SUMMARY OF CONTENTS

HONG KONG CASE UPDATE

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.

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Doctors succeeded in their claims for rest days and statutory holidays

Doctors working in public hospitals claimed that, in breach of their employment contracts as well as the Employment Ordinance, for many years the Hospital Authority had required them to work long hours without proper compensation. 

The doctors in this latest round of confrontation with the HA successfully claimed compensation for "rest days" and "holidays" for which they had been deprived but lost their claim on compensation for "overtime" worked.

Overtime

Paid overtime is not a statutory requirement so it is purely a matter of contract.

Under the letters of appointment of the doctors, their normal hours of work were 44 hours per week but they would be required to work overtime if necessary. 

The doctors in the present case were subject to an Honorarium Scheme which was put in place to recognise that doctors work many hours of overtime, for which they would not otherwise have received any compensation. The Scheme provided a monthly entitlement at fixed rates to the doctors who came within the specified criteria for payment. They were duly paid under the Scheme.

The Court considered that since the Honorarium Scheme was part of the contracts and was intended to be recognition for doctors working overtime, the doctors' claim under this "overtime" head should be dismissed.

In view of the interns' position, their letters of appointment did not even mention "normal hours". In addition, according to the Human Resources Policies Manual, employees under training who were required to attend duty beyond normal hours in connection with their training did not qualify for overtime allowance. The Court considered that it was a clearly understood position that interns had to work very long hours and such was part of their training. In no way would they receive special compensation for the additional hours of such training and their claims were dismissed. 

Rest Day & Statutory Holiday

Rest days and statutory holidays are provided under the Employment Ordinance.

In this case, although Sundays were granted as rest days, in many occasions, doctors were indeed on call and/or did ward rounds on Sundays.

The issue before the Court was whether being on call and/or doing ward rounds constituted "work" such that doctors could be said to have been deprived of their rest days or of their statutory right to abstain from working on a rest day.

There were 3 categories of "on-call":

i. Resident call

The doctors on resident call had to respond at short notice and expected to stay within the hospital compound. The activities of a doctor on call were wide ranging and include making ward rounds, attending to ward duties, out-patient sessions, and performing operation. 

The Court considered that doctors on resident call were at their place of work and were working for the entire period in which they were on such resident call. 

ii. On call outside the hospital

The doctors on this kind of call might or might not be expected to stay in the hospital compound but was expected to stay within the 30-minute distance parameter and remain contactable via pager or mobile phone. 

The Court concluded that a doctor was not "at work" or "working" simply by virtue of being on call outside the hospital. However, if circumstances arose such that in his best professional judgment, he was required to and did return to the hospital to work, he would be regarded as returning to "work". 

iii. Post-duty ward rounds

There are situations where a doctor whom, after being on call on Saturday 9am until 9am on Sunday, then had to stay for 2 additional hours until 11am on Sunday to make a post-duty ward round. Thereafter he was not required to stay at the hospital but was expected to stay within a 30-minute distance parameter.

The Court considered that for those 2 extra hours in the hospital, the doctor indeed was "working" in the true sense and this would be a breach of the EO and of the Human Resources Policies Manual. Yet, it would be unjust for the HA to be liable to compensate the doctor for an entire day.

The issues in disputes regarding statutory holidays were similar to those under "rest days" and the conclusions reached also applied to this claim. 

Conclusion

The Court concluded that the claim for "overtime" was dismissed, and the claim for lost rest days and statutory holidays succeeded for the full six-year period.

The Plaintiffs sought a declaratory judgment. Since a declaratory judgment was a matter for the Court’s discretion, the Court considered no useful purpose in exercising such discretion and declined to do so. 

The Plaintiffs sought time-off in lieu with pay as against an award of damages. The Court considered that this approach was flawed. First, the Plaintiffs had progressed in their careers over the years and their salaries had increased. Time-off in lieu as compensation would not account for the different values accorded to time between then and now. Second, time-off in lieu presented a form of injunctive relief and the Plaintiffs had not made out a case that damages would not be an adequate remedy. Third, giving the Plaintiff time-off in lieu would be devastating to the HA and to the efficient ongoing operation of the public hospital and medical system. Therefore, the Court granted an award of damages, to be assessed.

