Leung Ping Chuen v. Good Friendship (Hong Kong) Ltd and Another

[English Translation — 英譯本]
HCLA 11/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO 11 OF 2015

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO 1173 OF 2014)

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HCLA 13/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO 13 OF 2015

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO 1174 OF 2014)

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REASONS FOR JUDGMENT

Introduction

1.The appellant (i.e. the 2^nd defendant of the two original cases) (hereinafter “Rich Link”) and the 1^stdefendant of the two original cases (hereinafter “Good Friendship”) respectively operated a travel company (hereinafter collectively referred to as “the company”) at different times. The two respondents (i.e. the claimants of the two original cases) (hereinafter “Mr Leung” and “Mr Wong”) were employed by the company as tour coach drivers of the company at different times.

2.Mr Leung and Mr Wong were initially employed by Good Friendship. Later, due to operational difficulties, Good Friendship terminated the employment contracts with them. Rich Link took over the tour coaches of Good Friendship and employed Mr Leung and Mr Wong as tour coach driver. Rich Link also agreed to calculate their length of service from the time they joined Good Friendship. The mode of business and operation of Rich Link was more or less the same as that of Good Friendship.

3.Subsequently, Mr Wong retired and left the employment, while Mr Leung alleged that he had in effect been dismissed. They filed claims in the Labour Tribunal against Rich Link for compensation. On 17 March 2015, the Labour Tribunal found in favour of Mr Leung and Mr Wong and awarded them payment in lieu of notice, long service payment, wages for paid annual leave and wages for paid holiday.

4.Rich Link applied to the Court of First Instance for leave to appeal the decision of the presiding officer of the Tribunal. I granted leave to Rich Link on 4 December 2015 to appeal, based on a point of law, the quantum of compensation adjudged by the presiding officer.

Ground of appeal and reasons for decision of the presiding officer

5.The quantum of the compensation adjudged by the presiding officer was calculated on the basis of the wages of Mr Leung and Mr Wong, which were taken to include their income derived from selling souvenirs in the tour coaches. The point advanced by Rich Link on appeal is that the presiding officer failed to apply the correct legal principle in analyzing whether the income derived from selling souvenirs formed part of “wages” under the Employment Ordinance. Rich Link contends that selling souvenirs was a side business of drivers and was not work done or to be done under their contracts of employment, and hence the income therefrom should not have been included as wages.

6.Regarding the arrangement on selling souvenirs, the presiding officer made the following findings of fact at paras 22 to 26 of his Reasons for Decision:

“22. The defendant company contends that selling souvenirs was purely the claimants’ own business which had nothing to do with the defendant and the income so generated was not wages.

23. The arrangement of selling souvenirs was put in place by the defendant company and applied to all drivers. The souvenirs were restricted by the defendant company to two types of key rings and bauhinia. They were provided by suppliers designated by the defendant company and at designated prices. The procedure of promoting the sale of souvenirs to tourists was stipulated by the defendant company, and tour guides followed the prescribed process in promoting the sale of souvenirs at prices fixed by the defendant company. The cost of purchasing souvenirs was borne by the claimants. They could decide how many souvenirs to purchase but had to report to the defendant company the quantitiespurchased as well as the sales figures. The souvenirs had to be stored in tour coaches. The defendant company also issued notices from time to time, requesting the claimants to comply with stipulations relating to souvenirs, and punishment would be imposed for failure to comply with the stipulations.

24. It is obvious that the sale of souvenirs was solely arranged by the defendant company, in respect of which the claimants had no freedom or choice. The defendant company also regarded the souvenirs as their goods. The warning letter issued by Rich Link to Mr Leung stated that the souvenirs were the company’s goods. It was only when claims were filed that the company said instead that the letter had been issued by mistake. This, in my view, is sheer excuse.

25. The defendant company claims that what it charged and received was just management fee. However, it can be seen from the notice and warning letter that the claimants were liable for loss ofsouvenirs and might even have to pay compensation therefor. The claimants also had the duty to report the quantities. The defendant company did not really have a duty of management. Furthermore, no matter what the money was called, the defendant company did charge a specific sum from the sales figure. The defendant company was in fact taking a share of the profits of selling souvenirs.

26. I am of the view that the sale of souvenirs was actually controlled by the defendant company and not a private operation of the claimants themselves. It was actually part of the claimants’ work. It can also be seen from the notice of Rich Link that drivers could receivenon-souvenir-selling drivers’ allowances for trips which forbade the sale of souvenirs. The so-called private operation is in fact no more than a concoction of the defendant company.”

