited to take instructions on whether they wished to join Cathay in seeking the setting aside of the remitter.  At the commencement of the afternoon session, Mr Lee said that his clients joined Cathay in seeking a setting-aside of the remitter.  Having regard to how the remitter came to be ordered, the appropriate course is to set it aside as both sides ask.

Answer to the first question

56.   In submitting that LDA, GDA and DFSC are not to be included in the calculation of statutory holiday pay under s.41 or annual leave pay under s 41C, Mr Strachan puts forward three points.

57.   His first point, which appears to be his main point, runs as follows. The first subsections of s 41 and s 41C (s 41(1) and s 41C(1)) deal with one type of employee, namely, an employee who receives the same salary for each working day.  Such as an employee who is paid a monthly salary.  This, he says, is not the case here. The second subsections of s 41 and s 41C (s 41(2) and s 41C(2)) deal with a different type of employee, namely, an employee whose wages vary from day to day. However, he argues that these subsections are not apt to cover – and are not intended to cover – the situation of a basic salary plus allowances or other payments, as is the case here. If it were otherwise, there would be no need for the first subsections since s 41(2) and s 41C(2) can cater for the situation of a basic salary as well as the situation of a basic salary plus allowances or other payments. This, he submits, would also create an inconsistency in the amount of basic salary per day under the two sets of subsections since the calculation under the first subsections is based on what an employee would have earned whereas the calculation under the second subsections are based on the number of days on which the employee had actually worked.

58.   Mr Strachan’s second and third points can be dealt with together. He submits that LDA, GDA and DFSC are not earned every day in any particular wage period and that this makes calculating statutory holiday pay and annual leave pay by reference to these allowances and this commission unworkable. In the calculation of the average daily wage, he asks rhetorically: should one take into account any part or the whole of a day on which the employee had worked or the whole of the immediately preceding month or only the days on which these allowances and commission were earned?  He also argues that they cannot be characterized as “daily wages” because, he contends, they lack the requisite quality of dailiness.

59.   We reject these submissions.

60.   Section 39 confers on all employees an entitlement to statutory holidays.  And s 40 provides that employees who have worked under a continuous contract (as defined in the Ordinance) for three months are entitled to holiday pay.  Employees who have been employed under a continuous contract for not less than 12 months are, by virtue of s 41AA, entitled to paid annual leave according to their length of service.  And s 41 and s 41C specify respectively the rate of statutory holiday pay and the rate of annual leave pay to which the employee is entitled.  The intention of the legislation is clearly to enable an employee who has completed the length of service required by s 39 and s 41AA to enjoy statutory holidays and annual leave without any financial detriment.

61.   Both under s 41(1) and under s 41C(1), an employee’s entitlement is to a sum equivalent to what she would have earned if she had worked.  In the case of a statutory holiday that equates to the wages of a full working day.  And in the case of annual leave that equates to the wages for the annual leave period.  These subsections usually apply to the situation where for example the employee is paid a monthly salary or a fixed or constant remuneration.

62.   In the case of an employee who is employed on piece rates or whose daily wages vary from day to day, there would be days on which she may not be provided with any work and hence will not be paid any wages at all.  There would also be days on which she is paid more than what she is paid on other days. In such a case, she falls within s 41(2) and s 41C(2) which provide as follows.  The statutory holiday pay and the annual leave pay to which the employee is entitled shall be a sum which is to be calculated by reference to what she had earned in the immediately preceding period of 28 to 31 days (which is basically the previous month).  And it is to be a sum equivalent to the average daily wage earned by such employee on each day on which she had worked during that period.

63.   There are thus two questions for consideration in the application of s 41(2) and s 41C(2): first, whether the employee’s daily wages vary from day to day and if so, second, what are her statutory holiday pay and annual leave pay entitlements? It is only when it can be shown that the employee falls within s 41(2) and s 41C(2) (i.e. after the first question is answered in the affirmative) that it is necessary to adopt the method of calculation to ascertain her entitlements under those provisions.

