Can Service Charge Be Used to Pay Minimum Wages?

When the Minimum Wages Order (MWO) 2012 came into force on 1st October 2013 for the hotel industry,[1] certain hotels implemented a top-up structure wherein an employee’s service charge allocation would be used to meet the hotel’s minimum wages obligation [hereinafter referred to as the Top-Up Structure].

The National Union of Hotel, Bar & Restaurant Workers, Peninsula Malaysia, unsurprisingly, objected to the Top-Up Structure, and the matter, in every instance, was referred to the Minister of Human Resources, who in turn referred it to the Industrial Court pursuant to Section 26(2) of the Industrial Relations Act 1967.[2]

The party in whom the Industrial Court ruled against would then proceed to file a judicial review of the Industrial Court decision. Most of the cases involving the MWO 2012 are currently in the Court of Appeal pending the Federal Court’s determination of Crystal Crown Hotel & Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [hereinafter referred to as Crystal Crown].[3]

A few years later, the MWO 2016 came into force on 1st July 2016[4] raising the minimum wage from RM900 to RM1,000 per month for employees in Peninsula Malaysia and to RM920 for employees in Sabah, Sarawak, and the Federal Territory of Labuan . In Komtar Hotel Sdn Bhd (Hotel Jen Penang) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia,[5] it can already be seen that the issue of the Top-Up Structure in light of the MWO 2016 has now come before the Industrial Courts.[6]

From this, it can be anticipated that the Minimum Wages Order 2018[7] and the Minimum Wages Order (Amendment) 2018[8], just like its predecessors, will result in a whole host of Industrial Court cases which will subsequently be subjected to a judicial review application by the party who lost in the Industrial Court.

It is submitted that statute and case law are both clear on the point that service charge cannot be used to pay minimum wages.

Section 2 of the Employment Act 1955

Section 2 of the Employment Act (EA) 1955 defines “wages” to mean “basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service …”[9] It must be noted that the EA 1955 distinguishes between “wages” and “basic wages.” The former includes the latter. The former also includes “all other payments in cash payable to an employee for work done in respect of his contract of service …”

Thus, if it could be reduced to a mathematical formula,

Wages = basic wages + all other payments payable for work done in respect of a contract of service

Basic wages “is ordinarily understood to mean that part of the price of labour wherein the employer must pay to all workmen belonging to all categories. The term is used ordinarily in contradistinction to allowances - the quantum of which may vary in different contingencies. "Basic wage", therefore, does not include additional emolument which some workmen may earn on the basis of a system of bonus related to production. Nor does it include any other supplements and allowances, such as housing and cost of living, not directly related to the work in that category.”[10] Thus, service charge is not a part of basic wages.

Though it has been accepted up to the Court of Appeal level that service charge is included in “wages” for the purposes of Section 2 of the EA 1955,[11] service charge makes up the “all other payments” component rather than the “basic wages” component.

Section 2 of the National Wages Consultative Council Act 2011

Section 2 of the National Wages Consultative Council (NWCC) Act 2011 defines:

a) “wages” to have “the same meaning assigned to it in section 2 of the Employment Act 1955 [Act 265] …”[12]; and

b) “minimum wages” to mean “the basic wages to be or as determined under section 23.”[13]

From here, we can see that minimum wages is equated to basic wages, but is distinguished from wages. This distinction has been acknowledged by the High Court in inter alia THR Hotel (Selangor) Bhd v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar dan Restoran, Semenanjung Malaysia & Anor and other appeals [2018] 1 LNS 853[14] and New York Hotel Johor Bahru (Imej Klasik Sdn Bhd) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar dan Restoran, Semenanjung Malaysia & Anor [2018] 1 LNS 1389.[15]

For ease of understanding, if Section 2 of the EA 1955 read together with Section 2 of the NWCC Act 2011 could be reduced to a mathematical formula, it would be the following:

Wages = Minimum/basic wages + other payments payable (e.g. service charge) [16]

Summary

Premise 1      : Wages = Basic wages + other payments payable

Premise 2           : Minimum wages = Basic wages

Conclusion 1      : Therefore, wages = minimum/basic wages + other payments payable

