It is established employment law that neither gratuitous commission nor discretionary commission is to be included in the calculation of holiday pay or annual leave pay. But that still leaves the question of contractual commission i.e. commission to which an employee is contractually entitled. Is contractual commission to be included in the calculation of holiday pay and annual leave?
Court of Final Appeal Decision
The Hong Kong Court of Final Appeal decision of Lisbeth Enterprises Ltd trading as Philip Wain v Luk See Ming, Mandy considered this far-reaching question of law affecting many employees here receiving remuneration partly in the form of basic salary and partly in the form of commission.
This decision handed down on 28 February 2006 unanimously determined that, with the exception of commission accruing and calculated on a daily basis in amounts varying from day to day, no contractual commission is to be taken into consideration when determining holiday pay and statutory holiday pay under the Hong Kong Employment Ordinance.
In the Lisbeth case, the central issue was whether an employee’s "contractual commission" should be considered "wages" and therefore included in the calculation of holiday pay and annual leave pay under the Employment Ordinance.
In the case, Mandy worked as a beauty consultant in a health club for ladies, Philip Wain, owned by Lisbeth Enterprises Ltd. Under her employment contract, Mandy was entitled to a monthly salary of $5,600 and her average monthly commission amounted to about 10 times her basic salary and was based on sales made by her in accordance with a scale set out in her contract.
When Mandy left Lisbeth, she was paid annual leave and statutory holiday pay calculated by reference only to her basic salary, and she claimed that the calculation should also include her contractual commission.
The Labour Tribunal found that her commission should not be included in calculating annual leave and holiday pay.
She was not happy with this and appealed to the Court of First Instance. Based on the provisions in the Employment Ordinance, the Court found that Mandy’s commission was contractual rather than of a discretionary nature and thus her contractual commission should have been included in the calculation of holiday and annual leave pay.
Lisbeth appealed to the Court of Appeal and the Court of Appeal shared the same view as the Court of First Instance. So Lisbeth appealed to the Court of Final Appeal and there is a twist here. The Court of Final Appeal agreed with the Labour Tribunal’s decision (i.e her commission should not be included in calculating the annual leave and holiday pay).
The Court determined that the word "wages" in the Holiday and Annual Leave Pay sections of the Employment Ordinance means a benefit "accrued and calculated on a daily basis" and directed to what the employee "would" have earned. Mandy’s commission was calculated on a monthly basis and it varied from month to month depending on sales. Therefore, no commission should be included in the calculation of holiday and annual leave pay for Mandy, as the Holiday and Annual Leave pay sections only cover contractual commission accruing and calculated on a daily basis.
In Hong Kong, it is common for employees to receive a basic salary plus commission and up till now, we do not have a minimum wage law. Therefore, as a result of this case, many employees fear that their employers will substantially lower the basic salary or even provide a nil base salary so that they can avoid paying the holiday or annual leave pay. Some legislators have already proposed to amend the Employment Ordinance by stating clearly that commission should be included in the calculation of holiday and annual leave payment entitlement.
If you are uncertain about your rights or obligations under an employment contract or relationship, lawyers in our Employment Department will be happy to assist you with any inquiries you may have regarding employment or data privacy issues in Hong Kong or the PRC.
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