LAING AGNES AND OTHERS v. LISBETH ENTERPRISES LTD t/a PHILLIP WAIN INTERNATIONAL

cacv 204/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 204 of 2004

(on appeal from HCLA NO. 133 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of A Cheung J given on 28 June 2004 whereby he allowed an appeal by the 2^nd claimant from a decision of the Labour Tribunal and remitted the 2^nd claimant’s claim for payment of holiday pay and annual leave pay to the Labour Tribunal for retrial before another Presiding Officer.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  The 2^nd claimant was employed by the defendant under an employment agreement (“the agreement”) dated 9 January 1996 as a consultant to work in the defendant’s beauty and health club.  As the judge recorded, her main role was to recommend courses of treatment and exercise packages to new and existing members of the club.  She was also to provide after-sale services and handle questions or complaints that clients or members might have.

3.  The 2^nd claimant’s contract of employment was detailed.  It required the 2^nd claimant to devote the whole of her time and attention during business hours to the discharge of her duties and she was required to perform those duties to the best of her skill and ability.  She had to conform to the working hours which were required of her.  The 2^nd claimant was not permitted to engage in any other trade, business or occupation whatsoever other than the business of the company.  There were also restrictive covenants which prevented the 2^nd claimant from entering employment in competition to the defendant after termination of her employment.  In summary, therefore, this was a contract of employment which was carefully drafted to ensure that the 2^nd claimant gave her best to the defendant and would not pose a commercial danger in any way. 

4.  The contract provided for 10 working days annual leave after completion of 12 months continuous service.  The annual leave was to be with “full salary”.

5.  The remuneration of the 2^nd defendant was provided for in clauses 7 and 7A of the agreement.  They read as follows:

“	7.	SALARY
		Subject as hereinafter provided the Company shall pay to the Employee during the continuance of her employment hereunder a gross salary of Hong Kong Dollars Five Thousand Six Hundred per month (or such other salary as may from time to time be determined upon and notified to the Employee by the Company) such salary to be paid in arrear on the last working day of each calendar month.  In the event of any change of salary being so notified to the Employee by the Company such change shall thereafter have effect as if it were specifically provided for as a term of this Agreement.
		The Company shall have the sole discretion on the payment of bonuses to the Employee and if the Company so decides to pay bonus to the Employee, it will be paid in accordance with normal local practice.  No bonus is payable to the Employee during the probation period.
	7A.	COMMISSION
		In addition to her salary aforesaid the Employee shall be entitled to commission on sales made by her (provided payment is made by the customer) in accordance with the scale below :-
		Sales Range (HK$) Up to    100,000 . . . . . . . . . . . . . . . . . . . . . 2.5% 100,001     200,000 . . . . . . . . . . . . . . . . . . . . . 3.0% 200,001     350,000 . . . . . . . . . . . . . . . . . . . . . 3.5% 350,001     550,000 . . . . . . . . . . . . . . . . . . . . . 4.0% 550,001     850,000 . . . . . . . . . . . . . . . . . . . . . 4.5% 850,001     upwards . . . . . . . . . . . . . . . . . . . . . 5.0%

The above scale may be changed by the Company without prior notice.  If the Employee’s employment ceases for any reason whatsoever she will not receive any commission outstanding on any sales made by her prior to her last working day.”

6.  The reality of the situation was that, as the evidence shows, the 2^nd claimant was paid average monthly commissions as follows:

6/12/1996 - 5/9/1997	$78,178.60
6/9/1997 - 5/9/1998	$60,429.46
6/9/1998 - 5/9/1999	$83,711.41
6/9/1999 - 5/9/2000	$61,923.07
6/9/2000 - 5/9/2001	$52,802.22
6/9/2001 - 30/9/2001	$84,732.15.

7.  It can be seen, therefore, that the 2^nd claimant’s pay was in effect the commission under clause 7A.  The “salary” under clause 7 was in all years well under 10% of the total remuneration which the 2^nd claimant was paid.

8.  The issue in this case turns upon whether the commission payments should be used in the calculation of the wages which are required to be paid in respect of holiday and annual leave pay under the provisions of the Employment Ordinance, Cap. 57 (“the Ordinance”).  The more important pertinent sections of the Ordinance are as follows:

“40 Payment of holiday pay

Subject to section 12(11), an employee who has been employed by his employer under a continuous contract for a period of 3 months immediately preceding a statutory holiday shall, not later than the day on which the employee is next paid his wages after that holiday, be paid by his employer holiday pay at the rate specified in section 41, whether the employee takes a holiday on the statutory holiday or on an alternative or substituted holiday or a holiday under section 39(4).

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.  

(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.

