LI SHUK MAN v. HO WAI LING REBECCA t/a WINDSOR SAUNA

HCA 5446/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5446 OF 1996

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JUDGMENT ON LIABILITY

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Introduction

1. Shortly after the commencement of the trial of this action, and assisted by lawyers for the legally represented Plaintiffs as well as lawyers for the Defendant, 31 unrepresented Plaintiffs were able to reach settlement agreements with the Defendant. As a result, only the claims of P1, P18, P26 and P33 (who are represented by Mr Chan) and P19 (who acts in person) need to be determined by the Court.

2. Although P19 acts in person, Mr Chan for the legally-aided Plaintiffs has kindly indicated that he would try his best to take care of her interest in this action. P19 apparently was satisfied with this indication, she took little part in the trial and in fact did not turn up during the last day of the trial to make her final submissions. As a result, I only heard the final submissions of Mr Chan and Mr Grossman for the Defendant. As the paragraphs below will show, the interests of the legally represented Plaintiffs appear to coincide with those of P19. Further, as it turned out in the course of the trial, I consider that P19's interests have been more than adequately taken care of by Mr Chan.

3. I am also very much assisted by the good sense and diligence of lawyers for the parties in being able to:-

(a) narrow down the main issues of this case to 2 (relating to liability only);

(b) agree on the quantum of the sums which may be awarded upon Judgment on liability being pronounced.

4. The relevant facts can be summarized as follows. The Defendant used to run a sauna establishment in the name of "Windsor Sauna" and the Plaintiffs were her former employees, working as masseurs to provide massage services to the patrons. The Plaintiffs were dismissed by the Defendant and lodged claims with the Labour Tribunal in 1995. Their claims, which include wages in lieu of notice, severance payment and annual leave pay, were transferred to the High Court by the Tribunal in 1996.

5. As stated above, consequent upon an agreement reached between the parties, it is unnecessary to deal with the quantum of award as only 2 main issues (on liability) remain, namely:-

(1) whether the summary dismissal of P1 was justified according to s. 9 of the Employment Ordinance, Cap. 57;

(2) whether the tips paid by patrons of the sauna establishment to the Plaintiffs should be part of their wages in the calculation of the Plaintiff's claims.

6. In order to determine these issues, it is necessary to resolve the legal and factual issues raised by the parties in the course of the trial. Assessment of the credibility of the witnesses will be dealt with in more detail under separate headings for the said 2 issues. Although the witnesses' credibility is dealt with under separate headings, it does not mean that consideration has not been given to their testimony from an overall point of view.

Issue (1): Was P1's Summary Dismissal Justified?

7. It is undisputed that P1 has been working as a masseur for the Defendant before she was summarily dismissed on 17 November 1995. The issue between the parties is whether she was summarily dismissed pursuant to s. 9 of the Employment Ordinance, Cap. 57.

8. The first dispute between the parties over this issue is who has the burden of proof. Mr Grossman argues that the burden is on P1, not only to prove that she has been summarily dismissed, but also to prove that the summary dismissal was wrongful. He relies on the following cases in support of this argument:-

(a) To Kin Wah v. Shui Hing Co. Ltd [1985] 1 H.K.C. 239;

(b) Pao Yee Wah v. Chung Wai Stationary Factory, L.T.A. 45/85, unrep.;

(c) So Ching t/a South Sea Co. v. Kwan Hang Ching [1987] 2 H.K.C. 297.

9. Mr Chan contends, however, that it is up to the Defendant to prove that the summary dismissal was justifiable. Although he did not refer to any particular decision, Mr Chan said that this point was decided differently in a number of cases subsequent to those relied on by Mr Grossman.

10. For the following reasons, I disagree with Mr Grossman's argument that an employee who has been summarily dismissed must prove not only that he was dismissed but also he was dismissed wrongfully.

11. The first reason is this. It is a general rule that "the burden of proof lies upon the party who substantially asserts the affirmative of the issue": see Phipson on Evidence (2000) 15th Ed., para. 4-03. However, if the employee has to establish that he "was dismissed wrongfully", he has to prove that he has committed no (or no repudiatory) breach; that is, proving a negative. I do not see any good reason why in employment cases, the general rule should be departed from to put such burden on the employee because:-

"This rule is adopted principally because it is but just that he who invokes the aid of the law should be the first to prove his case; and partly because, in the nature of things, a negative is more difficult to establish than an affirmative": Phipson, para. 4-03.

When an employer faces a claim from an employee who asserts he has been dismissed without notice or payment in lieu, it is only fair that the employee should prove those allegations. If, however, the employer wants to invoke the aid of, for example, s. 9 of Cap. 57 in defence, there is no valid reason why the general rule should not apply to put the burden on him to establish the defence.