64.   Reference to “daily wages” is made in s 41(2) and 41C(2) because we are concerned with the entitlement for each statutory holiday or each day during the annual leave period. However, these subsections do not require that the employee is paid a daily wage or that she works every day to come within the ambit of these provisions. Nor is there a requirement in the statute that there must be a “requisite quality of dailiness” in her wages or that they must “accrue and is calculated on a daily basis”. In so far as Lisbeth Enterprsies Ltd decided that there was such a requirement, this was done in the peculiar context of considering whether the commission in that case fell within these subsections. Such a general requirement is not supported by the wording of these provisions. What is required in order to invoke s 41(2) and s 41C(2) is that the employee’s daily wages vary from day to day and this usually happens where for example her wages consist of several components, some fixed and some varying from day to day (as in the present case). It is clear that s 41(2) or s 41C(2) are intended to apply to employees earning variable wages or a basic salary (a fixed component) coupled with other allowances or other payments (a variable component).

65.   When considering whether an employee’s wages vary from day to day and if so, what are her entitlements under s 41(2) and s 41C(2), it may be relevant to examine whether a particular allowance or payment can be regarded as part of her wages. In such examination, it is necessary to take into account the meaning of “wages” as defined in s 2 and the circumstances of the case, including the terms of her contract of employment.

66.   Subject to the context otherwise requiring, the word “wages” is very widely defined for the purposes of the Employment Ordinance.  It is defined to include various types of allowance and commission and to exclude those items specified in (a) to (f) in that definition, which is to be found in s 2(1).  In the case of a basic salary coupled with variable allowances or other payments, deciding whether such allowances or payments are part of the wages involves considering: the nature of the allowances or payments in question; how they are earned; and how they are calculated and paid.

67.   We reject the suggestion that applying the method of calculation specified in s 41(2) and s 41C(2) in the case of a basic salary coupled with variable allowances or other payments is unworkable or would create an inconsistency. This method involves an investigation of what actually happened in the immediately preceding month, and that is easily ascertainable as a matter of fact. Essentially, applying s 41(2) involves taking the aggregate of the employee’s basic salary together with any allowance or payment which is included as part of her wages, and arriving at the average wage for each day. An employee who is paid a basic salary plus an allowance or other payment which can properly be included as her wages is on average obviously earning more a day than if she is paid only a basic salary.

68.   The dispute in the present case is whether LDA, GDA and DFSC can be regarded as part of the wages of a crew member for the purpose of calculating her statutory holiday pay and annual leave pay. If these allowances and this commission are included, there is little doubt that her wages vary from day to day and that her entitlements for statutory holiday pay and annual leave pay fall to be calculated according to the specified statutory formula in s 41(2) and s 41C(2).  We also see no difficulty in the method of calculation specified in s 41(2) and s 41C(2) for these allowances or this commission.       

69.   According to the terms of the relevant contracts of employment, LDA and GDA are earned whenever a cabin crew member is required to perform the relevant duties, and they are calculated down to the minute. That these allowances may be earned over a period of more than one day does not alter the fact that they are earned by a cabin crew member during the performance of her or his duties. They clearly qualify for inclusion as part of her or his wages for the purpose of statutory holiday pay and annual leave pay.

70.   DFSC is earned whenever the cabin crew member performs flight duty and is assigned to conduct the sale of duty free items.  The amount of commission (i.e. 3.5% of the total sale) can be calculated easily. Just because payment is made at the end of the following month and the exact amount may be subject to some slight adjustments upon the occurrence of some specific events, that does not affect her or his entitlement. This commission is clearly intended to form part of the wages of a cabin crew member who performs such duty. 

71.   The answer to the first question is that LDA, GDA and DFSC should be included when calculating statutory holiday pay under s 41 and annual leave pay under s 41C.

Answer to the second question

72.   In the absence of any term providing for some other rate, the parties obviously ought to be taken to have intended that the statutory rate of annual leave pay under s 41C (“the statutory rate”) would apply to any period of annual leave pay in excess of those prescribed by the Employment Ordinance (“excess periods”).  Mr Strachan submitted that there is an implied term to that effect in Ms Kwan and Ms Wu’s contracts and an express term to that effect in Ms Ho’s contract.

