Hotels Can't Use Service Charge to Fulfil Minimum Wage Obligations

Today, the Federal Court has upheld that hoteliers cannot utilise their workers' service charge to fulfil their statutory obligations to pay the minimum salary or incorporate them into a clean wage structure. 

Judge Datuk Nallini Pathmanathan stated that the Federal Court dismissed an appeal sought by a hotel company in its suit against the National Union of Hotel, Bar & Restaurant Workers Peninsula Malaysia.

The appeal took the form of two questions of law:

1. Whether under the National Wages Council Consultative Act 2011 (NWCCA), hoteliers are authorised to utilise part or all of the workers' service charge to satisfy their statutory obligations to pay the minimum salary

2. Whether regarding the NWCCA and its subsidiary legislation, one can incorporate service charge into a clean wage or utilised to top up the minimum wage. 

The dispute started when the hotel workers had asserted for their wages to be aligned with the Minimum Wages Order 2012 (MWO) and for such wages to be separated from the 10% service charge imposed on the hotel customers' billings. 

There is no mandatory "tipping" in Malaysia, but a 10% service charge imposed on customers' bills for the services provided.

The service charge was introduced to ensure a fairer distribution of cash-tips which would typically be given directly to front desk workers. 

Minimum Wage under NWCCA and MWO

Justice Nallini cited Section 2 of the Employment Act 1955 (EA). The Act defined "wages" as "basic wages" and all other payments in cash payable to a worker for the job done in respect of their contract of service except for some exclusions under the Act's provision. 

She said that basic wages do not include any payments in cash payable to a worker for work done in respect of their service. She added that basic wages under EA referred to the contractual sum negotiated between the employer and worker in a contract of service or a collective agreement.

If the quantum of an employee's basic wages is less than the minimum wage stipulated under the MWO, then employers are legally obligated to increase the basic wage to meet the stipulated minimum wage.  

Basic wages and the element of service charges 

Do the "basic wages" of a hotel worker under their contract of service (or collective agreement) include the element of service charges? 

Should the element "basic wages" include service charges, Justice Nallini said this would practically mean that no hotel employee's basic wages under their contract of service will fall below the minimum wage specified under the MWO.

She said if basic wages exclude the element of service charge, then the workes' basic wages under their contracts of service or collective agreement will have to be raised to meet MWO's minimum wage requirement. 

She stated that a service charge is a payment in cash payable to an employee for work done under their contract of service. It does not and cannot fall within the 'basic wages' definition under Section 2 of the Employment Act and the minimum wage legislation. 

The Court of Appeal likened the top-up structure as amounting to asking the workers to pay themselves from their own monies.

Service charges do not belong to the hotel

The judge said service charges (being monies collected from third parties) does not belong to the hotel since it acts as a fiduciary or trustee who holds the cash until distribution to the beneficiaries, who are the eligible employees. 

Justice Nallini stated that the employees eligible are those who enjoy a contract of service, granting them service charge points under their contracts or collective agreement. 

According to the judge, it was evident that monies obtained as service charges did not mix with the hotel's funds as they were kept separately to be distributed on a particular date as stated in the employees' contracts.

Since the monies did not belong to the hotel, Justice Nallini said there was no entitlement in law for the monies to be utilised to meet NWCCA and the MWO's statutory obligation.

"Wages, by their very definition, envisage monies belonging to the employer being paid to the employee under a contract of service.

"It does not envisage monies that are collected for the benefit of the employees being utilised by the employer to offset its own liabilities," Justice Nallini said.

Service charges cannot be used for 'clean wage' restructuring or 'top-up' basic wages

On the "clean wage" structure, Justice Nallini stated it would amount to a service charge relabelling since a hotel would proceed to charge a customer the same amount without calling it service charge but retains the monies' source. 

A relabelling would mean an employee is losing their service charge component that amounted to removing an entrenched term of service unilaterally and arguably, taking and utilising monies that were paid on trust for the workers for itself.

She said neither the Industrial Court nor the superior courts by way of judicial review are justified in allowing it as it failed to meet the minimum wage legislation's purpose. 

The same could be said for the "top-up" structure. It amounts to the service charge appropriation and utilisation, which does not change the fact that the monies' ownership vests in the eligible employees after the customer has paid their bill and is held on trust for them by their employers. 

She said that it is in such context that the Court of Appeal compared the "top-up" structure or the "clean wage" system as amounting to asking the workers to pay themselves from their own monies. 

A three-judge panel delivered the unanimous judgment. Justice Nallini led the judge panel, and the grounds of judgment was also agreed upon by Federal Court judges Datuk Abdul Rahman Sebli and Datuk Mary Lim Thiam Suan.

Source: Malay Mail

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