7.Applying the Court of Final Appeal case of Lam Pik Shan v Hong Kong Wing On Travel Service Limited[1],the presiding officer held that the income derived from the sale of souvenirs was money received directly or indirectly from persons other than the employer, by Mr Leung and Mr Wong as employees in the course of their employment pursuant to the arrangement made by the employer, and as such formed part of their wages. The presiding officer said at paras 27 to 30 of his Reasons for Decision:

“27. In Lam Pik Shan v Hong Kong Wing On Travel Service Limited FAMV No 55 of 2008, the Court of Final Appeal considered the question of whether tips earned by tour guides were wages. In that case, the tips were collected from tour group members pursuant to arrangements put in place by the employer, and would then be shared among tour guides, local guides, drivers and others. Although the sums of money were collected from tour group members, they were received directly or indirectly from persons other than the employer, by an employee in the course of his employment pursuant to arrangement of the employer. Such sums should be part of the wages.

28. I think there are similarities between that case and the present case. Although the sums of money involved in the sale were collected from tour group members, they were received directly or indirectly from persons other than the employer, by the claimants as employees in the course of their employment under the arrangement of the defendant company.

29. Although the form wasthat the claimants purchasedthe souvenirs and then sold them, everything was in fact manipulated by the defendant company, and the basic nature of the arrangement is no different from that of the case cited.

30. I find that the sale of souvenirs formed part of the claimants’ wages. Hence, the income derived from selling souvenirs should be included in calculating holiday and annual leave compensation and long service payment.”

Discussion

8.Mr Yip, Counsel for the appellant submits that the presiding officer erroneously applied Lam Pik Shan and mixed up the tips paid by tour group members with the income of drivers derived from selling souvenirs. The issue in Lam Pik Shanwas whether tips formed part of “wages” within the meaning of the Employment Ordinance. Section 2 of the Employment Ordinance defines the term “tips and service charges” as follows:

“tips and service charges, in relation to wages, means sums of money received, directly or indirectly, by an employee in the course of and in connection with his employment which are-

(a) paid or derived from payments made by persons other than the employer; and

(b) recognized by the employer as part of the employee’s wages;”

9.The thrust of Mr Yip’s submissions is that the facts in Lam Pik Shandiffer from those of the present case. The main differences are: the tour guide in that case was obliged under his contract of employment to collect tips from tour group members, and tips formed an overwhelming part of the income of tour guides. On the other hand, the drivers in the present case were not obliged to promote the sale of souvenirs and the income derived from the sale of souvenirs was lower than other income. Moreover, the drivers had to bear financial risk. Selling souvenirs was their side business. Mr Yip stresses that although the income from selling souvenirs was derived from persons other than the employer, the presiding officer made no findings of fact whatsoever in relation to recognition by the company that the income from selling souvenirs formed part of the employee’s wages, nor was there any evidence to support this fact.

10.Mr Chiu, Counsel for Mr Leung and Mr Wong submits that the drivers were obliged under the contract of employment to promote the sale of souvenirs. He points out that the company gave the drivers “non-souvenir-selling allowance” and included the income of each driver from selling souvenirs in the “list of income items” of that driver, and argues that these facts reflect that the company regarded the income from selling souvenirs as part of the drivers’ wages.

11.On the question of whether Lam Pik Shan is applicable to the present case, for now it is not necessary for me to deal with Counsel’s arguments set out above. I will do so later in this judgment. Although the income derived from selling souvenirs fulfills the two conditions set out in paras (a) and (b) of the abovementioneddefinitionin the Employment Ordinance, bothCounsel have neglected the ordinary meaning of the terms “tips” and “service charges” to which paras (a) and (b) are subject. Therefore, in respect of wages, “tips and service charges” must fulfill three conditions before they can be regarded as wages, namely the income concerned must be “tips” or “service charges” as these terms are ordinarily understood, and the conditions set out in paras (a) and (b). In common parlance, “tips” refers to a random sum of reward money, on top of the spending, given to a servant inrecognition or appreciation of his/hermanner in providing service. “Service charges” of course means fees paid for the service provided. The income from selling souvenirs is the net income obtained by deducting cost and money paid to the company from the total purchase price paid by tour group members.  Recognition or appreciation of the manner in which tour guides and drivers provide their services may well be a factor motivating tour group members to purchase souvenirs, but no matter how it is looked at, such income cannot be “tips” or “service charges” as these terms are ordinarily understood. Hence, Lam Pik Shan is in my view not applicable to the present case. I agree with Mr Yip’s submission that the presiding officer erroneously applied Lam Pik Shan and mixed up the tips paid by tour group members with the income of drivers derived from selling souvenirs. The next question is whether in the present case there is other legal basis to support the decision of the presiding officer on wages.