The Court ruled that a doctor on resident call on a rest day or statutory holiday should be considered to be at work for the entire day. As to the doctor on call outside the hospital, if and when he was called, and in fact went into the hospital, that such constituted "work" requiring recompense. As to the question of what period of that day should be recompensed, the question should be left to internal HA administrative process.

Should the HA fail to address the matter and the issue of quantum is required to be resolved judicially, the Court considered that assessment of quantum should be proceeded on the basis of a reasonable evidential assessment of the hours actually worked by doctors on their past rest days. The compensation for the total hours actually thus worked on rest days and statutory and public holidays should be based upon the then prevailing monthly salary of the particular doctor.

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CHINA EMPLOYMENT

Revised Individual Income Tax Law

At the 18th Session of the Standing Committee of the 10th National People’s Congress held on 27 October 2005 amendments were adopted to the Individual Income Tax Law of the People's Republic of China 中华人民共和国个人所得税法 were adopted. The amendments were promulgated by President Hu Jintao on 27 October 2005 and enter into effect on 1 January 2006.

Tax free allowance

A first amendment raises the tax free allowance applicable to wages and salaries from RMB 800 to RMB 1,600. Income earners shall only be taxed on the amount of personal income from wages and salaries which exceeds the allowance. 

Withholding obligation

Under the Law, the employer is the withholding agent for the individual income tax of its employees. The employer is consequently required to withhold the tax from the salary of all of its employees and then file a tax return and pay tax to the tax authority. A second amendment clarifies the position of certain taxpayers, including taxpayers who derive income from wages and salaries from two or more locations or do not have a withholding agent for whom this withholding arrangement may not be possible. Such taxpayers are required to file tax returns and pay taxes themselves in accordance with state regulations.

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DEACONS HR & PENSIONS PRACTICE GROUP

We are delighted to announce the expansion of our Human Resources & Pensions Practice Group with the arrival of Elsie Chan.

Elsie recently joined us as an Associate and her experience includes giving advice and preparing documents relating to Labour Tribunal actions on various employment issues covering termination of employment, enforceability of the restrictive covenants, variation of employment contracts, suspension of employment, personal data privacy matters and discrimination matters. She also assists clients in reviewing employment contracts and company policies.

Deacons' Human Resources & Pensions group was set up in 2004 to cater for the ever-increasing demand for our legal services in these areas from our clients. The practice has a dedicated team of five lawyers advising on a wide range of human resources and pensions law, both contentious and non-contentious, relating to the Employment Ordinance, employees' compensation, employment visas, labour disputes, discrimination issues and retirement schemes and provident funds. Our firm is particularly well known for its advice on the Mandatory Provident Fund and ORSO schemes, where clients include trustees, service providers, managers and employers.

The group is headed by partner Cynthia Chung who has extensive experience in retirement schemes, provident funds, mutual funds and unit trusts. Cynthia has been acknowledged twice as a recommended lawyer in the area of Labour & Employee Benefits by PLC Which Lawyer? (2005 and 2006 editions). She was also listed in the Guide to the World's Leading Labour & Employment Lawyers in 2005. Deacons is the only law firm in Hong Kong with a dedicated HR & Pensions Practice group headed up by a Chinese-speaking partner.

While Cynthia focuses primarily on Hong Kong related work, partner Kim Toh, who speaks Mandarin, Fujian, Chaozhou and Hainanese dialects, is responsible for China related employment and human resources matters. Kim is a China specialist and has many years of experience working with international, Hong Kong and PRC based clients.

Other members of our Human Resources & Pensions group are associates Paul Kwan and Vickie Leung. Paul, admitted as a solicitor in Hong Kong in 1992, has significant experience in employment & employment-related disputes; while Vickie who was admitted as a solicitor in Hong Kong in 2004 is experienced in advising on all aspects of non-contentious human resources and pensions issues.

Please feel free to contact any of the lawyers in our Human Resources & Pensions group should you wish to explore any issues with us.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.