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13 April 2021
It is a standard practice in the hotel industry to collect a 10% service charge from customers in place of a tip, which is in turn distributed to eligible employees. This is seemingly why hotel industry employees were previously paid a low basic salary; they were expected to be compensated with the income earned from the service charge.(1)
However, following the introduction of the National Wages Consultative Council Act (NWCCA) 2011 and the Minimum Wages Orders (MWOs) from 2012 to 2020, the hotel industry found itself having to incur additional salary costs to meet the minimum wage. To mitigate the costs incurred, the hotel industry resorted to supplementing employees' wages with the service charge in order to meet the minimum threshold for wage requirements.
This practice is prohibited following the Federal Court decision in Crystal Crown Hotel Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia.(2)
The appeal at the Federal Court stemmed from a trade dispute between a hotel and a trade union following the hotel's unwillingness to commence collective bargaining.
The dispute was referred to the Industrial Court for adjudication in February 2012. In light of the NWCCA and the MWOs, the trade union proposed retaining the service charge system along with a salary adjustment of 10% in the collective agreement. On the other hand, the hotel proposed using the service charge to pay the minimum wage.
It was a common legal position in all of the courts below – namely, the Industrial Court, the high court and the Court of Appeal – that the service charge could not be used to pay the minimum wage.
The following questions of law were posed to the Federal Court:
One of the hotel's arguments rested on Section 30(4) of the Industrial Relations Act 1967, which provides that the Industrial Court must have regard for the public interest and the financial implications and effect of an award on the industry concerned and related or similar industries. It was argued that the "basic wages" provided for in the NWCCA and the MWOs should include the service charge when consideration is given to the financial impact of the automatic increase of wages to the statutory minimum on the hotel industry.
The Federal Court dismissed the hotel's appeal and answered the abovementioned questions in the negative. The key takeaways are summarised below.
Employee benefits cannot be compromised
The Industrial Relations Act, the NWCCA and the MWOs are social legislations which share the common objective of meeting the needs of vulnerable and marginalised groups sections of society. As such, the Industrial Relations Act should be construed to ensure that the minimum wage under the NWCCA and the MWOs is achieved without abrogating other benefits or emoluments enjoyed by employees.
Basic wages do not include service charge
Pursuant to the NWCCA, 'wages' means basic wages and all other payments in cash payable to an employee for work done in respect of their contract of service as defined under the Employment Act 1955. 'Minimum wages' means the basic wages determined by Parliament under an MWO. The NWCCA further provides that the rate of basic wages under a contract of service (including a collective agreement) must be increased to the minimum wage stipulated under the MWOs. It follows that it is the basic wages that the NWCCA and the MWOs intend to increase to the minimum stipulated amount. Thus, the question is whether 'basic wages' includes the service charge. If so, the hotel would have no problem meeting the threshold for the minimum wage.
Following the definitions alluded to above, the Federal Court opined that 'wages' comprises two elements:
As such, a service charge cannot be part of basic wages as it falls within the definition of 'other cash payments'.
Contractual term cannot be varied without consent
A service charge is an additional cash emolument expressly provided for in an employment contract. If the hotel were to use the service charge to pay the minimum wage, it would be akin to depriving the employees of the entrenched terms of service, which cannot be done unilaterally.
Hotels hold service charge on trust
A service charge does not belong to the hotel, but to eligible employees. The hotel merely collects and holds the monies as a fiduciary or trustee until its distribution to eligible employees. As such, the hotel is not legally entitled to appropriate and use the service charge to meet its statutory obligation.
Principles of law prevail over a particular sector's interests
The COVID-19 pandemic, which has affected the hotel industry as a whole, cannot be a reason for the courts to depart from the accepted principles of law in respect of the construction that a service charge is not part of basic wages under minimum wage legislation.
While this decision may be unpopular among hoteliers and related or similar industries due to the financial impact of the COVID-19 pandemic, it was inevitable. The long-term impact that it may have on society as a binding precedent outweighs any likely detriment that it may cause to a particular industry. In this regard, the Federal Court also remarked that the decision is not confined to the facts of the appeal and pronounced it the material law on the relevant legislation which does not vary from case to case.
For further information on this topic please contact Gan Khong Aik or Lee Sze Ching (Ashley) at Gan Partnership by telephone (+603 7931 7060) or email (firstname.lastname@example.org or email@example.com). The Gan Partnership website can be accessed at www.ganlaw.my.
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