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Malayan Law Journal Articles/2014/Volume 5/Minimum Wage and the Service Charge Conundrum in the
Hotel Industry
[2014] 5 MLJ xcii
Malayan Law Journal Articles
2014

MINIMUM WAGE AND THE SERVICE CHARGE CONUNDRUM IN THE


HOTEL INDUSTRY
Gan Joo Ee
Senior Lecturer, School of Hospitality Management, Taylor's University
and
Goh Hoon Huar
Advocate & Solicitor
This article examines the implementation of the Minimum Wages Order 2012 ('MWO') in the hotel sector.
The remuneration structure in this industry is characterised by low basic wages supplemented by service
charge and other allowances. These pay components combined invariably exceed the minimum wage rates
prescribed by the MWO. In light of this, can the majority of hotel employees be deemed to be paid below the
minimum wage? Under the Guidelines on the Implementation of the Minimum Wages Order 2012 issued by
the National Wages Consultative Council, hotels are allowed to convert all or part of service charge into
wages in order to comply with the MWO. The service charge is already a very pliable pay component there
are existing uncertainties surrounding the interpretation/computational treatment of service charge. The
guidelines seem to have stretched the conceptual elasticity of service charge further. Implementing the MWO
as per the guidelines will enable the hotel sector to comply with the MWO with minimal increase in labour
cost. However, the guidelines have come under fire in Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar &
Restoran Semenanjung Malaysia v Crystal Crown Hotel & Resort Sdn Bhd. Until the issues raised in this
case are definitively resolved, the grey area concerning the restructuring of remuneration package in the
hotel sector will remain.
INTRODUCTION
The concept of minimum wage is not entirely new in Malaysia. After the Second World War, the Wages
Council Act 1947 was enacted to establish minimum wage rates for certain sectors. There was, however, no
minimum wage policy across all sectors and occupations. The government had in the past turned down the
demands of trade unions for a minimum wage on the ground that the minimum wage would affect the
country's competitiveness.1However, in 2010 the government announced that minimum wage would be
introduced, partly to create the necessary environment for industries to automate and increase
productivity.2In 2011, the National Wages Consultative Council ('NWCC') was formed to research on matters
concerning the minimum wage and to make recommendations to the government.3After consultation with
various employers' organisation, trade unions and NGOs, and with input from the NWCC, the Ministry of
Human Resource introduced a national minimum wage policy through the Minimum Wages Order 2012
('MWO').

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Implementation of the minimum wage in the hotel sector is far from straightforward. The remuneration
structure in the hotel sector is characterised by low basic wages supplemented by 'service charge'. The
practice of service charge evolved as an alternative to tipping. Where tipping is encouraged, only the
frontline employees who come into regular contact with customers/guests benefit from the practice. Instead,
a hotel imposes service charge on its customers/guests (calculated as a percentage of the total price of
goods/services sold) and distribute the same to a wider pool of employees. The rationale for the service
charge system has always been the low basic wages of hotel employees. With the implementation of the
MWO, should the service charge system be maintained? Is a hotel employee considered to be paid below
the minimum wage if his total salary (inclusive of service charge) exceeds the minimum wage? Should hotels
be allowed to reclassify all or part of service charge into wages in order to comply with the minimum wage
rates?
The NWCC has issued guidelines pertaining to the implementation of the MWO in the hotel sector. The
guidelines allow hotels to convert all or part of service charge into minimum wage. In other words, a hotel is
deemed to have complied with the MWO so long as the consolidated pay package of its employees exceeds
the relevant minimum wage rate.
Bending the meaning of service charge to the desired outcome is not uncommon. There are existing
uncertainties surrounding the interpretation/computational treatment of service charge. Different statutes
define 'wages' differently and this directly impacts the treatment of service charge. Thus, depending on the
issue at hand, service charge may or may not constitute wages. For the purpose of calculating contribution to
the Employees Provident Fund, service charge does not form part of wages; but for the purpose of
calculating retrenchment benefits, service charge is deemed wages of a hotel employee.
The NWCC's guidelines purport to increase the elasticity of service charge further by allowing its 'conversion'
into wages. The guidelines were however called into question in Kesatuan Kebangsaan Pekerja-Pekerja
Hotel, Bar & Restoran Semenanjung Malaysia v Crystal Crown Hotel & Resort Sdn Bhd.4The Industrial
Court's award in this case unshrouds uncomfortable questions concerning the minimum wage in the hotel
industry that arguably, only the Legislature can resolve.
THE MINIMUM WAGES ORDER 2012
The MWO prescribes two different minimum wages one for West Malaysia and another for Sabah, Sarawak
and the Federal Territory of Labuan (collectively 'East Malaysia'). Employees in West Malaysia should be
paid not less than RM900 per month or an hourly rate of RM4.33. By contrast, the minimum wage in East
Malaysia is RM800 per month or an hourly rate of RM3.85.5These minimum wage rates are applicable to
foreign workers but not applicable to domestic servants.6
In the case of probationers, the minimum wage may be reduced by not more than 30%.7This means that for
a probationer in West Malaysia, the minimum wage is RM630 per month. However, this reduced wage rate
shall only apply for the first six months of the probationary period.8It shall not apply to any extended
probationary period. If at the date when the MWO came into effect, a probationer was paid a rate higher than
the reduced rate allowed by the MWO, then the higher rate shall apply. In other words, if a probationer was
entitled to a more favourable wage rate at the date when the MWO came into effect, this favourable rate
would apply instead of the minimum standard set by the MWO.9
The employer and the employee, or the trade union (as the case may be) are not prevented from negotiating
on the restructuring of wages provided that the restructured basic wage complies, inter alia, with the
minimum wage rates; and is not less favourable than the employee's existing wage.10
The reference point for the minimum wage was the Poverty Line Income ('PLI'), which averaged at RM800
for Malaysia at the time the MWO was introduced.11This reference point, however, did not pre-empt
disagreements on what constitutes the appropriate minimum wage rates for Malaysia. The Malaysian Trades
Union Council ('MTUC'), for example, argued as far back as 2007 that a minimum wage of RM900 should be
coupled with a cost of living allowance of RM300, as an individual would have to earn at least RM1,200 to
RM1,500 to live in dignity in urban areas.12Further, it was uncertain whether the minimum wage would lead