12. The second reason is this. In at least the following 3 cases, the courts have concluded that the burden is on the employer to prove that the dismissal was justified:-

(a) Chow Koon Sing v. Fan Kok Choy, L.T.A. No. 26 of 1989;

(b) Chong Hau Sai v. Mok Kuen Shing, L.T.A. No. 75 of 1995;

(c) London Transport Executive v. Clarke [1981] I.C.R. 355.

13. In Chow Koon Sing, Deputy Judge Findlay (as he then was) observed that he did not think it was at all clear the onus is on the employee to prove that he was not dismissed for cause and further, in his view, this position would be contrary to common sense and principle and would require clear words in a statute to displace common sense and principle: see p. 4 of the transcript.

14. In Chong Hau Sai, Le Pichon J found that where an employer accused an employee of having been dismissed for theft, the burden was on the employer (though on a civil standard of proof) to prove that accusation.

15. In London Transport Executive, the English Court of Appeal dealt with the burden of proving "fair dismissal" in the context of s. 57(3) of the Employment Protection (Consolidation) Act 1978. The majority of the court concluded that contracts of employment are not an exception to the general rule that a repudiated contract is not terminated unless and until the repudiation is accepted by the innocent party (see p. 368B-F, per Templeman, LJ), the only exception being an employer giving notice of dismissal whether in accordance with the contract terms or in breach of them (see p. 373D-F, per Dunn, LJ). Such being the case, an employer who alleges he was entitled to accept the repudiation must satisfy the court he acted reasonably in doing so. I consider that the same reasoning applies to a dismissal claim at common law (and one under Cap. 57).

16. It was probably because of the above 2 reasons that P1 (as the employee) has made the plea at para. 12 of the Re-Amended Statement of Claim herein. As one expects to see in an employee's pleadings, this paragraph avers that the employer has breached the contract by dismissing her summarily. On the other hand, para. 8 of the Defence herein sets out the alleged repudiatory conduct on P1's part.

17. As stated above, there is no dispute in this action P1 was summarily dismissed. Having decided that the burden is on the Defendant to prove the dismissal was justified, I turn now to consider the parties' respective case relating to this issue.

18. The facts relied upon by the Defendant to defend the Plaintiffs' claims have been set out in a number of paragraphs in the Defence dated 30 November 1996. At para. 5(a) thereof, it was averred that 3 other masseurs breached their employment contracts by being habitually late for, or absent from, work from about July to September 1995. At para. 5(c) thereof, it was alleged that the Plaintiffs (presumably including P1) participated in a strike and did not work in mid-October 1995. At para. 8(a) thereof, P1 was said to have been sick on 16 November 1995 but she returned to work. Despite the Defendant's request to see her and to explain why P1 returned to work, P1 ignored the request and left after she had served a patron. On 17 November 1995, P1 refused to admit that she was wrong or to sign a warning letter (relating to her having returned to work earlier) or to give any satisfactory explanation for doing so. Para. 8(c) thereof alleges that the above amounted to repudiatory breach and the Defendant was justified in dismissing P1.

19. 2 matters are to be noted. One, there was no plea that P1 was habitually late for or absent from work. Secondly, there was no plea that it was a term of P1's employment contract that a masseur should not return to work when she was on sick leave. It is to be noted, however, that para. 8(a) of the Defence can be understood as implying that there was such a term when it alleges, among other things, that the 2 masseurs (including P1) were wrong in returning to work on 16 November 1995 when they were on sick leave. However, it is unclear from para. 8(a) of the Defence whether it is alleged that per se that was a repudiatory breach, or that all the acts set out therein together constituted such a breach.

20. What the Defendant said in her witness statement dated 20 July 1998 about P1's conduct on 16 and 17 November 1995 is similar to para. 8(a) of the Defence but P1's "wrong" was set out more explicitly in the Defendant's witness statement as follows:-

"18. On 16 November, 1995 [P1] ... applied .. for sick leave and their applications were allowed ... Later on that day, 2 customers ... requested the service of [P1] ... and my staff paged [P1] ... However, the company did not receive any call from [P1] ... Later on the same day, [P1] ... went back to the premises to serve the said 2 customers ... I then ... asked [P1] ... to go to my office to give an explanation ... [P1] however, left the premises immediately after she had served the customer. The following day, [P1] ... refused to signed [sic] any warning letter ... and gave no acceptable explanation as to why [she] applied to the company for sick leave on the one hand and yet accepted direct booking from customers without leave of the company on the other hand ..." (emphasis supplied).