Premise 3           : Service charge is a type of other payments payable

Conclusion 2     : Therefore, service charge cannot be used to pay minimum wages

Crystal Crown

When the matter came up for judicial review, the learned High Court judge was of the opinion that “the rationale and concept for the introduction of the service charge in the hotel industry as highlighted above showed that the money collected and deposited into the joint account of the employee and the Hotel belongs to the eligible employees of the Hotel and the payment to the employees in accordance with the service points allocation is provided in the contract of employment, hence I agree with the Award made by the IC that the Hotel could not be permitted to meet its obligation to pay the minimum wage as envisaged by the NWCC and MWO by utilising the service charge paid by its customers or patrons.” [17]

The Hotel appealed to the Court of Appeal[18] but its appeal was dismissed on 31st July 2017. The Hotel then went on to appeal to the Federal Court wherein the matter is still pending the Federal Court’s determination. Until and unless the decision of the Court of Appeal, which affirmed the decision of the High Court, is reversed, the legal position as it stands, whether in the context of MWO 2012, 2016, 2018 or any subsequent minimum wages order,  is that service charge cannot be used to pay minimum wages.

Disclaimer: The views or opinions represented here are personal and belong solely to the author and do not represent those of people, institutions or organisations that the author may be associated with in a professional or personal capacity, unless explicitly stated.

[1] See http://www.federalgazette.agc.gov.my/outputp/pua_20121228_P.U.%20(A)%20470-Perintah%20Gaji%20Minimum%20(Pindaan)%202012%20-%2028%2012%202012-%20final.pdf

[2] E.g. see Subang Jaya Hotel Development Sdn Bhd (Dorsett Grand Subang) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [2015] 4 ILR 539 refd(3), Berjaya Langkawi Beach Resort Sdn Bhd v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [2016] 2 LNS 1325, and Georgetown City Hotel Sdn Bhd v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [2016] 2 LNS 1326

[3] Civil Appeal No.: 02(f)-4-01/2018(W)

[4] See Order 1(1) of the Minimum Wages Order 2016 (http://www.federalgazette.agc.gov.my/outputp/pua_20160429_P.U.%20(A)%20116%20-%20Perintah%20Gaji%20Minimum%202016.pdf)

[5] [2019] 2 ILR 123 / Award No. 774/2019 [Case No: 28(7)(18)/3-66/17] [http://www.mp.gov.my/eicpp/MainServlet?action=downloadAward&awardIndex=29519&awardCategory=4]

[6] See paragraph 1(b)-(c) of Award No. 774/2019

[7] http://www.federalgazette.agc.gov.my/outputp/pua_20181017_P.U.%20(A)%20265.pdf

[8] http://www.federalgazette.agc.gov.my/outputp/pua_20181128_P.U.%20(A)%20305.pdf

[9] http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Act%20265%20-%20Employment%20Act%201955.pdf

[10] Decor Wood Industries (Terengganu) Sdn Bhd v. Timber Employees’ Union [1990] 1 ILR 423 (Award No. 107 of 1990). See also Words, Phrases & Maxims, Legally & Judicially Defined, Volume 2, A(/1), B by Anandan Krishnan at p. 575 and The Law of Industrial Disputes by OP Malhotra at p. 84

[11] See Abu Bakar bin Salleh & Ors v Langkasuka Resort Sdn Bhd (Langkawi Beach Resort & Langkawi Airport Sdn Bhd (Hotel Helang)) & Anor [2018] 1 MLJ 248 (CA), and Abdul Aziz Abdul Majid & Ors v Kuantan Beach Hotel Sdn Bhd & Ors [2012] 1 LNS 1294 (CA)

[12] https://www.ilo.org/dyn/travail/docs/1506/National%20Wages%20Consultative%20Council%20Act%202011%20-%20malaysianlaw.my.pdf

[13] Ibid.

[14] See paragraph 29 of [2018] 1 LNS 853

[15] See paragraph 27 of [2018] 1 LNS 1389

[16] Save for payments excluded by Section 3 of the EA 1955

[17] See paragraph 43 of [2015] 1 LNS 1450

[18] Civil Appeal No.: W-02(A)-1601-09/2015