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to an increase in real wage, in light of rising inflation. However, the MTUC eventually agreed to a minimum
wage of RM900 (for West Malaysia), as part of a compromise with the government and employers.13
Another concern was that, the PLI for Sabah and Sarawak was actually higher than that for West Malaysia. A
person in West Malaysia should earn at least RM763 to live above the poverty line, but he would require
RM1,048 in Sabah or RM912 in Sarawak to do the same. Yet the minimum wage rate in East Malaysia is
lower than that in West Malaysia. The government explained that as average salaries in East Malaysia were
very low, it was not possible to set a higher minimum wage rate, lest drastic increase in labour cost renders
many small and medium enterprises ('SMEs') uncompetitive.14
It should be remembered that the MWO represents a compromise between employers' organisation, trade
unions and the government. Further, the minimum wage rates under the MWO are not indexed minimum
wage rates that are adjustable from time to time to reflect the rate of inflation.15Thus, disagreements on or
dissatisfaction with the minimum wage rates may well resurface in the future. Be that as it may, the MWO
has come into effect. Where an employer employs more than five employees, or where an employer carries
out a professional activity regardless of the number of employees employed, the MWO came into operation
on 1 January 2013.16However, for employers with five employees or less, the MWO came into effect on 1
July 2013.17
Under r 2(2) of the MWO, the NWCC is allowed to grant deferment of implementation to certain employers.
The deferment periods granted by the NWCC benefited some industries en bloc, including the hotel industry.
Thus, a hotel that was a member of the Malaysian Association of Hotels, or the Association of Hotel
Employers, Peninsular Malaysia, or the Malaysian Association of Hotel Owners or the Malaysian Budget
Hotel Association was allowed to defer implementation of the MWO up to 1 October 2013.18In addition,
SMEs were granted blanket deferment on the implementation of minimum wage for foreign workers up to 31
December 2013.19Such deferment periods had expired and the government announced that there would be
no further extension. Labour departments throughout the country had been instructed to fully enforce the
MWO from 1 January 2014.20
REMUNERATION STRUCTURE IN THE HOTEL INDUSTRY
(a) Relatively low basic wage
It was estimated that the MWO affected up to 70% of hotel employees.21This suggests that the majority of
hotel employees had been receiving basic wages below the minimum wage rates. However, while basic
wage might appear low, it usually constituted only one component of an employee's total salary. The
employee would also receive a portion of the service charge collected from customers. In addition, an
employee might receive other allowances and/or be given non-pay components of remuneration, such as
free meals or free accommodation. The combination of pay and non-pay components characterises the
remuneration structure in the hotel industry, and this structure is known as the 'total reward system'.22In
short, a hotel employee's basic wage is not necessarily reflective of his total remuneration.
Prior to the implementation of the MWO in the hotel industry, the service charge portion would constitute at
least 50% of an employee's total salary.23Consequently, some hotels argued that their employees were
already receiving total salaries that exceeded the minimum wage.24
(b) The service charge system
Service charge is a sum chargeable over and above the total price of goods and/or services sold. Hotels in
Malaysia usually impose a service charge of 10% on their prices. The service charge is considered an
alternative to the practice of tipping, which is generally discouraged here. Since only front line employees
come into direct contact with customers and therefore stand to receive tips, the imposition of service charge
enables employers to distribute the collected sum to all employees. A 'service points' system is devised for
this purpose.
Basically, each service point represents a monetary value. The number of service points awarded to an
employee depends on his job performance and/or seniority. For example, W is paid a basic salary of RM600