73.   We see no such implied term in Ms Kwan and Ms Wu’s contracts.

74.   Mr Strachan’s argument that there is such an express term in Ms Ho’s contract, which argument we accept, runs thus.  Ms Ho’s monthly salary is calculated by reference to the number of hours which she has flown (“Block Hours”) together with the credits, being work credits and leave credits, which she has earned.   Those credits, per calendar day, are assigned a particular number of Block Hours in the amounts set out in for contract.  This is a Minimum Guaranteed Flying Pay (“MGFP”) which is equivalent to 70 Block Hours per month.  Ms Ho would receive the MGFP even in a month in which she has neither flown nor earned any credit.  However, if the total value of Block Hours together with the credits in the relevant month exceeds the MGFP, she receives a salary calculated by reference to the actual Block Hours and credits earned in that month.  Leave credits in respect of paid annual leave per calendar day are granted at the rate of 3.25 Block Hours. Over the course of a year, therefore, Ms Ho is credited with 21 x 3.25 x the hourly rate in respect of her annual leave, in recognition of the fact that during her 21 days of annual leave, which include both statutory and contractual annual leave, she will be unable to perform flight duties.  So, in the foregoing way, Ms Ho’s contract expressly provides a contractual rate for excess periods which contractual rate is different from the statutory rate.

75.   The answer to the second question is that the statutory rate applies to excess periods under contracts like Ms Kwan and Ms Wu’s but not to excess periods under contracts like Ms Ho’s.

Conclusion

76.   For the foregoing reasons, this appeal is allowed to the limited extent of (i) holding that the statutory rate does not apply to excess periods under contracts like Ms Ho’s and (ii) setting aside the remitter.  The appeal is otherwise dismissed.  Unless agreed, costs here and below will be dealt with on written submissions in respect of which the parties should seek procedural directions from the Registrar.

Mr Justice Ribeiro PJ:

77.   I respectfully agree with the judgment of the Chief Justice which I have had the benefit of reading in draft.  This is a case which has caused me some concern since consideration of the first question upon which leave to appeal was granted has compelled re-examination of the reasoning in Lisbeth Enterprises v Mandy Luk,[2] a unanimous decision of the Court to which I was party.  I shall confine my judgment to a discussion of that question which is formulated as follows:

“Whether Line Duty Allowance (‘LDA’), Ground Duty Allowance (‘GDA’) and Duty Free Sales Commission (‘DFSC’) should be included in the calculation of statutory holiday pay (under s 41 of the Ordinance[3]) and statutory annual leave pay (under s 41C of the Ordinance).”

A.    The relevant payments

78.   The material facts and the course of the proceedings below have been set out in the judgment of the Chief Justice, and it is unnecessary for me to repeat them. The precise terms on which each of the respondents was employed are not material for present purposes.   It is sufficient to note that the present discussion concerns employees who received a combination of a fixed salary and title allowance each month and who were additionally paid varying sums representing the two allowances and the commission mentioned. 

79.   The allowances and commission are described in the appellant’s printed case as follows:

“24. LDA is essentially an allowance paid to cabin attendants for time spent while on flying duties. Time begins to run when the cabin crew reports for flying duty and finishes when the engine is turned off at the end of the final sector flown. LDA varies based on the flight that the cabin crew is rostered to operate and the length of time spent on the flight. LDA is calculated down to the minute. No two flights produce the same amount of LDA.

25. GDA is essentially an allowance paid to cabin attendants for time spent on the ground preparing to fly (such time being calculated from the time when the cabin attendants are required to report for duty until the time when the aircraft commences to move under its own power) and time spent on the ground immediately after landing. GDA is also calculated down to the minute.

26.       DFSC is a commission paid to the cabin attendant based on the inflight duty free sales she has achieved.  DFSC is earned at a rate of 3.5% of each sale made. The commission is paid at the end of the month following the sale.  The commission is discounted by any late payment of bar cash, discrepancies, lost credit card payments etc.  There is also a system of incentives in the form of awards, an award being given to the top team with the best inflight sales performance and individuals receiving awards for top performance.  The awards are earned on a quarterly basis and made or paid 3 months after the end of each quarter.”