21. The Defendant's testimony can be summarized as follows. When P1 was employed by her, P1 was often absent from work without leave, and she has been warned many times for that. The incidents relating to P1 on 16 and 17 November 1995 were in fact only a "last straw" to make the Defendant decide to summarily dismiss her. Those incidents were that on 16 November 1995, P1 telephoned the sauna establishment and asked for sick leave which was granted to her. However, later that day, P1 returned to the sauna to serve a patron who asked for her service. The Defendant testified that hygiene was important in her trade. She therefore would not allow any employee who was on sick leave to return to work. In cross-examination, the Defendant said that this matter was clear to the employees as well because it was stated in the employment contract (meaning the written contract). Because of the above matters, the Defendant asked to see P1 but P1 ignored her request and left immediately after serving the patron. On 17 November 1995 when P1 returned to work, she was asked to sign a warning letter. She again showed insubordination by refusing to either admit she was wrong or to sign the warning letter. As a result of all the above, P1 was dismissed. DW2 also testified about the incidents on 16 and 17 November 1995 but as she was not present on 16 November, her testimony regarding this issue is of no weight.

22. For the following reasons, I do not find the 2 main allegations in the Defendant's testimony to be credible. In relation to the main allegation that P1 has been warned for absent from work without leave:-

(a) such an allegation was not made in either the Defendant's pleading or her witness statement;

(b) such an allegation was not put to P1 when she was cross-examined;

(c) the only documentary evidence put forward in support was a diary in which dates when P1 was absent were marked. There is no indication in the document that she was absent without leave;

(d) there was no warning letter given to P1 regarding this allegation. Further, the warning letter dated 17 November 1995 stated that it was the first warning. I therefore reject the Defendant's explanation that the previous warnings were oral and this was the first written warning;

(e) even this warning letter given to P1 on 17 November 1995 did not mention she had been habitually absent.

23. In relation to the main allegation that P1 has breached the contract by returning to work when she was sick, I also do not believe the Defendant's testimony because:-

(a) the written contract of P1 did not contain the term asserted by the Defendant. The closest term therein was Clause B4 which only provided inter alia that P1 should "pay attention to hygiene" which of course was not a prohibition against returning to work when a masseur is sick;

(b) such a term is inherently implausible. For example, it did not take into account the type of the masseurs' sickness. The sickness may not be contagious at all or otherwise affect the service to be provided to patrons. In fact, the Defendant never found out what P1's sickness was;

(c) the Defendant's complaint set out in para. 18 of her witness statement was not entirely the same as that in her testimony. Rather, the witness statement complained that P1: (1) refused to sign a warning letter and (2) returned to work without permission after she applied for sick leave;

(d) point (2) in (c) above is confirmed by the warning letter dated 17 November 1995:-

"Now the company warns you: you have already applied to the company for sick leave for a rest, but later you return to the company for work without the approval of any of the department heads, you have breached the rules of the company and deceived the company" (emphasis supplied).

24. Mr Grossman asked me to take into account the surrounding circumstances shortly before, and at the time of, P1's dismissal when I assess whether P1 has been in repudiatory breach of the employment contract. These circumstances include the earlier strike of the masseurs and the subsequent intervention of the trade union and the Labour Department followed by the management side executing a settlement agreement with the employees. There was during this period (up to P1's dismissal) a tense atmosphere in the Defendant's sauna. There may also be a need for tighter management control to be imposed as a result.

25. I do not consider it necessary to decide whether these circumstances ought properly to be taken into account in assessing whether a repudiation of an employment contract has been established. I am prepared to approach the issue assuming that they ought to be considered as well. Even then, I do not find the Defendant has shown that P1 has been in repudiatory breach of the employment contract.

26. As regards P1, I accept her testimony to be truthful and reliable. She might not have been a perfect employee but what she had done on 16 or 17 November 1995 fell far short of any act of repudiation of the employment contract. I find that what she had done on 16 November (that is, serving a patron who specifically asked for her service despite being sick) was in the interest of the Defendant's sauna. I also accept her explanation that she left on 16 November not knowing the Defendant was looking for her. She might not have acted entirely satisfactorily when she was asked to explain and to sign the warning letter on 17 November. However, I find her reaction to be understandable in view of the (aforesaid) background incidents which would make an employee feel that the employer might just be trying to "pick on her" after the earlier strike and her involvement as a workers' representative. In these circumstances, there was no valid reason to compel her to sign a warning letter on 17 November which, among other things, accused her of "deceiving the company".