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per month, and he is entitled to three service points valued at RM250 each. W's total salary is RM600 +
(RM250 x 3), which amounts to RM1,350.
A service point invariably constitutes a minimum value. Where business is good and the collected service
charge is higher, the value of a service point increases accordingly. However, the reverse is not true. An
employer cannot arbitrarily reduce the value of a service point on the pretext of reduced collection.
Service charge must be distinguished from the service tax that preceded the goods and services tax ('GST').
The service tax, regulated under the Service Tax Act 1975 (now repealed), was a tax of 6% on the price of
goods or services provided.25This tax was collected by businesses on behalf of the Department of Customs.
The repealed 1975 Act did not regulate the collection of service charge. The GST will replace the service tax
with effect from 1 April 2015.
The GST, regulated under the Goods and Services Tax Act 2014 ('GST Act 2014') is levied on both goods
and services at the rate of 6% on the prices of the goods or services concerned. The GST Act 2014 does not
impose rules concerning the collection of service charge by businesses. However, the practice of service
charge collection by hotels is recognised. The Department of Customs' Goods and Services Tax Guide on
Accommodation Premises and Similar Establishment expressly states (see A25, p 12) that '[I]f the tip is
included in the customer's bill as mandatory service charge, then GST is chargeable. GST is to be calculated
on the value of the supplies (customer's bill) inclusive of the service charge.' It is also acknowledged that the
service charge is 'normally at 10%' of the price of goods or services supplied.26
By and large, important practices concerning the collection and distribution of service charge emerged
through consensus among industry players. As mentioned, where service charge is imposed, the rate is
invariably 10% of the price of goods and services sold. Of the total sum collected, 90% is distributed to
employees through the service point system and 10% is retained by the employer for breakages, staff events
and administration of the service charge fund. The proportion of 9:1 is so established that in Bukit Jambul
Hotel Development Sdn Bhd v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar Dan Restoran,
Semenanjung Malaysia, the Industrial Court described this ratio of 9:1 as the norm in the hotel industry, and
that it should (unless for good and cogent reasons) be maintained.27The main element of 'breakages' is till
error or such other cost related to employees' mistakes. The retained sum of 10% should not be used to
cover the employer's operating cost, though there are admittedly, abuses. As stated above, as a rule of
thumb, the service points portion constitutes at least 50% of an employee's total salary.28
Overall, the collection and distribution of service charge is recognised as a stable practice in the hotel
industry; though, as the Federal Court pointed out in 29the fact that a hotel's service charge practice is
consistent with industry norm does not mean that no question of law arises for reference to the High Court.
Hotel Equatorial arose from a trade dispute between the hotel and the union concerning, inter alia, the
distribution of service charge. Consistent with industry norm, the collective agreement prescribed that 10% of
the service charge collected monthly shall be retained by the hotel and the remaining 90% shall be
distributed to the employees listed in an 'Appendix C'. The distribution of service points was to be determined
by the union. Pursuant to s 33A(1) of the Industrial Relations Act 1967 ('IRA'), the hotel applied for certain
questions of law to be referred to the High Court for determination. The focus here is limited to the service
charge. In this regard, the hotel sought determination on whether it was correct in law to limit the distribution
of service charge to those employees listed in Appendix C, and to leave the question of distribution of service
charge entirely to the union especially where there were many employees who were not members of the
union and therefore not represented by it.30
The Industrial Court dismissed the hotel's application. The hotel therefore applied to the High Court for an
order of certiorari to quash the Industrial Court's decision, and for an order of mandamus to direct the
Industrial Court to refer the questions of law to the High Court. The High Court held that, as regards to the
issue of service charge, the Industrial Court was entitled to attach great importance on the stability of the
hotel industry, which it believed, could be maintained by uniformity of practices, including that relating to the
distribution of service charge. The Industrial Court was therefore not wrong in refusing to refer the questions
of law to the High Court.31

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The hotel consequently appealed to the Federal Court. Seah FJ held that (as regards the issue of service
charge) the Industrial Court misconceived its functions under s 33A(1) of the IRA, as no tribunal or inferior
court can by its own decision finally decide on the question of the existence or extent of its jurisdiction. Such
question is subject to review by the High Court.32The Industrial Court had also taken into consideration, the
fact that it had no right to take into account, namely, that the service charge system pursuant to the collective
agreement was consistent with the current practice in the hotel industry. The hotel's appeal was therefore
allowed.33
Hotel Equatorial shows that although the practice of service charge is relatively uniform in the hotel industry,
there may still be questions of law that require the determination of the courts. Whether issues concerning
the interpretation of the service charge come before the Industrial Courts or civil courts partly depends on the
extent of unionism in the hotel industry. This is because without the support of trade unions, employees are
less likely to seek legal redress for their grievances. To date, union representation in the hotel and restaurant
industry is relatively weak. In 2011, there were 942,300 workers in the hotel and F&B sector this constituted
7.7% of Malaysia's labour force.34Yet, only a small number of hotel employees were represented by trade
unions. In 2013, there were only 18 unions representing 16,383 members in the hotel and restaurant
sector.35The number of collective agreements given cognizance of by the Industrial Court was also
unimpressive. In 2012, only 22 collective agreements affecting the hotel and restaurant sector were given
cognizance of.36On the assumption that the level of unionism remains status quo, it is very difficult for trade
unions to play a significant role in bringing about salary increases.
(c) Statutory recognition of the service charge system
While there is no statute that deals specifically with the collection of service charge, the practice is
recognised by law. The term 'service charge' is defined in the Employees Provident Fund Act 1991 ('EPF
Act'). The EPF Act deals with compulsory contribution ('EPF contribution') by a private sector employer and
its employee towards the latter's retirement savings. Contribution is based on a percentage of an employee's
salary. An employer is required to contribute 13% of its employee's salary to the employee provident fund
(the 'fund') whereas an employee contributes 11% of his or her salary into the fund.37For the purpose of EPF
contribution, service charge does not constitute 'wages'.
Section 2 of the EPF Act defines 'wages' as follows:
all remuneration in money, due to an employee under his contract of service or apprenticeship whether agreed to be
paid monthly, weekly, daily or otherwise and includes any bonus, commission or allowance payable by the employer to
the employee whether such bonus, commission or allowance is payable under his contract of service, apprenticeship or
otherwise, but does not include
(a)
(b)
(c)
(d)
(e)
(f)
(g)

service charge;
overtime payment;
gratuity;
retirement benefit;
retrenchment, lay-off or termination benefits;
any travelling allowance or the value of any travelling concession; or
any other remuneration or payment as may be exempted by the Minister. (Emphasis added.)

Under s 2 of the EPF Act, 'service charge' is defined as:


'any money or payment, whether in the form of a service charge, a service fee, a tip, or otherwise howsoever
described, which has been paid by, charged on, collected from, or voluntarily given by, a customer or any other person
(not being the employer) in relation to the employer's business and which is payable to an employee whether in whole
or in part, directly or indirectly, and whether under a contract of service between the employer and the employee, or
otherwise'.