80.   The question is whether sections 41 and 41C require such allowances and commission to be taken into account when calculating the employees’ entitlement to holiday and annual leave pay.

B.    The provisions of the Ordinance

81.   Employers are obliged to grant employees statutory holidays on each of the 12 days listed in section 39. By section 40, employers are obliged to pay them holiday pay. The rate of such payment is provided for by section 41 as follows:

“(1) Holiday pay shall be a sum equivalent to the wages which the employee would have earned on a full working day.

(2)  Notwithstanding subsection (1), where an employee is employed on piece rates or where the daily wages of an employee vary from day to day, the holiday pay shall be a sum equivalent to the average daily wage earned by the employee, and for the purposes of this subsection the average daily wage shall be the average of the daily wages earned by the employee on each day on which he worked during every complete wage period, comprising not less than 28 days and not more than 31 days, immediately preceding or expiring on the holiday or first day of the holidays.”

82.   The entitlement to paid annual leave is conferred by section 41AA. The right is to have between seven and 14 days annual leave, depending on length of service.  The rate of annual leave pay is laid down by section 41C which is similar to section 41 and provides as follows:

“(1) Annual leave pay shall, subject to subsection (2), be a sum equivalent to the wages which the employee would have earned if he had worked every day during the period of annual leave.

  (2) Where an employee is employed on piece rates or where the wages of an employee vary from day to day, the annual leave pay shall be calculated by reference to the average daily wage earned by the employee, and for the purposes of this subsection the average daily wage shall be the average of the daily wages earned by the employee on each day on which he worked during every complete wage period, comprising not less than 28 days and not more than 31 days, immediately preceding or expiring on the first day of the annual leave or on the day on which the contract of employment terminates, as the case may be.”

83.   The definition of “wages” in section 2 is important and relevantly runs as follows:

“‘wages’ – 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 [11 defined categories of payments].”

84.   Before examining those sections in more detail, their purpose should be addressed.  They are provisions for determining how much an employee is entitled to be paid when enjoying a statutory holiday or a period of annual leave.  Since, as we have seen, holiday and annual leave entitlements are measured in individual days – 12 statutory holidays and the number of annual leave days linked to length of service – the Ordinance provides for the amount of pay they should receive on each such day.  It requires the employee to be paid the sum he or she would notionally have earned as wages for each such day off.

85.   Since very few employees actually work on daily contracts (that is contracts whose individual duration is a single day, with payment of wages at the end of each day) a mechanism is needed for working out the equivalent of one day's pay, however the employee’s wages might actually be calculated and paid.  Sections 41 and 41C provide that mechanism.  They implicitly recognise that employees work under a whole range of differently structured employment contracts, ranging, for example, from monthly contracts on fixed salaries, through to piecework or commission-based contracts with variable remuneration. It is with these purposes in mind that the two provisions must be construed.

C.    The appellant’s principal argument

86.   Mr Mark Strachan, appearing for the appellant, contended that LDA, GDA and DFSC fall outside sections 41 and 41C.  He submitted first, that on its true construction, subsection (1) in each of those sections caters only for employees with a fixed remuneration and therefore applies to cases where there is little difficulty calculating holiday or annual leave pay for each day off in a “sum equivalent to the wages which the employee would have earned on a full working day”.  With respect, I agree.  That was recognized in paragraph 23 of Lisbeth (set out below) which focussed on the word “would” used in sections 41(1) and 41C(1).  In my view, the same conclusion is arrived at when one reads the first and second subsections together.  Subsection (2) caters for employees whose remuneration varies from time to time.

87.   The issue is whether the respondents come within subsection (2) in each of sections 41 and 41C.  Mr Strachan’s argument that they do not rests fundamentally on the proposition, derived from Lisbeth, that such wages can only come within those subsections if the allowances and commission “at least accrue or are calculated on a daily basis”.  The relevant paragraphs in Lisbeth run as follows:

“23. Plainly no mode of calculating holiday pay or annual leave pay based on commission is to be found in sections 41(1) or 41C(1). Those subsections are directed to what the employee “would” have earned. But commission involves what the employee might have earned, depending on whether the contractual requirements for entitlement to commission are satisfied. To the extent that provision is made for holiday pay and annual leave pay based on what the employee might have earned, that is done by sections 41(2) and 41C(2) which cater for piece rates and daily wages that vary from day to day. “Piece rates” have nothing to do with commission. What about “daily wages”? Perhaps the term “daily wages” applies only to wages in the sense of salary. But let us suppose for the sake of the present argument that the term extends to commission.