41AA Annual leave

(1) Subject to this Part, every employee who has been in employment under a continuous contract for not less than 12 months shall, in respect of each leave year, be entitled to paid leave (in this Part referred to as ‘annual leave’) calculated in accordance with subsection (2).

[There then follow specific provisions which are not in point as regards the issues in this case.]

41B Payment of annual leave pay

Where an employee is granted any period of annual leave, the employer shall pay him annual leave pay in respect of that period not later than the day on which he is next paid his wages after that period.

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.”

9.  The question which arises is what constitutes “… wages which the employee would have earned …”.  “Wages” is defined in section 2 of the Ordinance as follows:

“‘wages’ (工資) subject to subsections (2) and (3), means all remuneration, earnings, allowances including travelling allowances and attendance allowances, attendance bonus, commission, overtime pay, tips and service charges, however designated or calculated, capable of being expressed in terms of money, payable to an employee in respect of work done or to be done under his contract of employment, but does not include-
(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;
(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 Part IIA;
(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;” (emphasis added)

10.  The definition makes it quite clear that “wages” when used in the Ordinance includes commission.  This seems to me to pose no conceptual difficulty.  In a situation where an employee’s pay is calculated on the basis of commission, that constitutes his pay or wages.  That is the situation here.  The 2^nd claimant’s “salary” under clause 7 was for practical purposes virtually irrelevant in comparison to her “commission” under clause 7A.

11.  It would be noted that on the figures for commission given in respect of the 2^nd claimant, these sales must have amounted to a minimum of approximately just over $1 million per month and in some years the average monthly sales must have been approximately $1.6 million per month.  On those figures it is clear that making sales of services or products was an important ingredient in the 2^nd claimant’s work.

12.  Before this court, Mr Chang SC, who appeared on behalf of the respondent, took issue with the construction put upon the Ordinance by the judge below.  He argued that the commission which the 2^nd claimant had been paid should not be regarded as part of wages at least as regards sections 41 and 41C of the Ordinance.  He pointed out that although the word “commission” was inserted into the definition of “wages” in section 2 of the Ordinance by an amendment effected in 1997 that section itself commences with the time hallowed phrase “unless the context otherwise requires”.  He submitted that the context did so otherwise require.

13.  There were a number of reasons put forward as to why this was so.  In the first place the commission under clause 7A of the agreement was a monthly commission, not a daily commission.  The percentage commission on the sales would only have been known at the end of each month.  Furthermore, the payment of commission was dependent upon two factors.  The first is that there should be a sale and the second that payment should be received by the respondent.  It was said that the 2^nd claimant would thus not have received any payment in respect of commission had she worked a full working day instead of taking a holiday or instead of taking annual leave because, in the absence of any sales, there would have been no commission earned on those days.

14.  Furthermore, it was said that it would be impossible to work out the wages under either section 41 or section 41C if commission had to be taken into account because there was no way of calculating it on a notional basis and that the provisions of the two subsections (2) were not applicable to commission.  Rather as a plea ad misericordiam,Mr Chang argued that if the respondent were required to pay commission in respect of holiday periods, in effect, it would have to pay the 2^nd claimant an extra supplement out of its own pocket, something which had never been bargained for and which would inflict a loss upon the respondent.

15.  Finally, it was said that the provisions of section 42 of the Ordinance were applicable.  That reads as follows:

“Where, pursuant to the terms of his contract of employment or the terms of any other agreement or for any other reason, an employee is paid his ordinary wages in respect of any holiday, annual leave, maternity leave or sickness day, the employee shall not, in addition to such ordinary wages, be entitled to be paid holiday pay, annual leave pay, maternity leave pay or sickness allowance, as the case may be.”

16.  It was said that the “ordinary wages” were the payments under clause 7 of the agreement and that had been paid.  In contrast, it was said, that commission was not part of “ordinary wages”, since those would be different from “wages” and commission was something which was irregular, fluctuating, unpredictable and contingent.

17.  In my view the judge below was correct.  The statute must be construed as it stands.  It seems to me to be impossible to read either section 41 or section 41C as meaning anything other than that the 2^nd claimant was entitled to payments which took into account pay which had been calculated on the basis of “wages” previously paid under both clauses 7 and 7A of the agreement.  The fact that it was by amendment that the word “commission” was included in the definition of “wages” as used in the Ordinance in 1997 is, in itself, irrelevant.  If anything, the change in the statutory provision by including “commission” as part of the definition of “wages” as part of an amendment, would suggest that the inclusion was no oversight.  It may be true that the change in the definition of “wages” might have far reaching effects in the present situation, but it would also appear to have potentially far reaching effects in relation to other provisions of the Ordinance, for example in relation to maternity pay provisions: see sections 14 and 15 and sickness pay: see section 35.  There is clearly good reason why commission should be considered an ingredient of wages.  The present case is an example of a situation where an employee is employed to make sales and the pay or wages of the employee is, practically speaking, almost entirely commission-based. 