12.Mr Yip has referred to another case Wong Pui Tuen Kenny & Anor v Crown Motors[2], submitting that the legal principle therein is applicable to the present case. The claimant in that case was a car sales representative. In the course of car sales, he could obtain car finances on behalf of customers from a finance company associated with the employer and earn commission from that finance company. Chu J (as she then was) held that the commission did not fall within the definition of “wages” in the Employment Ordinance and could not be included as “wages” in calculating the employee’s entitlements under the Employment Ordinance.  She said at paras 14 and 15 of her judgment:

“14. The critical words in the statutory meaning of ‘wages’ under section 2(1) are ‘payable to an employee in respect of work done or to be done under his contract of employment’. The emphasis is on the contract of employment. Given that the Employment Ordinance is a piece of legislation to regulate general conditions of employment, hence the rights and duties of employers and employees under contracts of employment, a logical construction mandates that the statutory definition be read to refer to remuneration, earnings and allowances that are paid under contracts of employment. The obligation to pay and the entitlement to receive the payment must stem from the contract of employment.

15. In most instances, where the payment is in return for work performed or to be performed under the contract of employment, there will be a corresponding liability under the contract to pay for the work done or to be done. But it does not follow that if the work done or to be done is connected to and carried out under the contract of employment, the employer necessarily has a liability under the contract of employment to pay for it. Furthermore, where the employment facilities or affords the employee an opportunity to earn a remuneration, the employer does not become liable to pay the employee unless he is already obliged by the contract of employment to do so. If wages is not confined to remuneration, earnings and allowances payable under the contract of employment, employers will come under onerous burden for which there is no logical justification. It follows that although it is a very relevant factor that the work for which the remuneration is paid is work done under the contract of employment, the fact is not always determinative of the issue of whether the payment is part of the employee’s wages.” 

13.Chu J held that the employer’s obligation to pay wages and the employee’s right to receivewages must stem from the contract of employment between them. If the employee performs the obligations set out in the contract of employment and executes the work under it, the employer has a corresponding obligation to pay wages. Some employment relationships afford the employee an opportunity to provide service to and earn remuneration from a third party. General speaking, the service provided by the employee to the third party is merely an obligation or work connected to the contract of employment and is not necessarily an obligation and work under the contract of employment. If it is not an obligation and work under the contract, the employer is not obliged to assume the obligation of the third party to pay the employee. An employee who claims that the remuneration he has earned from a third party falls within the meaning of “wages” in the Employment Ordinance bears a very heavy burden of proof. I entirely agree with Chu J’s interpretation of “wages” under in the Employment Ordinance and the legal principles she set out.

14.Mr Yip submits that the facts of that case were no different from the facts of the present case; both involve the question of whether remuneration paid to an employee by a third party constitutes “wages” within the meaning of the Employment Ordinance for the purpose of calculating the employee’s entitlements under that Ordinance. Mr Yip submits that the contracts of employment between Rich Link and the drivers afford the drivers an opportunity to conduct a side business in the course of work by promoting the sale of souvenirs and earning extra money from tour group members, but promoting the sale of souvenirs is not an obligation and work set out in the contract of employment, and hence the income derived from selling souvenirs is not “wages” within the meaning of the Employment Ordinance and Rich Link has no corresponding obligation to pay for the extra money. The main argument advanced by Mr Yip is that the contracts of employment of Mr Leung and Mr Wong made no mention of an obligation to sell souvenirs, and the souvenirs were purchased by Mr Leung and Mr Wong with their own funds and hence were their personal properties. They had an absolute right to dispose of the souvenirs and decide whether to sell them or not. Selling souvenirs was their side business.