24. What then would supply the requisite quality of dailiness? Wages may not have to be paid on a daily basis before they can be regarded as “daily wages”. But I do not see how wages can be so regarded unless they at least accrue and are calculated on a daily basis. Subject therefore to the possibility that sections 41(2) and 41C(2) can be read to cover contractual commission accruing and calculated on a daily basis in amounts varying from day to day, those subsections do not cater for commission. It follows that holiday pay and annual leave pay form a context which requires that the word “wages” be read as excluding commission save possibly for commission accruing and calculated on a daily basis in amounts varying from day to day.

25. It is unnecessary to express any view in relation to that possible exception.  It is irrelevant to the present case since Ms Luk’s commission accrued and was calculated on a monthly basis.  Her commission was payable according to fluctuating monthly results and on a sliding scale which moved up and down with such results.  So her commission simply could not accrue or be calculated until the end of the month arrived and that month’s results were known.”

88.   Applying those paragraphs, Stone J decided in favour of the appellant at first instance.[4] His Lordship held that the employees failed on this point because “...the term ‘daily wages’ ... connotes a form of employment patently different from monthly wages”.[5]  He held that, “In no sense do Ms Kwan and Ms Wu earn ‘daily wages’ properly so-called ...”[6] and concluded:

“... just as the CFA held in Lisbeth Enterprises, op cit., that commission accruing and calculated on a monthly basis did not fall to be included in the calculation of statutory holiday pay and annual leave pay, so in the present instance neither LDA nor GDA fall to be included on the ground that neither can be said to accrue on a daily basis.”[7]

89.   Stone J’s judgment and Mr Strachan’s argument depend crucially on interpreting sections 41(2) and 41C(2) as laying down as an essential condition for their application, the requirement that the parties must have entered into contracts which stipulate that “wages”, in whatever form, “accrue or are calculated on a daily basis”.  Paragraph 24 of Lisbeth set out above, may reasonably be thought to support that approach.  That, in my view, is the problematical point in this appeal. 

D.    The provisions construed

D.1   The problem

90.   The construction adopted by the Court in Lisbeth (to which of course, I subscribed) results in sections 41(2) and 41C(2) being given a very narrow ambit.  Ms Luk’s commission was excluded on the basis that it did not accrue and was not calculated on a daily basis.  Instead, it:

“... was payable according to fluctuating monthly results and on a sliding scale which moved up and down with such results. So her commission simply could not accrue or be calculated until the end of the month arrived and that month’s results were known.”[8]

91.   As already mentioned, only very few people actually contract to be employed on terms that their remuneration (whether salary, allowances or commission, etc) accrues and is calculated on a daily basis.  It is much more common – if only for administrative convenience – for calculations to be made on a monthly or other periodic basis, taking fluctuations into account.

92.   That the sections should be given a very narrow ambit may well be thought to be inconsistent with the policy of the Ordinance.  It treats all forms of remuneration, including allowances and commissions, “however designated or calculated”, as falling within its definition of “wages” in section 2.   Yet on the construction adopted in Lisbeth and now advanced by the appellant, LDA, GDA and DFSC are to be excluded because they are not designated as “daily” and not calculated on a daily basis. 

93.   Moreover, sections 39 and 40 of the Ordinance provide for every employee to be granted statutory holidays and for employees to receive statutory holiday pay if they have worked under a continuous contract for at least 3 months.   The Ordinance then specifies that holiday pay is to be paid “at the rate specified in section 41”.[9] The rate of payment is obviously of central importance to the statutory scheme providing for paid statutory holidays and there is no indication that section 41 is intended to apply only to a small segment of the employee population.  If those who fall foul of the “accrued or calculated on a daily basis” requirement are excluded from section 41, one is left with a large legislative gap.  How does one determine how much such excluded employees should be paid on each statutory holiday to which they are entitled?  It is hard to accept that such a gap was intended.   The legislative intent cannot be to leave this to the parties’ express agreement.  Statutory employment protections are needed precisely because employment relationships are often ill-defined.