18.  Turning to subsections 41(2) and 41C(2), it is, in my view, of no avail to concentrate on the presence of the words “daily wages”, on the basis that the commission is not paid daily, because all the 2^nd claimant’s payments under the agreement were calculated on a monthly basis.  If that argument were to prevail, there would be no payment even of the so termed “salary” under clause 7: the entitlement under subsections 41(1) and 41C(1) is only to a day’s or days’ wages and to argue that the agreement only calculates wages in respect of a month must clearly be wrong: the Ordinance clearly envisages a pro rata payment. 

19.  Hence I have no difficulty in applying the provisions of subsections 41(2) and 41C(2) to the facts of this case.  Clearly there was no payment by piece rate, but there were daily wages varying from day to day, albeit that variation might be fixed on a monthly basis.  What the 2^nd claimant would be entitled to in respect of either holiday pay or annual leave pay would be dependent upon the total wages which had been paid in the preceding month.

20.  When viewed in that light it appears to me that there is no difficulty in construing the Ordinance in the way in which the legislature clearly intended, namely that where an employee’s pay was calculated on the basis of the amount of business that was transacted through him or her the entitlement to holiday pay and annual leave pay should not be reduced to nothing, or almost nothing, simply because he or she was required, or at the very least permitted under the statute, not to work on the relevant day.  That would obviously be the consequence if the person involved were an independent contractor.  But in the case of an employee, the legislature has decreed that there should be some level of consistency if not continuity in the level of pay.

21.  As regards section 42 of the Ordinance, I see no basis for restricting the meaning of “ordinary wages” to the bare, almost notional, payment under clause 7 of the agreement.  In my view “ordinary wages” has no other meaning than “wages” as used in the Ordinance.

22.  In summary, therefore, I consider that the judge came to the correct conclusion.  I would, therefore, dismiss this appeal and make an order nisi of costs in favour of the 2^nd claimant.

Hon Le Pichon JA:

23.  I have had the advantage of reading in draft the judgments of the Vice President and Stone J.  I agree with the judgment of the Vice President that the appeal should be dismissed for the reasons he gives.  In view of the divergence of opinion on the construction of the sections 41, 41C and 42 of the Employment Ordinance, I would add some short observations of my own.

24.  I gratefully adopt the facts which have been set out in the judgment of the Vice President.  I do not propose to set out the relevant statutory provisions again in my judgment except to mention that “wage period” is defined in section 2 to mean “the period in respect of which wages are payable under the contract of employment ….”.  Under the 2^nd claimant’s contract, the wage period was on a monthly basis.

25.  As a preliminary matter, it is to be noted that section 41 (which deals with the rate of holiday pay) and section 41C (which deals with the rate of annual leave pay) are structured in the same way.  Each contains two subsections.  Subsection (2) of each of those sections takes precedence: in section 41, subsection (2) takes effect “notwithstanding subsection (1)” and in section 41C, subsection (1) is “subject to subsection (2)”.

26.  Subsection (1) of those sections is directed at situations where it is possible to ascertain the equivalent of “wages which the employee would have earned” on a full working day.  It is implicit in such a requirement that such “wages” are fixed and ascertainable, without any element of uncertainty or contingency.  In the present case, the “commission” component of the wages of the 2^nd claimant remained unknown until the end of each month because it was dependent on two matters: first, that there should have been a sale; second, that payment for it had been received by the respondent.  Prima facie, the present case is not one that is within subsection (1) if the term “wages” is to be given its statutory meaning which includes commission.  The respondent’s contention that subsection (1) applies involves giving “wages” a meaning other than its statutory meaning.  As is explained below, as a matter of statutory construction, one would not opt for such a construction unless subsection (2) has no application.

27.  As noted above, subsection (2) is the overriding provision.  Where subsection (1) of each of those subsections does not appear to apply, it becomes necessary to consider whether subsection (2) applies.  I have no hesitation in coming to the conclusion that it does.  The 2^nd claimant’s earnings or wages have two components: a fixed monthly salary and commission which fluctuates.  Whilst the commission part of the wages of the 2^nd claimant would only be known at the end of the month, on the day a payment is received by the respondent in respect of a sale made by the 2^nd claimant, the 2^nd claimant becomes entitled to a commission equal to at least 2.5% of that amount.  At the end of the month it would be known whether or not the amount of commission is to be adjusted upwards.  That is dependent on the sales range achieved (as to which see paragraph 5 of the judgment of Rogers VP) and, if so, by what percentage. 