The above definitions emphasise this distinction: wages are due from the employer, whereas service charge
comes from a customer or any other person except the employer. Maintaining this distinction in the EPF Act

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may be conceptually neat, but the exclusion of service charge from computation of wages seriously
disadvantage hotel employees they lose out in terms of retirement savings. Had the EPF Act treated service
charge as part of wages, hotels would have had to contribute more to the fund.
We will see in the next section that exclusion of the service charge from 'wages' for the purpose of EPF
contribution is deliberately maintained. In 1986, following the Privy Council decision in PA Pereira & Anor v
Hotel Jayapuri Bhd & Anor,38service point value could have been considered part of wages for the purpose
of the EPF Act. Unfortunately, the government caused the relevant law at the time the Employees Provident
Fund Act 1951 (since repealed) to be amended, such that the service charge was excluded from definition
of wages.
SERVICE CHARGE AND COMPUTATION OF WAGES: PEREIRA v HOTEL JAYAPURI
Pereira was a cook at Hotel Jayapuri. His earnings were made up of his basic salary, food allowance and
five service points. EPF contributions were made in respect of his salary and allowance, but not in respect of
the five service points value. Pereira was a member of the National Union of Hotel, Bar and Restaurant,
which was accorded recognition by the hotel. The collective agreement between the union and the hotel
provided for the collection, accounting and payment of service charge. In the union's view, the service charge
should constitute part of the employees' wages such that EPF contributions should be made in respect of an
employee's service points. Pereira and the union applied for a declaration to this effect.
The Federal Court held that service charge is not part of wages. Section 2 of the 1951 Act defines 'wages' as
'remuneration in money due to an employee under his contract of service'. The corollary is that, to constitute
'wages', the money must be due from the employer and must (before payment to the employee) be property
of the employer.39Service charge cannot be deemed 'wages' because it is collected from the customer. The
hotel merely ensures fair distribution of the service charge to all employees regardless of the nature of their
duties. 'Although a good deal of arguments was addressed to [the Federal Court] on the question of
obligatory nature of the service charges as opposed to the gratuitous nature of their forerunner, the tipping,
[the court] do not think that such a distinction makes any difference. What matters ... is the question as to
whether the service charges are the property of the hotel or not.'40
Pereira and the union brought an appeal to the Privy Council, and the Board came to a different
conclusion.41Lord Mackay rejected the argument that service charge is payable by virtue of a person's status
as an employee, whereas 'wages' is payable in respect of work done. Where a contract of service provides
for two distinct payments for work done for a certain period, one could draw the conclusion that both
payments are due to the employee in respect of the work which he has bound himself to perform. Where
there is provision for additional remuneration if an employee does work over and above that which he has
bound himself by his contract to perform, the additional amount received will not be 'wages' within the
meaning of the 1951 Act. However, all remuneration to which an employee is entitled in terms of contract if
he performs only the work which he is bound to perform must, in the absence of special provision, be
considered 'wages' in respect of the normal periods of work to be performed by him.42
What about the Federal Court's reasoning that the service charge was not 'wages' within the meaning of the
1951 Act because it was money collected from customers and not the hotel's property? Lord Mackay stated
that even if this be a correct analysis of the position, Pereira's entitlement to his share of the service charge
nevertheless arose under his contract of service with the hotel. Therefore, even if the hotel was merely acting
as the employees' agent in collecting the service charge, that money was due to the employees by virtue of
their contracts of service as rewards for the service which the employees rendered under contracts to the
hotel. The service charge should therefore be deemed 'wages' for the purpose of s 2 of the 1951 Act.43
In March 1986, Parliament passed the Employees Provident Fund (Amendment) Act 1986 (the 'EPF
(Amendment) Act'), the provisions of which nullified this Privy Council decision. Thus, for the past 29 years,
hotel employees could not enjoy EPF contribution from their employers in respect of their service points. In
view that, about 50% of a hotel employee's total salary consists of service charge, the exclusion of service
charge from the definition of 'wages' in the EFP Amendment Act effectively deprives hotel employees of
higher EPF contributions by their employers.

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SERVICE CHARGE AND COMPUTATIONS OF OTHER BENEFITS


For the purposes of the EPF Act, 'wages' do not include service charge. What is the position under the
Employment Act 1955 ('EA')? In s 2 of the EA, 'wages' means basic wages and all other payments in cash
payable to an employee for work done in respect of his contract of service but excludes a variety of benefits
and other forms of ex-gratia payments.
Section 2 of the EA defines wages as follows:
'wages' means basic wages and all other payments in cash payable to an employee for work done in respect of his
contract of service but does not include
(a)
(b)
(c)
(d)
(e)
(f)

the value of any house accommodation or the supply of any food, fuel, light or water or medical
attendance, or of any approved amenity or approved service;
any contribution paid by the employer on his own account to any pension fund, provident fund,
superannuation scheme, retrenchment, termination, lay-off or retirement scheme, thrift scheme or any
other fund or scheme established for the benefit or welfare of the employee;
any travelling allowance or the value of any travelling concession;
any sum payable to the employee to defray special expenses entailed on him by the nature of his
employment;
any gratuity payable on discharge or retirement; or
any annual bonus or any part of any annual bonus;'