94.   The same points apply to annual leave pay.  Section 41AA confers on employees the right to paid annual leave and section 41C quantifies such pay. If many employees are excluded from section 41C(2) by a narrow interpretation of its ambit, a gap appears in the legislative scheme as to how annual leave pay for such excluded employees is to be calculated.

95.   In Lisbeth, it was held that the commission in that case did not come within the statutory definition of “wages” was excluded because the context indicated otherwise.  On this point, I respectfully agree with the Chief Justice’s analysis of the difficulties which undermine that conclusion.

D.2   The true construction of sections 41 and 41C

96.   I have come to the conclusion that on their true interpretation, the relevant sections are not confined by a requirement that the wages must have “accrued or be calculated on a daily basis”.  In my view, the two sections should not be understood to be laying down as conditions of their application, specific requirements regarding the actual terms of the employment contract entered into between employer and employee.  Both subsections (1) and (2) of each of sections 41 and 41C, are instead concerned with laying down a mechanism for ascertaining the notional equivalent of a daily wage for the purposes of establishing holiday and annual leave pay, whatever may be the actual terms and structure of the parties’ contract.  The statutory mechanism imports (as paragraph 21 of Lisbeth recognizes) an element of deeming so as to arrive at the equivalent of a daily wage, involving a process of averaging in cases where the remuneration is variable. 

97.   Thus, when dealing with employees whose salary is fixed and regular, section 41(1) prescribes that the entitlement on each statutory holiday is to payment of “a sum equivalent to the wages which the employee would have earned on a full working day”.  It is a notional sum since the employee does not in fact work on the statutory holiday, but one looks to see what he would have earned if he had worked.  His entitlement is not to payment of a contractually specified amount, but to the equivalent of a day’s wages which he would haveearned on the notional hypothesis.  The ascertainment process involves dividing the annualised fixed salary by 365 days (for the reasons given by the Chief Justice) and treating the deemeddaily wage as the employee’s holiday pay entitlement.

98.   As previously noted, section 41(2) caters for employees whose salary is not fixed, but which may vary.  The respondents, in my view, come within this subsection.  Their remuneration has two elements, a fixed monthly salary and title allowance on the one hand, and variable allowances and commissions on the other.  These must be taken in combination since they are both components of the respondents’ “wages” under section 2 of the Ordinance.  When taken together, they constitute sums of wages which vary from time to time because of the variable element consisting of the allowances and commission. 

99.   In providing that “where the daily wages of an employee vary from day to day, the holiday pay shall be a sum equivalent to the average daily wage earned by the employee”, section 41(2) is mandating the same approach as that discussed above in relation to section 41(1).  Mr Strachan, in my view correctly, accepted that the two expressions “full working day” in section 41(1) and “each day on which he worked” in section 41(2) have the same meaning.  Accordingly, where a variable element is introduced into an employee’s remuneration package, section 41(2) provides the mechanism for ascertaining his holiday pay entitlement by ascertaining the equivalentof what he notionally would have earned as an average day’s wages.   This requires one to take the total of the fixed and variable elements applicable to the wage period in question and dividing that total figure by the number of days in that wage period (as envisaged in subsection (2)), deemingthe resultant sum the equivalent of the average daily wagewhich the employee would have earned and thus his or her daily holiday pay entitlement. 

100. The same applies mutatis mutandis to sections 41C(1) and 41C(2).  Section 41C(1) deems the annual leave pay entitlement to be “a sum equivalent to the wages which the employee would have earned if he had worked every day during the period of annual leave” and operates in the same way as section 41(1).  Section 41C(2) deals with employees with variable remuneration (“where the wages of an employee vary from day to day”) and requires their annual leave pay entitlement to be calculated “by reference to the average daily wage” based on prior completed wage periods.