15.Whether selling souvenirs is an obligation or work specified in the contract of employment is a matter of construction of the contract. Although the contract of employment (written contract) signed by each of Mr Leung and Mr Wong did not mention an obligation to sell souvenirs, para 5 of the written contract stipulated that “such other rules, regulations, rights, interest or protections as are announced by the Company shall also form part of this Contract”. It follows thatthe terms of the contract of employment were not exclusively contained in the written contract; some of the terms might be set out in documents issued by the company to the drivers such as notices, codes of conduct and warning letters. It was on the basis of these documents that the presiding officer held that the arrangement of selling souvenirs was put in place by the employer and applicable to all drivers. This is a finding of fact made by the presiding officer and is amplysupported by evidence. I do not intend to quote the relevant clauses in these documents. Details of the arrangement include:

(1)   Drivers were required to purchase souvenirs from suppliers designated by the company;

(2)   The company allowed the promotion and sale of only two kinds of souvenirs: key rings and bauhinia plates;

(3)   The sale prices of souvenirs were decided by the company;

(4)   The process of promoting the sale of souvenirs to tour group members was prescribed by the company;

(5)   The company requiredthe tour guides to follow the prescribed process in promoting the designated souvenirs;

(6)   Drivers were required to declare to the company the stock and sales figures of the souvenirs;

(7)   The souvenirs had to be stored in tour coaches;

(8)   Drivers were liable for any loss of souvenirs; and

(9)   The company charged and received a specific sum of money based on the sales figures.

16.The requirements on the purchase and sale of souvenirs were set out in great detail. Drivers purchased with their own funds the two kinds of designated souvenirs from the designated suppliers and stored the souvenirs in the tour coaches. Tour guides promoted, by way of a designated process, the sale of these designated souvenirs to tour group members,with sale prices fixed by the company. Drivers were responsible for declaring to the company the stock and sales figures of the souvenirs and handing over part of the sales proceeds to the company. Drivers who violated the declaration requirement would upon first violationreceive oral warnings and would upon subsequent violation not be paid reimbursement and tips of the preceding week (which was tantamount to paying a fine). Any rational reader who has read the written contract and documents such as notices, codes and warning letters will regard the sale of souvenirs as an implied condition of the contract of employment —a duty of, and work assigned to, a driver under the contract of employment.

17.As for the second major issue raised by Mr Yip, the souvenirs were purchased by the drivers with their own funds and prima facie they had absolute power to determine the quantity of goods purchased and also the power to dispose of them by deciding whether to sell them or not.The sale of souvenirs was their side business. They conducted their own business and exercised the power of management, enjoyed the fruits of their own investment and good management, and bore financial risks. All profits and losses of the business went to them. Mr Yip further points out that Mr Leung had candidly stated in his testimony that the souvenirs were purchased by him with his funds and they were his personal properties which he had the right to transfer to others. Mr Yip contends that Mr Leung’s subjective will lends support to the assertion that the sale of souvenirs was his side business.

18.With respect, I do not agree. It can be seen from para 16 above that in the course of promoting and selling souvenirs, the company had considerable power of management and control. Drivers did not have the right to choose what souvenirs to sell or to determine the sale prices and process of promoting sale. They were also required to report to the company the stock and sales figures. Mr Yip submits that such control was exercised merely for the purpose of ensuring the company’s operation and quality of service and calculating the benefits due to the company. While I agree with this statement, the management and control exercised by the company far exceeded the management by the drivers of their own business operation and was more in line with the employment by the company of drivers to operate the business of selling souvenirs. Another important fact is that the company directed the tour guides to work with drivers in promoting the sale of souvenirs, and also decided that tour guides could take a specified percentage of the proceeds of selling bauhinia plates as remuneration for promoting the sale of souvenirs, but could not take any part of the proceeds of selling key rings as remuneration. There was no reason for tour guides to provide free promotion service to the drivers’ side business. Taking into account the arrangement set out in para 16 above, in particular the above considerations, a reasonable or even an irresistible inference is that the sale of souvenirs was an arrangement put in place by the company and was part of the company’s operation rather than a side business of the drivers; the promotion of souvenirs by tour guides andthe purchase of souvenirs by drivers, the keeping of stock and sales records, and the payment of part of the proceeds of sale of souvenirs to the company, were their respective obligations and assigned work under their contracts of employment.

19.Moreover, the company provided “non-souvenir-selling allowance”. The company prohibited drivers from selling souvenirs in certain tour groups. Drivers who were assigned to serve those tour groups would be given “non-souvenir-selling allowance” the amount of which was similar to their income from selling souvenirs. Mr Yip argues that this allowance was providedmerely to encourage drivers to serve those tour groups. In any event, this allowance also reflects that promoting the sale of souvenirs was an obligation of the drivers under their contracts of employment, and that the company also regarded the income derived from selling souvenirs as part of the wages. Hence, if drivers were not allowed to sell souvenirs, the company would pay them “non-souvenir-selling allowance” to make up for the loss of their income (ie “wages”). This allowance also serves to refute Mr Yip’s argument about side business.

