The Court of Final Appeal in Hong Kong has recently given its judgment in a long-running dispute over holiday pay which may have implications for other employers which offer annual leave over and above the statutory entitlement.

In Cathay Pacific Airways Limited v Kwan Siu Wa Becky & ors the Court held that where contracts of employment offer annual leave in excess of the requirements in the statutory Employment Ordinance then, in the absence of any term providing for some other rate, that additional holiday pay should be calculated in the same way as for statutory holiday. It also held that Cathay Pacific had to include certain allowances and commissions when calculating that additional contractual holiday pay.

Under the current Employment Ordinance, the daily rate of statutory holiday pay is calculated by reference to an employee’s average daily wage during the relevant reference period. This is normally the 12-month period prior to the first day of annual leave or termination of the contract (as appropriate), but for employees who have been employed for less than 12 months the reference period is the actual length of their employment.

The definition of wages for these purposes includes all remuneration, earnings, allowances (including travel and attendance allowances), attendance bonuses, commission, tips and service charges payable to an employee under his contract of employment. It does not include discretionary elements such as a discretionary bonus or discretionary commissions or allowances. Furthermore, no account is taken of overtime pay unless it is of a “constant character” or the monthly average over the reference period is equivalent to or exceeds 20% of the employee’s average monthly wages during the same period.

Employers need to be aware that in light of Cathay Pacific, these provisions will apply to any excess contractual annual leave unless the employment contract explicitly states otherwise. Therefore, if an employer wishes to calculate additional contractual holiday in a different manner, for example only including basic salary rather than additional benefits and allowances, this should be explicitly stated in the employment contract.