Hong Kong: Commission Need Not Be Included When Calculating Holiday Pay and Annual Leave Pay!
The Court of Final Appeal made a landmark ruling at the end of February on an unprecedented claim for holiday pay or annual leave pay based on commission in Lisbeth Enterprises Limited v Mandy Luk. The Court concluded that, apart from the contractual commission which accrued and calculated on a daily basis in amount varying from day to day, no commission is to be included in the calculation of holiday pay and annual leave pay. The Court of Final Appeal unanimously overturned the earlier decisions of the lower courts. (See our Newsletter Issue 2006.1) The background of this case is as follows: Sections 41(1) and 41C(1) of the Employment Ordinance provide that holiday and annual leave pay shall be a sum equivalent to the wages which the employee would have earned on a full working day. Sections 41(2) and 41(2) provide that where the wages of an employee vary from day to day, the pay shall be a sum equivalent to the average daily wages of the preceding wage period. The definition of "wages" under section 2 of the EO includes contractual commission. Section 2 of the EO contains an express statement to the effect that the definitions which it provides must give way to any different meaning that the context may require. The question before the Court of Final Appeal was whether the context of holiday pay and annual leave pay required the exclusion of contractual commission from the meaning of "wages". The Court adopted a purposive approach in deciding this issue by interpreting the legislation in its context and as a whole. In this case, commission would only be earned "if and when sales were made by the employee" and "payment was made by the customer". The employee’s commission fluctuated along with what the employer so received. If the Company were required to pay commission in respect of holiday periods, in effect, it would have to pay the employee an extra supplement out of its own pocket, and giving the employee something by way of a share in nothing. The Court considered that for such an exercise to be possible, there would have to be a workable mode of calculation. Under the circumstances of this case, the Court did not accept that the commission constituted an amount the employee "would" have earned under section 41(1) and 41C(1) but instead, it should only be treated as an amount the employee "might" have earned. In this regard, the Court of Final Appeal considered that there was no workable mode of calculating holiday or annual leave pay based on commission in sections 41(1) and 41C(1). The Court also did not consider that sections 41(2) and 41C(2) applied in the present case. Although the Court accepted that wages might not have to be paid on a daily basis before they could be regarded as "daily wages", the Court did not accept that wages could be so regarded unless they at least accrued and were calculated on a daily basis. It was clear that the present case did not fall into this category as the employee’s commission was payable according to fluctuating monthly results and on a sliding scale which moved up and down with such results. So the commission simply could not accrue or be calculated until the end of the month arrived and that month’s result was known. As a result, the Court of Final Appeal considered that subject to the possibility that sections 41(2) and 41C(2) were to be read to cover contractual commission accruing and calculated on a daily basis in amounts varying from day to day, no commission is to be included in the calculating of holiday and annual leave pay.