27. For the above reasons, I find that P1 has been wrongfully dismissed.

Issue (2): Should "Tips" be Included in the Plaintiffs' "Wages"?

28. It is common ground that when the Plaintiffs were working as masseurs at the Defendant's establishment, apart from being paid a basic salary, they were also paid tips by the patrons of the establishment. The facts relating to the payment of tips are substantially (if not entirely) undisputed and are as follows.

29. When a patron was served by a masseur inside the massage room, he may offer to pay tips to her for her massage service. If he did so, the masseur would inform the staff at the reception counter of the amount of tips offered by the patron and this would be recorded down by those staff. After the patron has been served and when he made payment at the reception counter, the amount of tips he actually paid to a particular masseur would be entered in a tips record book. The amount of basic salary and amount of tips respectively paid by the Defendant to the Plaintiffs were separately set out in the Defendant's records.

30. If tips were paid by the patron in cash, 10% would be deducted and kept by the Defendant whereas if tips were paid by credit card, 15% would be retained. Cash tips were (after the said deduction) paid by the Defendant to the masseurs at the end of each day whereas tips paid by credit card were (also after the said deduction) paid at half-monthly intervals. On the other hand, basic salary was paid through bank transfers.

31. Neither the Defendant nor her witness could satisfactorily explain how the rates of deduction (10% and 15% respectively) were arrived at. DW2 Madam Ho Yuk Chun testified that the Defendant engaged 2 additional staff at the counter and one accounting staff to deal with matters related to tips at monthly wages of about $40,000 in total. The total amount of deducted tips far exceeded this sum.

32. Further, according to the Defendant's testimony, this practice of tips being paid by sauna establishments was not peculiar to hers, but was common in the trade.

33. It is also undisputed that the amount of tips received by the Plaintiffs monthly on average was substantially more than their basic salary. The testimony of DW2 was in essence that the basic salary of the Plaintiffs was $46 for each 45-minute session. On average, a masseur would earn about $30,000 per month, out of which about $6,000 to $7,000 would be the basic salary. Hence, tips made up about $23,00 to $24,000 (or 76% to 80%) of their monthly income.

34. The dispute of the parties over this issue necessitates an examination of the respective definitions given in s. 2 of Cap. 57 to the words "wages" and "tips". The relevant provisions read:-

"'wages' ... , 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 ... " (emphasis supplied);

"'tips and service charges' , in relation to wages, means sums of money received, directly or indirectly, by an employee in the course of and in connection with his employment which are-

(a) paid or derived from payments made by persons other than the employer; and

(b) recognized by the employer as part of the employee's wages; (Added 48 of 1984 s. 2)" (emphasis supplied).

35. In essence, the only dispute over this issue is whether the tips paid to the Plaintiffs had been recognised by the Defendant as part of their wages. It is undisputed that the other elements in the said definition provisions of Cap. 57 have been established by the Plaintiffs. Mr Grossman for the Defendant contends that the Defence had adduced credible evidence that the Defendant did not recognise the tips to have been part of the Plaintiff's wages. On the other hand, Mr Chan argues that given the circumstances of this case, the tips paid must have been recognised by her to be so.

36. The notion of "recognition" must involve, among other things, knowledge. A person cannot properly be said to have recognized something without his knowing its existence. From this starting point, I consider (and Mr Chan does not dispute) that the reference to "recognised by the employer" in Cap. 57 is intended to refer to a subjective recognition of the employer. It is thus insufficient to prove merely that the employer ought reasonably to have done so. Further, the burden of proving "recognition" lies with the employee.

37. Having said so, however, by the time an action comes to be decided by the Court (and which involves a dispute as to whether the tips were so recognised by the employer), it is almost certain that the employer will deny that the tips were so recognised. In these circumstances, the usual way in which an employee can prove this issue is by:-

(a) discrediting the evidence adduced by the employer that the employer did not recognize the tips as part of his wages;

(b) having done so, establishing (on a civil standard) a sufficient evidential basis for an inference to be drawn that his employer recognized the tips as part of his wages.

38. Mr Chan appears to agree with the above approach because he submits that the usual matters which ought to be taken into account in deciding this issue include whether the receipt of tips by the employees is "notorious, habitual and closely connected (with the employer's business)". In this connection, Mr Chan relied on The Employment Ordinance An Annotated Guide (at pp. 14 to 15) where the learned editor referred to Madam Leung Ho v. Hong Kong Macao Hydrofoil Co. Ltd, District Court Workmen's Compensation Case No. 190/82. As the citation of that case implies, it was a workmen's compensation claim involving an examination of the definition of "earnings" in the (then) Cap. 282. The District Court decided that point by reference to whether, among other things, the matter was notorious, habitual and closely connected with the business.