Unlike s 2 of the EPF Act, s 2 of the EA is silent when it comes to service charge. The latter does not
expressly exclude the service charge from the definition of 'wages'; but neither does it state that service
charge form part of wages.
In Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran, Semenanjung Malaysia v Hotel Equatorial
(M) Sdn Bhd, the Industrial Court decided that service charge has to be taken into account when computing
the 'ordinary rate of pay' for purposes of calculating overtime pay and pay on rest days and public
holidays.44This approach will result in higher rate of pay thus advantageous to hotel employees.
Service charge was also considered relevant in the computation of retrenchment benefits. The sum an
employee receives as retrenchment benefits depends on his last drawn wages and the year of service he
has completed with the employer. In the hotel industry, if we merely take into account the employee's basic
wage and not service charge, the retrenchment benefit is necessarily lower. This is arguably unfair as a hotel
employee's total remuneration may include up to 50% of service charge. In Pudu Sinar Sdn Bhd v National
Union of Hotel, Bar & Restaurant Workers Peninsular Malaysia,45the Industrial Court decided that for the
purpose of calculating retrenchment benefit, 'wages' include the service charge.
In this case, the union brought a complaint against Melia Hotel alleging that the hotel had not complied with
the relevant provision of the collective agreement in the computation of retrenchment benefits. The union
argued that service charge should have been included in the computation of wages for the purpose of
calculating the retrenchment benefits, particularly since the definition of 'wages' in the EA does not exclude
service charge. The hotel contended otherwise. The Industrial Court referred to Tsoukka & Others v
Potomac Restaurants Ltd46where the English Employment Appeal Tribunal held that moneys received by
way of service charge should be counted for the purpose of redundancy payment. The Industrial Court also
referred to the Privy Council decision in Pereira which held that service charge constituted 'wages' for the
purpose of EPF contribution. Ultimately, in the view of the Industrial Court, it would be unfair to exclude
service charge from the calculation of retrenchment benefits. 'It is common knowledge that basic wages of
employees of hotels and restaurants are low because the service charges are taken into account.'47The
Industrial Court in Pudu Sinar, did not however, refer to the EPF Amendment Act which rendered the Privy
Council's decision in Pereira inapplicable. If the court had done so, it would have been apparent that Pereira
was not helpful to the case since s 2 of the EPF Act expressly excludes service charge from the computation
of wages for the purpose of EPF contribution.

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Since the EA and the EPF Act define 'wages' differently as regards to the service charge, this causes
uncertainty in the computation of wages in the hotel industry. Depending on the remuneration component
concerned, service charge may or may not constitute wages. The above cases show that the service charge,
as a pay component in the remuneration structure of the hotel industry, is very flexible. In the next section, it
will be seen that the computational pliability of service charge is stretched further by the MWO.
GUIDELINES ON THE IMPLEMENTATION OF THE MINIMUM WAGES ORDER 2012
The NWCC had issued the Guidelines on the Implementation of the Minimum Wages Order 2012 (the 'MWO
Guidelines'), para 3(v) of which specifically states that 'for the hotel sector where the service charge
collection is implemented, the employer may convert all or part of the service charge meant for distribution to
the employees, to form part of the minimum wages'.48
In other words, the MWO Guidelines allow hotels to convert all or part of the service points into wages, for
the purpose of complying with the MWO. This means that where a hotel pays its employees basic wage that
is below the minimum wage, it may reclassify all or part of the service charge into 'wages' for the purpose of
meeting the relevant minimum wage rate.
Prior to the issuance of the MWO Guidelines, we had had to deal with the Janus-faced nature of the service
charge, due to the difference in definition of 'wages' between the EA and the EPF Act. For the purpose of
EPF contribution, service charge is not wages; but for computation of ordinary rate of pay and retrenchment
benefits, it counts as wages. With the MWO Guidelines, the service charge seems to have acquired extra
pliability where necessary, the same can be converted into wages. The MWO Guidelines effectively enables
the hotel industry to comply with the minimum wage rates and minimise increase in labour cost at the same
time. Under the MWO Guidelines, a hotel employee may be paid relatively higher basic wage (consistent
with the relevant minimum wage rate), yet find his total service points reduced. Alternatively, a hotel
employee may be paid a clean wage without any service charge following the implementation of the
minimum wage policy. In other words, hotels are allowed to 'repackage' their employees' total remuneration
in a manner that does not result in drastic increase in salary levels.
A small consolation is that, hotel employees will benefit from higher EPF contributions following the
conversion of service charge into wages as allowed under the MWO Guidelines. Before the MWO, an
employee's compensation package consisted of lower basic wage and a significant portion of service charge.
A compensation structure of lower basic wage and higher service charge allowed a hotel to save on EPF
contribution cost.
Assuming that a hotel does convert all or part of service charge into basic wage, it now finds a higher
proportion of basic wage in an employee's total remuneration. Consequently, the hotel has to make EPF
contribution based on a higher amount, thus they are likely to face an increase in EPF contribution cost.
A private sector employee is also required to make EPF contribution, in a sum constituting 11% of his or her
salary. This sum is deducted by the employer and paid to the fund on the employee's behalf. Prior to 1
October 2013, most hotel employees made relatively minimal EPF contributions, calculated based on low
basic wage. With the implementation of the MWO in the hotel industry, the remuneration structure may be
such that basic wage is higher while the service charge portion is lower. With the conversion of service
charge into wages, hotel employees will also have to make higher EPF contributions that reflect the
converted service charge. This may mean less take-home pay. It is not improbable that some hotel
employees may prefer higher take-home pay under the pre-MWO position.
CHALLENGING THE MWO GUIDELINES KESATUAN KEBANGSAAN PEKERJA-PEKERJA HOTEL,
BAR & RESTORAN SEMENANJUNG MALAYSIA V CRYSTAL CROWN HOTEL
The MWO Guidelines was considered in Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar & Restoran
Semenanjung Malaysia v Crystal Crown Hotel & Resort Sdn Bhd. In this case, the hotel sought to implement
the minimum wage through a clean wage system whereby an employee's allowances and benefits are
consolidated with his basic wage.49The hotel proposed to pay wages that incorporate an enhanced value of