28.  The receipt of payment by the respondent in respect of sales made by the 2^nd claimant and therefore the amount of commission due to the 2^nd claimant would thus vary from day to day subject to any upward adjustment at the end of the month.  So whilst the salary component under clause 7 of the contract is a fixed sum, with the consequence that the amount of salary earned per full working day is also fixed, the commission component rendered the daily earnings variable.  For this reason, it could be said that the ‘daily wages’ of the 2^nd claimant varied from day to day: that is precisely the situation that is addressed by subsection (2).  In such a case, subsection (2) provides a formula for calculating the average daily wage.  There is clearly no difficulty in applying that formula to the facts of the present case.  In my view, there is no requirement that before subsection (2) can be invoked the wage period must be by the day i.e. that the employee has to be paid on a daily basis.  In this respect, it is similar to subsection (1) which envisages a pro rata payment for working out the amount the employee would have earned on a full working day where the employee is paid on a monthly basis.

29.  I would add that reading sections 41 and 41C as a whole, I do not see that anything in the context requires “wages” to be given a meaning other than its statutory meaning.  Those provisions are meant to define the rate of pay so as to remunerate the employee for days taken by way of holiday or annual leave.  An employee’s pay must mean his or her earnings under the particular employment contract which in the case of the 2^nd claimant are determined by both clauses 7 and 7A of her contract.  Had subsection (2) not been applicable (which is not the case) such that one has to fall back on subsection (1), in that scenario, there would be a context for restricting the meaning of wages to exclude any component that is uncertain or not fixed and ascertainable.  But, as explained above, that simply does not arise on the facts.

30.  Finally, as to the meaning of ‘ordinary wages’ in section 42, in my view, the epithet ‘ordinary’ neither detracts nor adds to the meaning of wages nor create a context that requires wages to mean something other than its statutory definition.

Hon Stone J:

31.  For my part I take a view of this appeal contrary to that of Rogers VP and Le Pichon JA, whose judgments I have read in draft.

32.  In my judgment the conclusion reached by the learned judge below was in error, and that of the Labour Tribunal was correct.

33.  As the judgment of the Vice President makes clear, this case principally turns upon the construction of sections 41, 41C and 42 of the Employment Ordinance, Cap 57.

34.  The respondent, the 2^nd claimant, who formerly was employed by the appellant as a beauty consultant, contends that the statutory holiday and annual leave pay for which provision is made under the Ordinance should include commission as well as salary.

35.  On 22 October 2003 this claim was dismissed by the Labour Tribunal, a decision reversed on appeal by the learned judge below.  The employer now appeals to this court.

36.  Central within the argument of Mr Chang SC, on behalf of the appellant, is the premise that section 41 and section 41C, which deal respectively with the rate of holiday pay and annual leave pay, cannot and do not encompass the element of commission which made up by far the greater proportion of the monthly emoluments of the 2^nd claimant during the period in which she was employed by the appellant.

37.  He says that these sections were intended for application in terms of regular and ascertainable salaries only, and can have no application in terms of fluctuating commission payments.

38.  I agree.

39.  Given that commission payments are a moveable and contingent feast — wherein, as the Vice President has pointed out, a sale must not only have been achieved but in addition the monies for the particular services thus sold must actually have been received by the employer — I find it difficult to appreciate how commission can be said to play any part in a sum “equivalent to the wages which the employee would have earned on a full working day” (section 41(1) : rate of holiday pay) or in a sum “equivalent to the wages the employee would have earned if he had worked every day during the period of annual leave” (section 41C(1) : rate of annual leave pay) (emphasis added).

40.  In my view the only monies which it can be said with certainty that the employee “would have earned” had she been working on such days is that represented by the agreed monthly salary that was paid to her by the employer in any event.  Whilst section 41(1) and 41C(1) have the effect, as Mr Chang submitted, of ‘deeming’ the employee to have worked during holidays and annual leave, this is a far cry from ‘deeming’ the employee both to have made a sale to a customer and for that customer actually to have paid up on that sale, thus triggering payment of commission under clause 7A of the employment contract.

41.  It strikes me that a construction of the Ordinance effectively requiring the employer to compensate its employees in terms both of the element of basic salary and that of commission — which may, or may not, have been achieved had there been attendance at work upon the days in question — is not only to strain the language of a statute which speaks of monies which “would” (not might) have been earned, but also, as Mr Chang suggested, thus would inflict upon the employer an expense for which it had not bargained, and which possesses no factual basis.