20.Another point made by Mr Yip is that, as Mr Leung purchased the souvenirs with his funds and subjectively considered the souvenirs to be his private properties, the sale of souvenirs was a side business he ran on his own and had nothing to do with the company. In respect of property ownership, subjective will is the most important factor for consideration. However, if the subjective will is inconsistent with other objective circumstances, it can reasonablybe inferred that his subjective will is misconceived.  Although Mr Leung considered the souvenirs to be his private properties, it can be seen from para 16 above that the company had absolute control over the souvenirs. After purchasing the goods, drivers had to report to the company the stock and store the goods in tour coaches. They had to pay compensation for any loss of souvenirs, and would be punished by fine if they failed to make a report or declaration to the company. Neither Mr Leung nor Mr Wong took any issue with these requirements. It appears from these requirements that the subjective will of the company was that once reported, the souvenirs concerned became the properties of the company which had power to dispose of them. The company also laid down detailed requirements regarding the sale of souvenirs. As Mr Leung and Mr Wong raised no objection to these requirements, the common intent between them and the company should, properly understood, be that once a report was made, the souvenirs concerned became the company’s properties, and the money used for purchasing the souvenirs was but a monetary dispute between the drivers and the company. From the above facts, I can further infer that, regarding the purchase of souvenirs, the common intent and agreement of the company and the drivers was that the drivers purchased the souvenirs for the company, with quantities to be decided by the drivers and the purchase price to be paid by the drivers for the company. Promoting and selling souvenirs were obligations of the drivers and tour guides under the contracts of employment. Tour guides promoted the sale of designated souvenirs by way of the process designated by the company,while drivers were responsible for keeping sales records, collecting sales proceeds, reporting to the company the sales figures, paying to the company a specified percentage of sum of money,and keeping the balance as reimbursement of their cost for purchasing souvenirs and their remuneration for selling souvenirs.  Therefore, the remuneration in fact came from the company, not from tour group members.

21.Finally, Mr Yip contends that even if drivers were obliged by the contracts of employment to sell souvenirs, this did not mean the company had a corresponding obligation to pay remuneration. He refers to the abovementioned judgment of Chu J in Wong Pui Tuen Kenny & Anor v Crown Motors. The basis for Mr Yip’s submission is: the drivers’ income from selling souvenirs came from a third party, and Mr Leung and Mr Wong were unable to prove that the company was under a corresponding obligation to pay remuneration to them. In light of the inferences of fact that I drew in the preceding paragraph, the remuneration came from the company and not a third party, and the sale of souvenirs was work assigned to Mr Leung and Mr Wong under the contracts of employment, and the company had an inescapable corresponding obligation to pay them remuneration.

22.To conclude, although the presiding officer erroneously applied the case of Lam Pik Shan, from his findings on facts and further inferences that can be drawn from those facts, the sale of souvenirs was work assigned to Mr Leung and Mr Wong under the contracts of employment, and their income from selling souvenirs, which in fact came from the company, falls within the definition of “wages” under the Employment Ordinance, and the company was under a corresponding obligation to pay them. Such income should be included as the wages of Mr Leung and Mr Wong in calculating the compensation to which they are entitled under the Employment Ordinance. It follows that the decision of the presiding officer is still correct.

Conclusion

23.For the above reasons, I uphold the decision of the presiding officer, dismiss the appellant’s appeal with costs, and order that Mr Leung’s own costs be taxed in accordance with the Legal Aid Regulations. The order for stay of execution which I granted previously will be automatically dismissed after 30 days from the date of this judgment.

Mr Victor Chiu, instructed by Wong, Fung & Co. as assigned by the Legal Aid Department, for the Claimant (Respondent) (HCLA 11/2015)

Mr Victor Chiu, instructed by Wong, Fung & Co., for the Claimant (Respondent) (HCLA 13/2015)

Mr Richard Yip, instructed by Paul W. Tse, Solicitors, for the 2^nd Defendant (Appellant)

Translated by the Judgment Translation Unit of the Judiciary and vetted by Mr. Edmund Cham, Solicitor.