INTRODUCTION
 
Service charge is a benefit or cash emolument that is specific to the hotel industry. Service charges are imposed by hotels as part of the bill to their customers (e.g. 10% of the bill) in lieu of “tipping”. The service charge is then distributed to the employees. The purpose of service charge is to supplement the monthly salaries paid to workmen in the hotel industry.
 
Recently, the Federal Court in Crystal Crown Hotel & Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran Semenanjung Malaysia [2021] MLJU 385 had to consider whether service charge can be utilised to meet the statutory minimum wage. 
 
BACKGROUND FACTS
 
The National Union of Hotel, Bar and Restaurant Workers (“Union”) was granted recognition in 1999. In October 2011, the Union invited Crystal Crown Hotel & Resort Sdn Bhd (Crystal Crown Hotel Petaling Jaya) (“Hotel”) to commence collective bargaining in respect of the terms and conditions of employment to be contained in the parties’ 1^st collective agreement. The Hotel’s unwillingness to do so resulted in a dispute being referred to the Industrial Court for adjudication under section 26(2) of the Industrial Relations Act 1967 (“IRA”) in February 2012.
 
The dispute in the Industrial Court related to the terms to be incorporated into the 1^st collective agreement in which the Union proposed the retention of the service charge system together with a salary adjustment of 10% whereas the Hotel proposed the introduction of a clean wage system to replace the service charge altogether (“Clean Wage System”) or alternatively, if service charge was to be maintained that the Hotel implement a top up structure where it could utilise the service charge to pay minimum wage (“Top Up Structure”).
 
The Industrial Court Award
 
The Industrial Court found that salary and service charge comprised fundamental terms of an employee’s contract of employment and could not be unilaterally varied at the instance of the employer i.e. the Hotel, and ordered, amongst others, that:
 

1. the employees’ minimum salaries be increased from RM900 to RM1,300; and

2. the service charge system be retained and limited to only employees covered under the scope of the 1^st collective agreement.

The Decision of the High Court
 
The High Court dismissed the Hotel’s application for judicial review and upheld the award of the Industrial Court save in relation to the 10% immediate increment on salary revision, which the Union had agreed to abandon in the Industrial Court.
 
The Decision of the Court of Appeal
 
On appeal, the Court of Appeal dismissed the Hotel’s appeal and affirmed the decision of the High Court. The Court of Appeal acknowledged the origin and approved practice of service charge in the hotel industry and stressed that service charge does not come from the employer’s own funds but from customers who pay this 10% charge in lieu of ‘tipping’. The Court then held that:
 

Leave to appeal to the Federal Court
 
The Federal Court granted the Hotel leave to appeal on the following questions of law:
 
Question 1
 
Whether under the 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
 
Question 2

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.
 
Amicus Brief
 
In addition to the Hotel and the Union, the Malaysian Employers Federation and four Hotel Associations, namely the Association of Hotel Employers Peninsular Malaysia, Malaysian Association of Hotels, Malaysia Association of Hotel Owners and Malaysia Budget Hotels Association (collectively “Amicus Parties”) were granted permission to appear and submit an amicus brief vide amicus curiae.
 
The Amicus Parties supported the Hotel’s stance that service charge should be utilised for either the Clean Wage System or the Top Up Structure.
 
DECISION OF THE FEDERAL COURT
 
As a starting point, the Federal Court considered the purpose and objective of the NWCCA which is implemented vide the minimum wage orders issued periodically. The Federal Court opined that the NWCCA serves as social legislation in that it has been implemented with a view to achieving higher equality in terms of income distribution between the poorest earning members of the workforce and capital, as a whole.
 
The Federal Court found, in considering the submissions of the parties on:
 

that what the Hotel (and the Amicus Parties) are asking the Court to do is to construe and utilise section 26(2) of the IRA and section 30(4) of the IRA to alter, modify, vary or supplement the statutory effect and consequence of the NWCCA and MWO.
 
The Federal Court then raised the question as to whether the statutory provisions in the IRA can or ought to be construed such that they effectively abrogate clear and express legislation enacted by Parliament under NWCCA and MWO. The Federal Court held that the answer must necessarily be no, for the following main reasons:
 

The “Minimum Wage” as envisaged under NWCCA and MWO
 
The Federal Court then went on to consider the definition of “minimum wage” under the NWCCA and MWO, and held as follows:
 

The Guidelines on the Implementation of the Minimum Wages Order
 
The Hotel and Amicus Parties relied considerably on the Guidelines on the Implementation of the Minimum Wages Order dated 6 September 2012 (“Guidelines”) which provide that “the employer may convert all or part of the service charge meant for distribution to the employee, to form part of the minimum wages;…”. The Federal Court disagreed with their submission and held that the said Guidelines had been held by the Court of Appeal in Shangri-la Hotel (KL) Bhd v National Wages Consultative Council & Ors (Court of Appeal No: W-01(A)-484-12/2016) to be ultra-vires the primary legislation, and even if coupled with section 30(5A) of the IRA cannot override the specific statutory definitions set out in the primary legislation.
 
