In the hotel industry, service charge is imposed on bills to customer (eg: 10% of the total bill). The sum is paid by customers, and the hotel collects this money on behalf of the employees. The service charge is then distributed to employees based on “service charge points”. Service charge could be compared to mandatory tipping, although the mechanism of collection and distribution is more nuanced than that. The service charge supplements the low monthly salaries paid to workmen in the industry.
On 24 March 2021, in Crystal Crown Hotel & Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia (Civil Appeal No 02(f)-4-01/2018), the Federal Court determined that:
- Hoteliers cannot utilise the employee’s service charge to satisfy their statutory obligations to pay the minimum wage; and
- Service charge cannot be incorporated into a clean wage or utilised to top up the minimum wage
- The legislation governing minimum wage in Malaysia is the National Wages Council Consultative Act 2011 (“NWCCA 2011”) and the Minimum Wages Order(s) 2012 to 2020.
- Minimum wages refers to the quantum of monies determined by the government as the minimum sum of money to be paid as a wage under a contract of service or collective agreement. Under the minimum wage legislation, “minimum wages” is defined as “basic wages” to be or as determined under the Minimum Wages Order.
- There is a distinction between “wages” and “basic wages”. Under Section 2 of the Employment Act 1955, “wages” is defined as “basic wages” and all other payments in cash payable to an employee for work done regarding his contract of service, with certain exclusions. Therefore, “basic wages” is a separate component from “all other payments in cash payable to an employee for work done in respect of his service”.
- The minimum wage legislation uses the phrase “basic wages” to define “minimum wage”. Therefore, the minimum wage legislation increases the quantum of basic wages under individual contracts of employment or a collective agreement, where the sums paid as basic wages falls below the statutory minimum.
- Since service charge is a payment in cash to an employee for work done under his contract of service, it does not fall within the definition of “basic wages” and therefore cannot be construed as part of minimum wage.
- Service charge, being monies collected from third parties, does not belong to the hotel. When paid by a customer as part of the bill, ownership of those monies does not vest in, or transfer to the hotel. The hotel is holding the monies in trust for eligible employees to be distributed on a specific date as provided for in their contracts. Since the monies did not belong to the hotel, the hotel cannot utilise the service charge to meet the statutory obligation for minimum wage. To allow otherwise would be amounting to ask the employees to “pay themselves from their own monies”.
- The hotel proposed a new compensation structure whereby employees would no longer earn “service charge” separately but would instead receive a “clean wage” which incorporates the service charge element. The Federal Court held this is just a relabelling of the service charge to avoid the minimum wage legislation, and should not be allowed as it does not meet the object or purpose of the minimum wage legislation.
- Similarly, the hotel cannot utilise the service charge to “top up” or supplement basic wages to meet minimum wage requirements. Ownership of the service charge still vests in the eligible employees after the customer has paid his bill, and the hotel cannot utilise money it does not own.
During submissions, the hotel highlighted that imposing the minimum wage requirements in this manner would have a “ripple effect”. More senior employees further up the wage scale will also enjoy indirect wage increases.
However, the Federal Court agreed with the Union’s submissions that the ripple effect of minimum wage is acknowledged as a benefit by the International Labour Organisation. The hotel industry has been insulated by relying on its customers to meet its basic costs and overheads for employees, but other industries have had to cope without such subsidy or supplement. This cannot justify a “distorted” construction of the definition of “minimum wage” under the legislation.
Similarly, the Federal Court declined to consider the economic hardships faced by the hotel industry due to the COVID19 pandemic:
“[T]he reality is that the present appeal deals with wages relating back to 2012. The eligible employees have been waiting from then until now to have this trade dispute dealt with… It would have been anticipated by any prudent employer that monies due from those dates would have been set aside and therefore available for payment to the eligible employees, who as members of the hotel industry are equally affected by the pandemic.
Shortly put, we are answering a legal question relating to the construction of the minimum wage legislation and our answer must be in accordance with accepted principles of law… The fact of the pandemic in 2020 and 2021 cannot and does not alter our findings.”
The Federal Court’s decision means that employers must ensure that the “basic wages” offered to employees meets the statutory minimum wages. Employers who utilise “service charge” (or any other forms of payments from customers or third parties) to supplement the minimum wage, may be running afoul of the law. This is even if employees end up with “take home” cash far beyond the minimum wage amount.
Employers who may be affected should take this opportunity to re-evaluate their compensation and benefit structures to comply with the law. Given the current economy, businesses should have a long-term outlook as to how any compensation changes will affect their commercial plans. Businesses that cannot find a commercially sustainable solution to meet minimum wage requirements may unfortunately be forced to look at more drastic actions such as workforce reduction or total business closure.
This article was written by Donovan Cheah. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.