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the currently allocated service charge points, plus an allowance that will offset the employee's EPF
contribution on the additional basic wage. This however, would mean that the employees cease to be
entitled to any service charge. One issue that arose was whether the hotel was entitled to unilaterally change
the employment contracts of its employees, where the contracts concerned stipulated that salaries would be
payable in the form of basic wage plus service charge.50
The hotel emphasised that historically, the hotel industry practised a dual remuneration system consisting of
basic wages and service charge due to the low basic wages in the industry. Fluctuating business and
occupancy rates were offered as reasons for maintaining low basic wages, which would be cushioned by
service charge; and that with improved business, the value of each service point would increase. The hotel
argued that with the implementation of the MWO, hotel employees could no longer be said to be earning low
wages. Thus, the rationale for service charge no longer exists. Further, if the hotel and indeed other hotels
within the industry are required to pay service charge on top of the minimum wage rates, the hotel industry
as a whole will suffer. The hotel therefore urged the Industrial Court to consider the factors laid out in s 30(4)
of the IRA, namely public interest, the financial implication and the effect of the award on the economy of the
country, and on the industry concerned and also the probable effect in related or similar industries.51
The hotel pointed out that an employee would be receiving double benefits if he is allowed to retain his
service points once his salary is increased to RM900 a month. Moreover, the payment of service charge is
merely a practice and not a requirement pursuant to any legislation. Even if the practice of service charge
should be maintained, the hotel argued that wage restructuring is permissible such that all or part of service
charge can be utilised to increase the basic wage to RM900.52After all, it should be remembered that the
MWO Guidelines expressly allow hotels to convert all or part of service charge into minimum wage.
The union argued that the employees should be paid the minimum wage rate as per the MWO, plus service
charge. In the union's view, the National Wages Consultative Council Act 2011 (the 'NWCC Act 2011') does
not allow the hotel to convert service charge into basic wages. The union therefore urged the court to look at
the NWCC Act 2011 and the Minimum Wages (Amendment) Order 201253as opposed to the MWO
Guidelines that do not have force of law.54
The Industrial Court unanimously decided in favour of the union, on the ground that the term concerning an
employee's salary in the form of basic wage plus service charge (as stipulated in the employment contract)
constituted a fundamental term that could not be unilaterally changed by the hotel.55
On the one hand, the decision advances the rights of hotel employees the MWO should be implemented in
a manner that results in real increase in salary levels. Allowing hotels to convert all or part of service charge
into basic wage for the purpose of complying with the minimum wage rates seems to defeat the spirit of the
MWO. On the other hand, the award in Crystal Crown Hotel is at variance with the MWO Guidelines and it is
humbly submitted that the court's reasoning as regards to s 30(4) of the IRA could be further fortified.
Admittedly, para 3(v) of the MWO Guidelines leans in favour of the hotels in that it allows hotels to minimise
the increase in labour cost by converting all or part of the service charge to meet the minimum wage rates.
Hotel employees may not enjoy significant increase in real salary if the hotel sector adopts the measure
permissible under para 3(v). Section 30(4) of the IRA requires the Industrial Court to have regard to the
public interest, the financial implications, and the effect of the award on the economy of the country, and on
the industry concerned, and also to the probable effect in related or similar industries. It would seem from the
overall tenor of the award that the Industrial Court considered that public interests lied in the hotel employees
receiving real increase in salary levels with the implementation of the minimum wage rates.
The MWO Guidelines were not discussed at great length in the court's decision.56Although the MWO
Guidelines were not bylaws, they were nevertheless material consideration that the hotel was entitled to refer
to in planning the implementation of the minimum wage. In Majlis Perbandaran Pulau Pinang v Syarikat
Bekerjasama-sama Serbaguna Sungai Gelugor Dengan Tanggungan, the respondent co-operative society
argued that the state authority's 'Development Plan', 'Structure Plan' and other plans that affected its housing
project were not legal requirements. The Federal Court held that the plans and guidelines (on affordable
housing) were made with statutory underpinning, namely ss 4(4) and 6(1)(c) of the Town and Country

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Planning Act 1976. Drawing analogies with English cases concerning planning permission, the Federal Court
stated that such planning guidelines were material consideration. The appellant council was entitled to
impose the disputed planning condition to give effect to the guidelines provided that the conditions imposed
were not unreasonable and were kept within the four walls of legitimate planning goals. In this case,
however, the Federal Court considered the imposition of the disputed condition to constitute an abuse of
power.57Further, as Edgar Joseph FCJ pointed out, the fact that the appellant council may take into
consideration the development plan 'does not mean that [it] must slavishly comply with it'.58
It should be noted that the MWO Guidelines were made by the NWCC, a public body established pursuant to
s 3 of the NWCC Act 2011 to monitor and advise on the minimum wage policy of the country. The NWCC is,
inter alia, responsible for advising the government on all matters relating to minimum wages, including its
development at the international level;59and for making recommendations to the government on the
minimum wages rates and coverage according to sectors, types of employment and regional areas, and
other matters relating to minimum wages and wages.60The NWCC also has the function of consulting the
public on the minimum wage rates and coverage,61and collecting and analysing data and information, as
well as conducting research on wages and the socioeconomic indicators.62The MWO Guidelines was issued
by the NWCC in connection with the performance of its functions the opening paragraph of the MWO
Guidelines specifically states they were made pursuant to the powers granted to the NWCC under s 4(2) of
the NWCC Act 2011. It would not be unreasonable to consider the MWO Guidelines to have been issued
upon appropriate research and consultation with various parties affected by the minimum wage rates, and
that the same could probably be supported by relevant data.
As mentioned above, the implementation of the MWO may result in higher labour cost in the hotel industry.
This may in turn result in higher room rates and increase in the price of services offered by hotels. A
hypothetical decision- maker tasked with the NWCC's mandate may take into account the fact that tourism is
the country's second largest foreign exchange earner, and seventh largest contributor to the economy,
contributing RM47.2 billion to the gross national income in 2012.63Further, that guest accommodation
business accounted for almost a third of foreign tourist's spending. In 2013, tourists paid RM19.82 billion on
hotel charges the largest component of their spending followed by shopping, tours and food and
beverage.64A decision-maker may be concerned about the impact of higher room rates consequent of
increased labour cost on the competitiveness of the tourism industry. At the other end of the spectrum is
unfortunately, the injustice to hotel employees in condoning the stagnation of their salary levels despite the
coming into effect of the MWO.
Importantly, development plans and guidelines are factors that may be taken into account, although they
may not carry the force of law. No doubt, the weight that a guideline/policy carries depends, inter alia, on the
nature of the subject matter and wordings. In Khaw Lay Eong v Majlis Perbandaran Pulau Pinang, guidelines
that encourage a local planning authority to give incentives to bumiputera property developers were deemed
discretionary only. The guidelines were loosely framed and more akin to a suggestion that would be left to
the wisdom of a planning authority. Moreover, the guidelines could not be followed where in so doing, valid
planning consideration would be compromised.65
Paragraph 3(v) of the MWO Guidelines is, in the authors' view, reasonably specific, but to assess the weight
that should be attached to para 3(v) and the competing interests of hotels and trade unions are beyond the
scope of this article. Different factions may hold conflicting but equally reasonable views on where the
balance of public interest lies. The MWO Guidelines represent the views of the body whose main function is
to advise the government on the implementation of the minimum wage. The legality of the MWO Guidelines
was of course not challenged in Crystal Crown Hotel. For the purpose of s 30(4) of the IRA, however,
arguably, unless the MWO Guidelines can be said to be Wednesbury66unreasonable in that no reasonable
decision-maker applying his mind to the issues could have made them; the MWO Guidelines should not be
disregarded without cogent justification when the court have regard to the factors of public interest, financial
implications and the effect of the award on the economy of the country, the hotel sector and other related
sectors.
CONCLUSION

