Apex court agrees hoteliers can’t use service charge to satisfy minimum wage obligations

In a press summary of the unanimous judgment, Federal Court judges Datuk Nallini Pathmanathan said the Federal Court dismissed the appeal sought by Crystal Crown Hotel & Resort Sdn Bhd vs the National Union of Hotel, Bar & Restaurant Workers Peninsula Malaysia. —Picture by Yusof Mat Isa
In a press summary of the unanimous judgment, Federal Court judges Datuk Nallini Pathmanathan said the Federal Court dismissed the appeal sought by Crystal Crown Hotel & Resort Sdn Bhd vs the National Union of Hotel, Bar & Restaurant Workers Peninsula Malaysia. —Picture by Yusof Mat Isa

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KUALA LUMPUR, March 24 — The Federal Court has today upheld that hoteliers are not entitled to utilise their employees’ service charge to satisfy their statutory obligations to pay the minimum wage or incorporate them into a clean wage structure.

In a press summary of the unanimous judgment, Federal Court judge Datuk Nallini Pathmanathan said the Federal Court dismissed the appeal sought by Crystal Crown Hotel & Resort Sdn Bhd in its suit against the National Union of Hotel, Bar & Restaurant Workers Peninsula Malaysia.

Accordingly, the appeal took the form of two questions of law — whether under National Wages Council Consultative Act 2011 (NWCCA) hoteliers are entitled to utilise part or all of the employees’ service charge to satisfy their statutory obligations to pay the minimum wage; and whether having regard to the NWCCA and its subsidiary legislation, service charge can be incorporated into a clean wage or utilised to top up the minimum wage.

The dispute began when the hotel employees had insisted for their salaries to be aligned with the Minimum Wages Order 2012 (MWO) and for such wages to be separated from the 10 percent service charge imposed on the billings of the hotel’s customers.

In Malaysia, there is no compulsory “tipping”. Instead, a 10 per cent service charge is imposed on all bills paid by customers for the services rendered.

The rationale for the introduction of the service charge is to ensure a fairer distribution of cash-tips which would usually be given directly to front desk employees.

The Industrial Court had previously ruled that hotels could not incorporate and convert a portion of their employees’ service charge to form part of the minimum wages to meet the minimum wages requirement. The aforementioned judgement was further affirmed by the Court of Appeals.

‘Minimum wage; as envisaged under NWCCA and the Minimum Wage Order (MWO)

Justice Nallini said Section 2 of the Employment Act defined “wages” as “basic wages” and all other payments in cash payable to an employee for work done in respect of his contract of service except for several exclusions under the provision of the Act.

“What is clear therefore is that basic wages does not include any payments in cash payable to an employee for work done in respect of his service,” she said.

Summarising further, Justice Nallini said basic wages under the Employment Act referred to the contractual sum negotiated between the employer and employee under a contract of service or a collective agreement.

In other words, if the quantum of one’s basic wages is less than the minimum wage stipulated under the MWO, employers are legally bound to increase the basic wage to meet the stipulated minimum wage.

Thus the question arises of whether the “basic wages” of a hotel employee under his contract of service (or collective agreement) include the element of service charges.

Should the element of “basic wages” be inclusive of service charges, Justice Nallini said this would virtually mean that no hotel employee’s basic wages under his contract of service will fall below the minimum wage specified under the MWO.

Conversely, Justice Nallini said if basic wages did not include the “service charge” element then employees’ basic wages under their contracts of service or collective agreement will have to be increased to meet the minimum wage specified under the MWO.

“Applied to the present factual matrix, it follows that service charge is a payment in cash payable to an employee for work done under his contract of service.

“It does not and cannot fall within the definition of ‘basic wages’ as defined in the minimum wage legislation and Section 2 of the Employment Act,” she added.

Service charges collected cannot to be utilised to introduce a ‘clean wage’ restructuring or ‘top-up’ basic salaries

Justice Nallini said service charges — being monies collected from third parties — does not belong to the hotel since hotels act as a fiduciary or trustee who holds the monies until distribution to the beneficiaries who are the eligible employees.

“When it is paid by a customer as part of the bill, ownership in those monies does not vest in, or transfer to the Hotel.

“Ownership of the monies is immediately transferred and lies with the employees who are eligible to receive those monies.

“And the employees eligible are those who enjoy a contract of service granting them service charge points under their individual contracts or under their collective agreement,” she said.

The learned judge said this was evident in the fact that monies collected as service charges did not mix or intermingle with the hotel’s own funds as they were kept separately to be distributed on a specific date as provided for in the employees’ contracts.

Since the monies did not, at any point in time belong to the Crystal Crown Hotel, Justice Nallini said there was no entitlement in law for the monies to be appropriated and utilised to meet the statutory obligation created by the NWCCA and the MWO.

“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,” she said.

Touching on the “clean wage” structure, Justice Nallini said it would amount to a relabelling of service charge since a hotel would continue to charge a customer the same sum without calling it service charge yet retaining the source of the monies.

A relabelling would therefore meant an employee losing their service charge component that amounted to the removal of an entrenched term of service unilaterally and arguably, taking and utilising monies that were paid on trust for the employees for itself.

To that end, Justice Nallini said neither the Industrial Court nor the superior courts by way of judicial review are justified in allowing this as it failed to meet the object or purpose of the minimum wage legislation.

Furthermore, the same could be said for the “top up” structure since it amounts to an appropriation and utilisation of the service charge, which in no way altered the fact that ownership of the monies vests in the eligible employees after the customer has paid his bill and is simply held on trust for them by their employers.

“It is in that context that the Court of Appeal likened the top up structure or the clean wage system as amounting to asking the employees to pay themselves from their own monies,” she said.

Justice Nallini also noted that the Court was also asked to take into consideration the impact of the Covid-19 pandemic, including the present circumstances and conditions faced by the hotel industry in the formulation of a judgment.

Instead, the learned judge said the present appeal dealt with wages relating back to 2012 whereby the eligible employees have been waiting since then to see to the conclusion of the ongoing trade dispute.

“They have not received any of the monies owed to them as a consequence of the implementation of the minimum wage legislation for at least six or seven years.

“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,” she said.

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

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