42.  I attach no significance to the fact that the fixed salary of the 2^nd claimant in this case represented but a minor proportion of her historical monthly income.  This is no more than a reflection of the contractual relationship into which both employer and employee freely have entered.  There is nothing inimical in commercial enterprises legitimately arranging their affairs in a manner most advantageous to their interests, whether such interests encompass motivation for the employee to generate sales or whether the particular compensation arrangements are made with an eye upon the employer’s statutory obligations.

43.  Nor do I accept that the provisions of subsections 41(2) and 41C(2) reinforce the 2^nd claimant’s argument.  If anything, the contrary is the case.

44.  Subsections 41(2) and 41C(2) lay out the methodology of the “average daily wage … during every complete wage period” in instances in which the employee is employed on ‘piece rates’ or in situations of ‘daily wages’ varying from day to day.

45.  Plainly the employment situation now under consideration is not one involving piece work, nor can the 2^nd claimant’s position be classified as one involving payment of ‘daily wages’ properly so-called, which clearly betokens employment upon a daily basis.

46.  The framers of this legislation have seen fit to specify these categories, and to provide a particular methodology for the calculation of holiday and annual pay in these circumstances.

47.  I am unable to agree with the apparent conclusion of the learned judge below (at paragraph 28 of his judgment) that the statutory formula within these subsections is, or was intended to be, used to cover all situations in which the employee’s “wages” are contingent or fluctuating in nature.

48.  This constituted a further limb of Mr Chang’s argument in this appeal.  Absent application of the statutory formula as set out in subsections 41(2) and 41C(2) — which he maintained could not and did not apply on the undisputed facts of this case — how, he asked rhetorically, was the calculation of holiday/annual leave pay to be achieved in the circumstances of the present case?

49.  This seems to me to be a powerful additional argument.  It clearly made an impression, also, upon those representing the 2^nd claimant.  Somewhat curiously, at least until shortly prior to this appeal, when there was filed a supplemental skeleton argument, no reliance appears to have been placed by the 2^nd claimant upon subsections 41(2) and 41C(2); in fact, we were told by Mr Chang that hitherto it had been “common ground” that these subsections had no application to the present case.

50.  In so far as this view now has changed, and the 2^nd claimant seeks to mount a submission to the contrary, I reject it.  And in so far as the learned judge by implication intended (albeit he did not say so in terms) that upon a retrial the Labour Tribunal was to adopt this formula for the purpose of calculation of the 2^nd claimant’s entitlement, I consider such approach to be incorrect.

51.  In my judgment, therefore, the present statutory scheme does not permit the injection of largesse for which the 2^nd claimant now contends.

52.  I do not consider the undisputed facts of this case permit the element of commission to be regarded as part of “wages” for the purpose of sections 41(1) and 41C(1) of the Ordinance.  Whilst I appreciate that the definition of “wages” within section 2(1) of the Ordinance includes ‘commission’, in my judgment this is a case in which, in the words of the carriage to section 2(1), “the context otherwise requires”.

53.  In my view the provisions of section 42 of the Ordinance serve to buttress the foregoing conclusions.

54.  Mr Chang argued that this section applied in the circumstances of this case, and that the term “ordinary wages” — which term is not defined within section 2 of the Ordinance — should not simply be equated with “wages”.  He submitted that the term “ordinary wages” encompassed a narrower subset within the wider class, and argued that the term ‘ordinary’ denotes regularity, and refers to the regular or basic element of the remuneration received by the employee.

55.  I accept this submission.  The term ‘ordinary’ is not lightly to be disregarded or simply ignored.  I accept the submission that, pursuant to the terms of her employment agreement, the 2^nd claimant had an entitlement only to her clause 7 salary, which represents her “ordinary wages” — in contradistinction to irregular and fluctuating commission payable upon fulfillment of certain contractual conditions — and that in this case such “ordinary wages” in fact already had been paid pursuant to clause 7; thus, as was contended, the provisions of section 42 have been satisfied and the 2^nd claimant had no legitimate entitlement to any further payment in terms of holiday or annual leave pay.

56.  This construction further is consistent with the clear contractual intention of the parties in this case, which is that as a consequence of working at the appellant’s salon the employee only had an entitlement to a clause 7 “gross salary”, and that there was no entitlement to clause 7A commission unless and until a sale was successfully executed in terms of receipt of payment for such sale.

57.  Speaking for myself, I would have allowed this appeal and set aside the order of the court below, with costs here and below to the appellant, to be taxed if not agreed.  I would have declined to certify the case as fit for two counsel.

Hon Rogers VP:

58.  There will therefore be an order in the terms of paragraph 22 above.