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Considering that the practice of service charge is so established in the hotel industry, it seems strange that
the treatment of service charge for the computation of employment related benefits and wages remains
kaleidoscopic. The inconsistency is due to the different definitions of wages adopted by the EPF Act and the
EA respectively. The former expressly excludes service charge from the definition of wages, while the latter
is silent as regards to the status of service charge. Consequently, for the purpose of calculating EPF
contribution, service charge does not constitute wages, but service charge can be considered wages for the
purpose of calculating the ordinary rate of pay and retrenchment benefits, and probably, other forms of
benefits as well.
The MWO Guidelines introduced another complicating factor by providing that all or part of service charge
can be converted into wages for the purpose of complying with the MWO. Alas, the validity of para 3(v) of the
MWO Guidelines is itself in doubt following Crystal Crown Hotel. It is premature to comment on the impact of
this decision, especially because, at the time of writing, it is not known to the authors whether the award will
be challenged in the High Court.
The adversarial system of our courts invariably leads to a win-lose solution. Where the hotel wins, the
employees may find their salaries repackaged with no significant increase, despite the minimum wage policy.
Where the union wins, the labour cost in the hotel sector seem likely to increase. In the interest of both sides,
a win-win solution must be explored, and this is the province of the economists, accountants, hotel owners
and operators, trade unions and the government. Yet, by virtue of s 30(4) of the IRA, the Industrial Court in
Crystal Crown Hotel was required to demonstrate multiple competences in diverse disciplines.
Ultimately, there is the question of whether the court is the best forum to determine, fundamentally, economic
issues. Perhaps it is time that the Legislature re-examines the laws affecting the interpretation of wages and
service charge.

1 See Netto, A (18 July 2007), 'Minimum wage row flares in Malaysia', Asia Times Online. Retrieved from
http://www.atimes.com/atimes/Southeast_Asia/IG18Ae01.html.
2 See Rahim Seman, Z (9 January 2014). Malaysia implements minimum wages. The Star Online. Retrieved from
http://www.thestar.com.my/News/Nation/2014/01/09/Malaysia-implements-mininum-wages/.
3 The NWCC was formed pursuant to s 3 of the National Wages Consultative Council Act 2011.
4 Award No 875 of 2014, Industrial Court, Kuala Lumpur.
5 See the MWO, r 4.
6 See the MWO, r 3.
7 See the MWO, r 5(1).
8 See the MWO, r 5(3).
9 See the MWO, r 5(4).
10 See the MWO, r 6 for relevant criteria.
11 Jala, I (4 March 2013), 'Why there is a need for minimum wage policy', The Star Online. Retrieved from
http://www.thestar.com.my/Business/Business-News/2013/03/04/Why-there-is-a-need-for-a-minimum-wage-policy.aspx.
12 Netto, n 1 above.
13 See Gooch, L (1 May 2012), 'Malaysia Enacts Minimum Wage', The New York Times. Retrieved from
http://www.nytimes.com/2012/05/02/business/global/malaysia-enacts-minimum-wage.html?_r=0.
14 See Jala, n 9 above.
15 For a discussion on the impact of indexed minimum wage rate in the hotel industry, see Croes, R and Tesone, D V (2007).

