Introduction

Bonuses may take many different forms, including mandatory and discretionary bonuses, which are often governed by employment contracts. In the recent case of Xu Yi Jun v GF Capital (Hong Kong) Ltd [2020] HKCA 663, the Court of Appeal (“CA”) unanimously held that an employer cannot set-off an employee’s guaranteed bonus by reason of the employee’s misconduct committed prior to the contractual cut-off date for entitlement against any potential liability owed by the employee. 

Background

In December 2015, GF Capital (“Employer”) employed the plaintiff, Xu Yi Jun (“Xu”), as the managing director of its Structured Finance Department. Clause 6 of Xu’s employment contract (“Employment Contract”) provided that she would, irrespective of her performance, receive a guaranteed bonus of HK$7,800,000 (“Bonus”). The Bonus would be payable in full on 31 March 2017 (“Due Date”) but could be forfeited if Xu had been found guilty of any gross misconduct before the Due Date.

In April 2016, Xu recommended the Employer to make a loan to a client to fund client’s investment in a target company (“Loan”). In October 2016, it became clear that the client would default on the Loan because the Securities and Futures Commission ordered the target company to cease trading. The Employer commenced an investigation to look into the matter, including whether Xu had properly discharged her duties in recommending the Loan (“Investigation”). 

The Employer delayed payment of the Bonus on the Due Date pending the conclusion of the Investigation. The Investigation was completed in May 2017 and identified certain failings of Xu. Xu then resigned on 14 June 2017. The Employer refused to pay the Bonus to Xu and Xu brought proceedings against the Employer at the Labour Tribunal.

Arguments by the parties

Xu claimed against the Employer for breach of the Employment Contract by failing to pay the Bonus and section 32 of the Employment Ordinance (“EO”) for deducting the Bonus from her wages. 

The Employer argued that Xu was not entitled to the Bonus as a result of her gross misconduct that occurred before the Due Date and counterclaimed damages against Xu for breach of contractual duties, fiduciary duties and duty of care that far exceeded the amount of Xu’s claim. The Employer also claimed that such damages should be set-off against Xu’s claim (if any).

Procedural history

The Labour Tribunal transferred the case to the Court of First Instance (“CFI”). At the CFI, Xu applied for a summary judgment against the Employer before a Master, which was dismissed. Xu appealed against the decision to a judge but the appeal was again dismissed. Xu further appealed to the CA.

Key issues in appeal and the CA’s decision

Issue 1: Proper construction of Clause 6

The crux of the issue was what constituted the event that triggered forfeiture of the Bonus. Xu argued that it was necessary for there to be a finding of gross misconduct before the Due Date for the Bonus to be forfeited. On the contrary, the Employer contended that such finding before the Due Date was not necessary so long as the gross misconduct had occurred before the Due Date.

The CA agreed with Xu’s construction based on the language of the relevant part of Clause 6. The CA was of the view that the Employer’s construction would cause uncertainty as to when the finding could be made and there would be no cut-off date for the finding. If Clause 6 were to be construed as contended by the Employer, the Employer could simply declare that there were allegations of gross misconduct and withheld payment for an indefinite period while investigating the gross misconduct alleged to have happened prior to the Due Date. 

Issue 2: Equitable set-off against the Bonus

The second issue was whether the equitable set-off sought by the Employer is precluded by section 32 (Restriction on deductions from wages) of the EO. In particular, section 32(1) stipulates that “[n]o deductions shall be made by an employer from the wages of his employee or from any other sum due to the employee otherwise than in accordance with [the EO].” (emphasis added)

1. Scope of section 32

The CA held that notwithstanding the references to “wages” in section 32 of the EO and its section heading (i.e. “Restriction on deductions from wages”), which was defined to exclude any end of year payment under section 2 of the EO, the phrase “or from any other sum due to the employee” was sufficiently wide to cover an end of year payment such as the Bonus. 

2. Whether equitable set-off amounts to “deduction” under section 32 

The CA noted that the term “deduction” was not defined in the EO. To this end, the CA considered the historical source of the EO and the English legislative policy, which provided protection for certain class of employees by declining to allow set-offs against salary. As such, the CA took the view that the legislature could not have intended to permit an employer to deprive an employee of the right to payment of a sum due to her until the court had determined the amount of damages (if any) suffered by the employer for the employee’s bad or negligent work. Therefore, equitable set-off amounts to “deduction” under section 32.

3. Equitable set-off in the context of legal proceedings and outside legal proceedings

The Employer sought to distinguish between an equitable set-off in the context of legal proceedings and that outside legal proceedings. The Employer submitted that the former was permissible and was not precluded by section 32 of the EO. 

However, the CA rejected this argument and distinguished the case law submitted by the Employer on the basis that they referred to set-off by judgment and related to whether the employers were allowed to exercise set-off in the absence of statutory protection. Accordingly, the CA held that the wording of section 32(1) clearly did not permit the Employer to exercise an equitable set-off by raising a claim for a sum that has yet to be determined by the court against its liability to pay the Bonus.

As a result, the CA allowed Xu’s appeal and entered final judgment against the Employer.

Key takeaways

This case serves as a reminder for employers to expressly and precisely set out in employment contracts the criteria of entitlement of bonuses and the triggering events of forfeiture of such bonuses. Section 32 of the EO prohibits any deduction from “wages of his employee or from any other sum due to the employee”, including contractual bonuses. If an employer has a claim against an employee for negligence or misconduct but the amount has yet to be determined by the court, then the employer should consider first paying any relevant sum to the employee, then instigate an independent claim against the employee for damages regarding such negligence or misconduct.