101. Adopting this construction, the fact that the respondents’ actual employment arrangements did not provide for their allowances and commission to accrue and be calculated on a daily basis does not exclude such payments from being taken into account.  Their total wages, comprising both fixed and variable elements taken from the prior completed wage period, can simply be added together and divided by the number of days of the wage period to obtain what is deemed to be an average daily wage, to serve as the measure of holiday pay and annual leave pay.

102. It has to be accepted that the reasoning in Lisbeth poses problems and may not be consistent with the abovementioned approach.  It was held in Lisbeth that the facts of that case made calculation unworkable, although the basis of such unworkablility now appears somewhat obscure.  Lisbeth, in my view, must to be confined to its own special facts and I would adopt the construction discussed above as the true construction of sections 41 and 41C.

Lord Neuberger of Abbotsbury NPJ:

103. In common with the other members of the Court, I agree that the three questions raised on this appeal (as set out in paragraph 3 of the Chief Justice’s judgment) should be disposed of in accordance with the order proposed in paragraph 42 of the judgment of the Chief Justice.  I also agree with para 43.

104. As to the first question, which raises the most difficult point in the appeal, I consider that Line Duty Allowance, Ground Duty Allowance and Duty Free Sales Commission should all be included when calculating pay under sections 41 and 41C of the Employment Ordinance Cap 57, for the reasons given by the Chief Justice in paras 20 – 33 above, and by Ribeiro PJ in paras 90 – 102 above.

105. Cathay’s appeal on the second question should, in my view, be dismissed in relation to Ms Kwan and Ms Wu, and allowed in relation to Ms Ho, for the reasons given by the Chief Justice in paragraphs 34 – 41 of his judgment, and, as I do not understand Bokhary and Chan PJJ to be giving different reasons, for the reasons set out in paras 72 – 75 above.

106. Cathay’s appeal on the third of the questions raised should, in my opinion, be allowed for the reasons given by the Chief Justice in paragraph 5 above, and for the reasons given by Bokhary and Chan PJJ in paragraph 55 above.

107. No further comments are called from me in relation to the latter two questions.

108. I think that any difficulties in answering the first of the questions, primarily arise from two factors. The first is the decision and reasoning of this Court in Lisbeth Enterprises Ltd v Mandy Luk (2006) 9 HKCFAR 131. The second factor which gives rise to difficulties is the meaning of “full working day” and “every day during the period of annual leave” in, respectively, sections 41(1) and 41C(1), coupled with “each day on which he worked” in sections 41(2) and 41C(2) (and I shall refer to these four phrases as “the phrases”).

109. So far as the decision in Lisbeth is concerned, I am content for present purposes to say, in common with all other members of the Court, that it was decided on its own special facts, and cannot be taken as laying down any principle of general application in relation to the interpretation of any of the statutory provisions under scrutiny on this appeal. I would not want to be thereby understood as suggesting that Lisbeth was rightly decided; that is not a point which properly falls for decision on this appeal, as it was not ventilated before us, and it does not need to be resolved for the purpose of disposing of this appeal. However, as at present advised, not least in the light of what is said by the Chief Justice in paras 24 – 27 and 30 – 32 above, and by Ribeiro PJ in paragraphs 90 – 95 and 102 above (with all of which I agree), I am by no means convinced that Lisbeth was rightly decided.

110. I would like to say a little more about the second factor, namely the effect of the phrases in a case such as this (where the employees are employed effectively on a full-time basis, as opposed to a piece-work basis), because I have found it a particularly difficult topic, on which my views have fluctuated.

111. Although sections 41(1) and 41C(1) employ different phrases, namely “full working day” and “every day during the period of annual leave”  respectively, it seems to me that they must have the same meaning. It would be inconsistent in principle and capricious in practice if it were otherwise, given that the two subsections have essentially the same aim. For similar reasons, the phrase used in subsection (2) of each section, “each day on which he worked”, should have the same meaning as the phrase used in subsection (1) of each section (and the fact that the same expression is used in subsection (2) of section 41 and section 41C therefore confirms the view that the phrases used in subsection (1) of the two sections should be given the same meaning).