39. Mr Grossman argues that "recognition" should not be held to be established unless there was clear and unequivocal evidence of an express agreement, or conduct from which recognition should be inferred, relying on National Union of Gold, Silver & Allied Trades v. Albury Brothers Ltd [1979] I.C.R. 84. That decision was related to the issue of the recognition of a trade union by an employer for the purpose of collective bargaining under the Employment Protection Act 1975 in the U.K.

40. I find that the disagreement between counsel was more a difference in emphasis than one in approach. I consider the National Union decision to be consistent with the approach to this issue set out above, namely, whether there is credible direct evidence of the recognition (or non-recognition) of tips, and if not, whether the evidence (including the employer's conduct) entitles an inference to be drawn. Having found that the parties' difference is more related to emphasis, I prefer the approach advocated for by Mr Chan.

41. The parties also referred to Star Express Ltd. v. Cheng Tak and Others, L.T.A. No. 86 of 1998. Although the issue of whether tips paid therein were recognized as part of the wages was raised in the appeal, the learned Deputy Judge held the Presiding Officer to have correctly found on the facts of the case the so-called "tips" were in substance "wages". The issues of what amounted to "recognition" and whether the Presiding Officer failed to consider that point were held to be irrelevant for the purpose of that appeal. That decision is therefore of no assistance to either party (or the court) in this action.

42. For the above reasons, I will examine the relevant evidence adduced in this action to see whether:-

(a) the evidence adduced by the Defendant denying her recognition of the Plaintiffs' tips as part of their wages is credible;

(b) (if the above evidence is not credible) the whole of the evidence enables the Court to infer that the Defendant in fact recognized their tips as part of their wages.

43. I shall deal with point (a) above first. In her testimony, the Defendant denies that she ever recognized tips as part of the Plaintiffs' wages. In view of the facts set out above under this heading, I reject this denial as incredible because the collection, retention and distribution of tips was "notorious, habitual and closely connected to the business".

44. Tips were collected, kept and distributed openly in the Defendant's establishment. They were common in the trade and the Defendant herself was fully aware of them (both when she worked as a masseur earlier and when she operated her own business). There is therefore no question that tips were "notorious" to the Defendant.

45. Tips were regularly received, kept and distributed by the Defendant. Tips were collected from the patrons when they paid for the services received at the Defendant's establishment. Cash tips were kept by the Defendant until the end of the business day when they were distributed to the masseurs. Tips paid by credit card were kept until they were distributed at half-monthly intervals. The 10% and 15% difference was kept by the Defendant on a regular basis. Although there was no direct evidence to this effect, the difference must have been kept as part of the Defendant's income in the accounts. Tips were therefore "habitually" collected, kept and distributed.

46. Tips were paid by the patrons for the massage services of the Plaintiffs. But it must be noted that massage services were both an essential part of the Defendant's business and the work for which the Plaintiffs were employed by the Defendant to perform. Tips were therefore closely connected not only with the Defendant's business but also the employment of the Plaintiffs.

47. Having rejected the evidence adduced by the Defence on this issue, I now turn to consider point (b) above. From the facts set out under this heading, the only proper inference must be that the Defendant has recognized tips as part of the Plaintiffs' wages.

48. In coming to the above conclusion, I have taken into account, but disagree with, Mr Grossman's arguments that:-

(a) the engagement of additional staff to deal with tips;

(b) incurring additional expenses in relation thereto;

(c) the collection and payment of tips is common in the trade, are irrelevant. I also disagree with him that:-

(a) the payment of tips was something personal between the patrons and the masseurs. This argument may (and the word "may" is emphasized) have some substance if there had not been the facts relating to the collection, retention and distribution of tips (stated above);

(b) the Defendant was merely facilitating the collection and distribution of tips on the Plaintiffs' behalf. Similarly, this argument ignores the Defendant's involvement regarding tips stated above;

(c) the absence of any express contract term regarding tips indicates tips were not recognized by the Defendant as part of the Plaintiffs' wages. This fact has to be considered in the light of the other matters set out above.

Conclusion

49. For the above reasons, I find in the Plaintiffs' favour over the said 2 issues on liability.

Costs Order Nisi

50. There is no apparent reason why costs should not follow the event. There is a costs order nisi pursuant to R.H.C. Ord. 42 r. 5B(6) that costs of this action are to be paid by the Defendant to P1, P18, P19, P26 and P33 to be taxed if not agreed. The costs of P1, P18, P26 and P33 are to be taxed in accordance with the Legal Aid Regulations.