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The indexed minimum wage and hotel compensation strategies. Journal of Human Resources in Hospitality & Tourism Vol 6(1)
2007 pp 109124.
16 See the MWO, r 2(1)(a).
17 See the MWO, r 2(1)(b).
18 The deferment on implementation was granted pursuant to the Minimum Wages (Amendment) Order 2012.
19 See The New Straits Times (20 March 2013). SMEs may defer minimum wages for foreign workers until Dec 31. Retrieved
from http://www.nst.com.my/nation/general/smes-may-defer-minimum-wages-for-foreign-workers-until-dec-31-1.238218.
20 See Rahim Seman, n 2 above.
21 See Suhaili, B M (11 September 2012), 'Minimum wage policy will hit hotels hard', The Borneo Post. Retrieved from
http://www.theborneopost.com/2012/09/11/minimum-wage-policy-will-hit-hotels-hard/.
22 See Mars, G and Mitchell, P (1976), Room for Reform? A Case Study of Industrial Relations in the Hotel Industry, Milton
Keynes: Open University Press.
23 See Loh, J (1 November 2009), 'Takings land in the wrong pocket', The Star Online. Retrieved from
http://www.thestar.com.my/story.aspx?file=%2f2009%2f11%2f1%2ffocus%2f4923310&sec=focus
24 See Hidayu, N (6 November 2012), 'Are Hotels Ready for Minimum Wage?' Human Resources. Retrieved from
http://www.humanresourcesonline.net/news/36486
25 The Service Tax Act 1975 was repealed pursuant to s 181 of the Goods and Services Tax Act 2014. However, s 181(2)
provides that '(n)otwithstanding the repeal of the Service Tax Act 1975, any liability incurred, service tax due, overpaid or
erroneously paid under that Act may be collected, refunded, remitted or enforced as if that Act had not been repealed'.
26 See Royal Malaysian Customs (2014). Goods and Services Tax Guide on Accommodation Premises and Similar
Establishment (as at 14 July 2014). Retrieved from
http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/Revised/Accomodation%20revised%20BI140714%20G5.pdf
27 [2005] 2 ILR 927, p 943. The Award in this case was challenged in the High Court in Bukit Jambul Hotel Development Sdn
Bhd (Hotel Equatorial Penang) v Kesatuan Kebangsaan Pekerja-Pekerja Hotel, Bar Dan Restoran, Semenanjung Malaysia &
Mahkamah Perusahaan Malaysia (Case No R225146 of 2005). The High Court stated (on pp 1213 of the judgment) that the
Industrial Court was correct in its decision that the 9:1 ratio as regards the distribution/retention of service charge is the norm in
the hotel industry.
28 Loh, n 20 above.
29 [1984] 1 MLJ 363.
30 See Hotel Equatorial, n 29 above, pp 364365.
31 See Hotel Equatorial, n 29 above, p 369.
32 See Hotel Equatorial, n 29 above, pp 369370. Seah FJ cited Farewell LJ (at p 880) in Rex v Shoreditch Assessment
Committee, ex p Morgan[1910] 2 KB 859 in this regard.
33 See Hotel Equatorial, n 29 above, pp 369371.
34 See Department of Statistics (2011), Analysis of Labour Force in Malaysia, 2010 and 2011. Retrieved from
http://www.statistics.gov.my/portal/images/stories/files/LatestReleases/findings/RINGKASAN_PENEMUAN_PTB2011.pdf (See
Table 3: Number and percentage distribution of employed persons by industry, Malaysia, 2010 and 2011).
35 See Department of Trade Union Affairs (2013), Number of trade unions by industry in Malaysia. Retrieved from
http://www.mohr.gov.my/jheks/index.php/en/source/statistics
36 See Ministry of Human Resources (2012), Labour and Human Resources Statistics 2012. Retrieved from
http://www.mohr.gov.my/docz/StatistikPerburuhan2012latest.pdf (see Table B2.9b: Number of trade unions and membership
registered with the Department of Trade Union Affairs by Industry, 20082012).
37 See the EPF Act, s 43 and Schedule 3. Note that where an employee receives wages exceeding RM5,000, the employee's
contribution of 11% remains, but the employer's contribution is 12%.

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38 [1986] 2 MLJ 1 (PC).


39 See PA Pereira & Anor v Hotel Jayapuri Bhd & Anor[1983] 2 MLJ 314 (FC), at p 315.
40 See Pereira (FC), n 39 above, per Salleh Abas CJ at p 316.
41 Malaysia had abolished appeals to the Privy Council in criminal and constitutional matters on 1 January 1978. Appeals to the
Privy Council in civil matters were abolished on 1 January 1985, except for cases filed before that date.
42 See Pereira (Privy Council), n 38 above, p 4.
43 Ibid.
44 [2008] 3 ILR 590, p 605.
45 [2002] ILJU 86.
46 (1968) ITR 259.
47 See Pudu Sinar, n 45 above, per Yussof Bin Ahmad (Chairman).
48 See National Wages Consultative Council (6 September 2012). Guidelines on the Implementation of The Minimum Wages
Order 2012. Retrieved from http://www.mohr.gov.my/pdf/imwg021012.pdf
49 See Crystal Crown Hotel, n 4 above, para 5.
50 See Crystal Crown Hotel, n 4 above, para 6.
51 See Crystal Crown Hotel, n 4 above, paras 2430.
52 See Crystal Crown Hotel, n 4 above, paras 3237.
53 The Minimum Wages (Amendment) Order 2012 granted, as regards certain class of employers and individual employers,
deferment of implementation of the MWO.
54 See Crystal Crown Hotel, n 4 above, paras 812.
55 See Crystal Crown Hotel, n 4 above, paras 59.
56 Issues concerning the MWO Guidelines were dealt with mainly in paras 8 and 12 of Crystal Crown Hotel, n 4 above.
57 [1999] 3 MLJ 1, pp 5154, 67, 7879.
58 See Sungai Gelugor, n 56 above, p 51.
59 See the NWCC Act 2011, s 4(1)(a).
60 See the NWCC Act 2011, s 4(1)(b).
61 See the NWCC Act 2011, s 4(1)(c).
62 See the NWCC Act 2011, s 4(1)(d).
63 The Star Online (9 October 2013), 'Nazri Aziz: Malaysia to reap RM168bil from tourism by 2020'. Retrieved from:
http://www.thestar.com.my/News/Nation/2013/10/09/nazri-aziz-tourism/.
64 See Ganesan, V (2014), 'Banking on the multi-billion-ringgit accommodation business', The Edge Malaysia (21 July 2014) pp
7072.
65 [2013] 10 MLJ 716, p 726.
66 See Associated Provincial Picture Houses Ltd v Wednesbury Corp[1984] 1 KB 223.