No escape from paying minimum wage

It is a standard practice in the hotel industry to collect a 10% service charge from customers in place of a tipping system, which is then distributed to eligible employees. This explains why hotel industry employees typically receive a low basic salary, as the service charge income compensates for the difference.¹

However, following the introduction of the National Wages Consultative Council Act 2011 (“NWCCA”) and the Minimum Wages Order(s) from 2012 to 2020 (“MWO”), the hotel industry faced additional salary costs to comply with the minimum wage requirement. To mitigate these costs, many hotels began using the service charge to supplement employees’ wages to meet the minimum threshold.

This practice, however, is no longer permissible following the Federal Court’s decision in Crystal Crown Hotel Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia.²

Facts

The appeal at the Federal Court arose from a trade dispute between a hotel and a trade union after the hotel refused to commence collective bargaining. The dispute was referred to the Industrial Court in February 2012. In light of the NWCCA and MWO, the trade union proposed to retain the service charge system and add a 10% salary adjustment in the collective agreement. The hotel, however, proposed to use the service charge to pay the minimum wage.

The Industrial Court, High Court, and Court of Appeal all held that service charge cannot be used to pay minimum wages.

Issues

The following questions of law were posed to the Federal Court:

Whether under the NWCCA, hoteliers are entitled to use part or all of the employees’ service charge to meet their statutory obligation 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 used to top up the minimum wage.

The hotel argued under section 30(4) of the Industrial Relations Act 1967 (“IRA”) that the Industrial Court should consider public interest and financial implications. It contended that ‘basic wages’ under the NWCCA and MWO should include service charge, given the financial burden of increasing wages to meet the statutory minimum.

Decision of the Federal Court

The Federal Court dismissed the hotel’s appeal and answered both questions in the negative. The key takeaways are as follows:

(1) No compromise with employees’ benefits
The IRA, NWCCA and MWO are social legislations designed to protect vulnerable workers. These laws must be interpreted to ensure that the minimum wage is achieved without diminishing other employee benefits.

(2) Basic wages do not include service charge
Under the NWCCA, ‘wages’ consist of two components: ‘basic wages’ and ‘other cash payments’. The Federal Court clarified that service charge falls under ‘other cash payments’ and therefore cannot form part of ‘basic wages’ used to meet minimum wage requirements.

(3) Contractual terms cannot be varied without consent
Service charge is an additional cash emolument expressly stated in the employment contract. Using it to meet minimum wage obligations would deprive employees of an agreed benefit — which cannot be done unilaterally.

(4) Hotels hold service charge on trust
Service charge funds belong to the employees, not the hotel. Hotels merely collect and hold these monies in trust until distribution, and therefore cannot lawfully appropriate them for wage obligations.

(5) Principles of law prevail over the interests of a particular sector
The COVID-19 pandemic’s financial effect on the hotel industry cannot justify a departure from the legal principle that service charge is not part of basic wages under the minimum wage laws.

Conclusion

While the Federal Court decision may be unpopular among hoteliers due to its financial implications during the pandemic, its social and legal significance outweighs short-term industry concerns. The Court’s pronouncement on the relevant legislations applies broadly and sets a clear precedent for future cases.