Can employers rely on “team based” commission and team leader bonus already paid to employee to deduct sickness allowance, holiday pay and annual leave pay payable to employees?

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Introduction

In a recent case Mak Wai Man v Richfield Realty Ltd [2019] HKDC 358, the District Court clarified whether statutory entitlements (including sickness allowance, holiday pay and annual leave pay) payable to employee under the Employment Ordinance (Cap. 57) can be reduced by “team based” commission (the “Commission”) and team leader bonus (the “Bonus”) already paid by employer.

Background

The Plaintiffs (the “Employees”) entered into employment contracts (the “Employment Contracts”) with the Defendant (the “Employer”) respectively in 2007 or 2008 for working in the marketing department of the Employer. Under the Employment Contracts, apart from the monthly basic salary, travel allowance and commission, the Employees were also entitled to, among others, sick leave, holiday and annual leave with pay. Under the Employment Ordinance, an employer shall pay to its employee, among others, sickness allowance, holiday pay and annual leave pay to which the employee is entitled upon termination of employment contract (the “Statutory Entitlements”).

Following the termination of the Employment Contracts by the Employer in 2014, the Employees commenced proceedings in the Labour Tribunal and claimed against the Employer, among others, shortfalls of their Statutory Entitlements in accordance with the Employment Ordinance and the Employment Contracts. Under sections 35(4), 41(6) and 41C(6) of the Employment Ordinance, if, pursuant to the terms of one’s contract of employment or any other agreement or for any other reason, an employee is paid by his employer a sum of money in respect of a paid sickness day / a holiday / a day of annual leave taken by him, the sickness allowance / holiday pay / annual leave pay payable to the employee in respect of that sickness day / holiday / annual leave is to be reduced by the sum (collectively, the “Deduction Sub-sections”). The Employees took the view that the Commission should be distinguished from basic monthly salary and that the Commission (i) was paid on the basis of work actually done and not calculated purely on a periodic basis; and (ii) was only attributable to the days on which the Employees had worked and not to non-working days. The Commission was team-based and contingent on success of a project, and distinguished from other types of commission that are attributable to the individual performance or individual effort. The Employees submitted that the Statutory Entitlements should not be reduced by the Commission already paid by the Employer and claimed for the shortfall of the Statutory Entitlements.

On the above issue, the Labour Tribunal considered that the Commission was accumulated from work done in the past over a period of time, and that the Commission received by the Employees during their leave was for work done in the past, and not for the “paid sickness day / holiday / annual leave day”. The Labour Tribunal ruled in favour of the Employees, i.e. the Statutory Entitlements payable should not be reduced by any part of the Commission (the “Award”). The Employer successfully appealed against the Award in the Court of First Instance. The Award was set aside and the matter was remitted to the Labour Tribunal, which subsequently transferred the case to the District Court. The issue was whether, having regard to the legislative intent, the Statutory Entitlements payable to the Employees should be reduced by such payment of the Commission, and also the Bonus (if there was no agreement among the parties, as there was ambiguity as to the treatment of the Bonus by the Employer), under the Deduction Sub-sections.

Decision

Legislative background and policy reasons behind the Deduction Sub-sections

The Deduction Sub-sections were introduced to the Employment Ordinance in 2007 triggered by the ruling of the Court of Final Appeal in Lisbeth Enterprises Ltd v Mandy Luk (2006) 9 HKCFAR 131, which held that although contractual commission was included in the definition of “wages” under the Employment Ordinance, it could not be included in computing the Statutory Entitlements as the contractual commission was not accrued or calculated on a daily basis and in such circumstances the Employment Ordinance did not provide a workable mode of calculation for the Statutory Entitlements. Following the above decision, the Government considered that the then Employment Ordinance was not able to reflect the policy objective of including contractual commission for the purpose of calculating the Statutory Entitlements. It also gave rise to unreasonable differential treatment between employees with commissions accrued on a daily basis and employees with commissions accrued on monthly basis.

Whilst the definition of wages in the Employment Ordinance covers sums of money “payable to an employee in respect of work done or to be done under his contract of employment”, the Explanatory Paper on Committee Stage Amendments Proposed by the Administration (LC Paper No CB(2) 1511/06-07(03)) extended, for the purpose of calculating the Statutory Entitlements, the definition of wages to include “any sums paid by an employer in respect of any specified period of leave taking by an employee and normal working day on which the employee is not provided with work by his employer…”. The purpose of the amendment was to ensure that the Statutory Entitlements would not be lessened or depressed by reason of payments being made which cannot be classified as being paid for “work done or to be done”. Due to the inclusion of such sums in the calculation of the daily rate used for computing the Statutory Entitlements (for instance, sickness allowance amount to a sum equivalent to four-fifth of the daily average wage earned during the period of 12 months immediately preceding the sickness day or the first sickness day), it was crucial to state clearly that any sums paid for Statutory Entitlements could be deducted in order to avoid double payment by employers.

Whether the Commission and the Bonus constitute sums of money paid for the Statutory Entitlements

Pursuant to the Deduction Sub-sections, the question was whether, “pursuant to the terms of the contract of employment or any other agreement or for any other reason”, the Commission and the Bonus constitute sums of money paid for the Statutory Entitlements.

It was not disputed that there was no express term in the Employment Contracts which stipulated that the Commission and the Bonus were paid for the Statutory Entitlements. For “any other reason”, the District Court took the view that it should not be interpreted narrowly and should not be limited to the genus of agreements. Further, such reasons have to be consistent with the policy objective of the legislation.

The District Court considered the nature of the Commission and the Bonus. The District Court considered the Commission to be a “team-based” remuneration paid monthly on a fixed date of each month, contingent on the success of a project earned through the work done throughout a prolonged period of time and not contingent on whether leave had been taken by the relevant employee. As regards to the Bonus, the District Court considered it to be a fixed amount awarded to the team leader upon each successful transaction paid monthly on a fixed date of each month, derived from the success of the team as a whole and not contingent on whether the team leader was on leave during the month or not.

As the Commission and the Bonus were payments received for both working days and notional working days, they fall under the extended definition of wages. Further, failure to deduct the same when calculating the Statutory Entitlements would cause double payment of the Employees’ Statutory Entitlements.

Therefore, the District Court held that the Commission and the Bonus fall under the limb of “any other reason” within the Deduction Sub-sections and should be deducted when calculating the Statutory Entitlements, and found that there was no shortfall in the Employees’ Statutory Entitlements.

 

Conclusion

The Chief Justice stated in Cathay Pacific Airways Ltd v Kwan Siu Wa Becky (2012) 15 HKCFAR 615 that in usual scenario of employees merely earning a monthly salary without any additional allowance, the salary covers non-working days such as statutory holidays and other leave days, and such employees would have no claim for outstanding Statutory Entitlements. However, the scenario involving contractual commission is more complicated as commission could fluctuate each month. The inclusion or non-inclusion of commission payments could drastically affect the ultimate sum of Statutory Entitlements. Employers may consider stating the treatment of commissions and bonuses in the employment contracts explicitly to prevent ambiguities and potential disputes.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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