The Privy Council Decision in Pereira
 
The Hotel also argued that the element of service charge comprises a part of “wages” under section 2 of the EA by reason of the Privy Council decision in Peter Anthony Pereira & Anor v Hotel Jayapuri Bhd & Anor [1987] CLJ (Rep) 12. The Federal Court disagreed and held, amongst others, that the fact that service charge becomes due to the employee as a consequence of his contract of service does not transform the service charge into a part of “basic wages”. The Federal Court held that the service charge becomes a part of the additional emoluments he receives under his contract of service for work done, and to that extent amounts to “wages”.
 
The Subsistence of a Trust between the Hotel and Employees in law
 
The Federal Court further held that service charge, being monies collected from customers, does not belong to the Hotel. The Hotel is holding the monies in trust for eligible employees to be distributed to them 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 its statutory obligation for minimum wage.
 
The Clean Wage System
 
The Federal Court held that the Hotel’s proposition of 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, is just a relabelling of the service charge to avoid the minimum wage legislation. As such, it should not be allowed as it does not meet the object or purpose of the minimum wage legislation.
 
The Top Up Structure
 
The Federal Court also held that similarly, the Hotel cannot utilise the service charge to “top up” or supplement basic wages to meet minimum wage requirements. The ownership of the service charge still vests in the eligible employees after the customer has paid his bill and is simply held on trust for them by the Hotel.
 
The Ripple Effect of the Imposition of the Minimum Statutory Wage
 
The Hotel and Amicus Parties also argued that imposing the minimum wage requirements in this manner would have a “ripple effect” in which more senior employees further up the wage scale would enjoy indirect wage increases.
 
However, the Federal Court concluded that the legislature had considered the ripple effect that would result when enacting the minimum wage legislation and held that it is not open to the court to modify, alter or vary the object and intent of enacted legislation to meet the needs of a single group of employers in one sector. The Federal Court also noted that the hotel industry perhaps feels the difference more keenly because it has until now been relatively insulated by relying on its customers to meet its basic costs and overheads for employees, but other industries have had to cope with the implementation of the minimum wage without such subsidy or supplement. 
 
The Covid-19 Pandemic
 
Similarly, the Federal Court declined to consider the economic hardships faced by the hotel industry due to the Covid-19 pandemic. The Federal Court pointed out that the reality is that the present appeal deals with wages relating back to 2012 and that the fact of the pandemic in 2020 and 2021 cannot and does not alter their findings. The Federal Court also held that section 30(4) of the IRA cannot be utilised to alter a matter relating back to a trade dispute and award dating back to 2012.
 
Distribution of Service Charge to Eligible Employees
 
The Federal Court held that only eligible employees under the Hotel and Union’s collective agreement may participate in and be entitled to service charge. The Federal Court opined that as employees under the excluded categories such as those working in the security, personnel, confidential and managerial capacity do not fall within the purview of the collective agreement, there is no discrimination under Article 8 of the Federal Constitution.

The Federal Court however did not go on to make any further findings on the other group that concerned them, i.e. foreign workers, as there were no foreign workers employed by the Hotel in this case.
 
The Impact of this Decision
 
The Federal Court declined to confine this decision to this appeal and held that it had considered and adjudicated on the numerous submissions put forward not only by the Hotel and the Union but also by the Amicus Parties. Also, the Federal Court held that their analysis was predicated on questions of law rather than of fact and determined the construction to be accorded to the relevant law, primarily the NWCCA and the MWO. The Federal Court further held that these were pronouncements on the material law by the apex court in this jurisdiction.
 
CONCLUSION
 
The Federal Court accordingly answered both questions of law in the negative and dismissed the appeal. 
 
This decision is significant in several respects. It is the authoritative ruling of our apex court as to how service charge is to be treated by the hotel industry in relation to the statutory “minimum wage”. In consequence of this decision, employers in the hotel industry will have to review their compensation and benefits structure to comply with the ruling. Hotel operators who depend on the service charge collected to pay the minimum wage prescribed by law and who are now facing difficulty in continuing their operations will need to consider their options including a workforce reduction and other cost-cutting measures.
 
Case commentary by Foo Siew Li (Partner) of the Employment Law Practice Group of Skrine.