112. On the face of it, the meaning and effect of these phrases seem to be innocuously clear, until one starts to consider just how they are to be applied in practice. Even in a simple case where the issue arises in the case of an employee who works full-time for an employer, as in this case, the expression “full working day” appears to present a problem. In a case where such an employee regularly works five (or six) days a week, does one assume that she works 365 days a year or 261 - or 313 - days a year (or around 30 days, or around 22 - or 26 - days a month), and does one reduce that number of days to allow for holidays and annual leave? The question is crucial, because the employee’s annual (or monthly) pay is fixed, and number of “full working days” is crucial for the purposes of calculating the sum payable under section 41(1).

113. In most, or at any rate many, such cases, the issue will be academic, as the employee will be paid under a contract which fixes a fixed monthly rate or annual rate of pay, and specifies the number of days holiday and leave to which the employee is entitled. In such a case, the employee’s rights under section 41(1) are already catered for in her employment contract, and there is no need to consider precisely how section 41(1) works or means. In such a case, the employee is treated as if she was, in effect paid a fixed amount each day of work, holiday or leave.

114. However, the sort of question which I have identified would arise in a case where the employee was paid at a daily rate, on the days when she actually works. In such a case, I agree with the view, as expressed by the Chief Justice and Ribeiro PJ, namely that, in a case such as the present, where the employee is a full time employee of the employer, she is to be treated on the basis that every day is a “full working day”.

115. At first sight, that seems unfair and inconsistent. Take an employee who works five days a week and is paid $1,000 each day she works. At first sight, one would expect her to be paid $1,000 for a day’s holiday or leave to which section 41 or 41C applies. However, that would only be the outcome if the employee’s “full working day” was confined to weekdays. For this simple reason, it initially appeared to me that “full working day” should not be taken as applying to weekends in the example just given.

116. However, further consideration has convinced me that, in such a case, the employee should be treated on the basis that every day is a “full working day”.

117. First, it would be inconsistent if an employee employed full-time on a five-day week basis, at monthly wage of $20,000 per month (assuming, to keep it simple, a non-leap year February) should have her pay under sections 41(1) and 41C(1) calculated on a different basis from an employee employed on effectively identical terms except that her pay was at the rate of $1,000 per day.

118. Secondly, where an employee works a three-day week (or even a two-day week) but is nonetheless employed full-time in practice (e.g. because the nature of her work means that when she is working she must put in 15  hours a day), it would seem inconsistent if her pay under sections 41(1) and 41C(1) was based on what she earned on the three (or, a fortiori, the two) days on which she worked. It would be far more logical to treat such an employee as entitled to pay under those sections in the same sort of amounts as if she worked for the more normal five days, rather than the more intensive three (or two) days, a week.

119. Thirdly, as the Chief Justice has emphasized, the application of sections 41 and 41C should, if possible, involve a clear and simple exercise. The more consistently those sections are applied, the more likely employers and employees will know where they stand, and the less room there is for manipulation of the terms of employment contracts to minimize or maximize the benefits to be enjoyed under the two sections.

120. Fourthly, there is a logical problem in treating only every weekday as a “full working day” in the case of an employee who works every weekday. Such an employee is entitled to holidays and leave days, so those days should not, on the basis of this assumption, be “full working day[s]”. Thus, if one is going to limit the phrase to days when the employee is bound to be at work, it would produce a result which would involve a degree of circularity, and which would not be easy to calculate. It might also be a disincentive to employers to grant longer holidays and more leave days to employees, as the more such days were granted the fewer the “full working days”, and therefore the greater the pay per working day, which would result in an increased amount payable under the two sections.

121. Fifthly, in the normal holiday case, where an employee takes a week or two weeks off in one tranche, there would be no difference in outcome under the two sections between treating every day as a “full working day” and an approach which would limits the expression to weekdays.

122. Sixthly, the meaning is the one supported by counsel for the appellant in this case, and it was not challenged by counsel for the respondents.

Chief Justice Ma:

123. In the result, the three questions for determination in this appeal should be answered as set out in para 42 above.  Costs are to be dealt with as indicated in para 43 above.