In Hong Kong, an employment contract can be terminated by either the employer or the employee by giving the other party notice or making a payment in lieu of notice. A payment in lieu of notice is calculated by reference to the average daily wages earned by the employee in the 12 months preceding the day on which notice of termination is given. It is therefore important to understand what is meant by 'wages' under the Employment Ordinance.
In the recent case Qantex Capital Markets Ltd v Dimitri Philippides ( HKCU 226), the court considered whether bonus payments formed part of an employee's wages and should therefore be taken into account when calculating a payment in lieu of notice.
Qantex Capital Markets Ltd (QC) brought separate proceedings against five of its former employees who had resigned en masse to join one of its competitors. Each of the five former employees had delivered a letter constituting notice of immediate termination of their employment and made a payment in lieu of notice pursuant to Section 7 of the Employment Ordinance.
The matter at issue was whether the payment in lieu of notice should have included the quarterly bonuses which QC had paid to the former employees in the 12 months prior to the termination of their respective employment contracts. QC applied for summary determination on this point of law and sought summary judgment for payment of wages in lieu of notice.
Under Section 2(1) of the Employment Ordinance, 'wages' are defined as:
all remuneration, earnings, allowances including travelling allowances and attendance allowances, attendance bonus, commission, overtime pay, tips and service charges, however designated or calculated, capable of being expressed in terms of money, payable to an employee in respect of work done or to be done under his contract of employment, but does not include…
(c) any commission which is of a gratuitous nature or which is payable only at the discretion of the employer;
(f) any annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer.
Counsel for QC argued that 'wages' are very broadly defined in the Employment Ordinance. He submitted that just because a bonus is discretionary (or its amount is discretionary), an employer's discretion in awarding the bonus is not unfettered and cannot be exercised in bad faith or capriciously. In making this submission, he referred to a series of cases following Clark v Nomura International plc ( IRLR 766). Therefore, while expressed to be discretionary, the bonuses were contractual in nature and fell within the statutory definition of wages (and outside the exclusions set out in Sections 2(c) and (f)).
Counsel for the former employees argued that the quarterly bonuses had been commission payments, as they had been calculated solely by reference to the former employees' personal performance calculated in accordance with a formula. Alternatively, the quarterly bonuses had been a share of their annual bonus entitlement and had been gratuitous in nature. He thus argued that they fell within the exceptions and should be excluded from the definition of wages.
In her judgment, the Honourable Madam Mimmie Chan J held that most of the cases relied on by QC dealt with the manner in which any discretion may be exercised by an employer and were not authorities on whether the bonuses in question were wages for the purpose of Section 7. She held that, in deciding whether discretionary bonuses form wages, the court must construe the relevant contractual provisions to see whether the bonuses in question fall within the statutory inclusion and outside the exceptions. She then considered the cases relevant to this issue.
In ICAP v Elaine Chan ( HKCFI 1039), the relevant contractual provision provided for a discretionary profit sharing scheme expressed to be "payable every 6 months". The evidence from witnesses in the case was that the salary and bonus were part of the annual remuneration package, and the contract made it plain to the judge that the bonus was "payable every 6 months". Accordingly, the judge determined that the bonus was not an end of year payment or annual bonus within the exclusion of "any end of year payment, or any proportion thereof". Therefore, the bonus fell within the statutory inclusion of the definition of wages. On the evidence adduced and as a matter of construction of the relevant contractual provisions, the court also came to the conclusion that there was little or no discretion involved in calculating the bonus pool, and that the bonuses payable were neither of a gratuitous nature nor payable only at the employer's discretion.
In Peter David Rice v Baring Securities (HK) Limited ( 1 HKC 76), the court was asked to ascertain the nature of the bonus paid to the employee and to determine whether the minimum guaranteed bonus was an agreed one-off bonus or an end of year payment. On construction of the relevant contractual provision, the court considered the minimum guaranteed bonus to which the employee was stated to be "entitled" in March 1996 to be a bonus with reference to that year, and was therefore an 'annual bonus of a contractual nature' (ie, an end of year payment which constituted an exception to the definition of wages).
The judgment in Wong Huey Lan v Colgate-Palmolive (HK) Limited ( HKCFI 436) was also decided on its facts. In that case, the court found that the payment made to the employee had been a formulaic incentive payment, rather than a discretionary bonus, such that it could not be regarded as payable only at the employer's discretion. The court expressly left open the question of whether in the situation of a truly discretionary bonus, the bonus could still be regarded as payable only at the employer's discretion. The court also considered it relevant to consider how the parties themselves regarded the payment in determining whether it could be properly regarded as only payable at the discretion of the employer.
Accordingly, the question of whether the bonuses were wages depended on:
- how they were calculated or determined;
- whether they were contractual or payable only at QC's discretion; and
- whether they were proportions of an annual bonus.
These issues are all interwoven with issues of fact and should be resolved at trial through the cross-examination of witnesses and consideration of the relevant documents. Therefore, the judge held that the issues in this case were clearly triable and that it would be "totally inappropriate" to summarily determine the case on a point of law. The parties were directed to proceed to trial.
Bonuses are common in many industry sectors in Hong Kong and are used to attract talent and incentivise employees. In some sectors, bonus and commission payments form the greater part of employees' remuneration. The relevant contractual provisions are usually drafted to provide employees with a level of reassurance regarding their bonus entitlements, while ultimately affording employers the final say in whether to pay a bonus and how much it should be. The courts have imposed additional limitations on this discretion in an attempt to prevent arbitrary decisions. However, in practice, employers still tend to have considerable room to manoeuvre. QC's arguments in this case were unusual in that employers normally seek to emphasise the discretionary nature of their bonus provisions.
This decision (and the cases discussed in the judgment) illustrates the importance of both the drafting of bonus provisions and the facts surrounding the exercise of any discretion. When drafting employment contracts, employers should – in addition to formulating the level of discretion that they wish to maintain – consider whether they intend for bonus payments to fall within the definition of wages. Factors which should be considered include:
- how the bonus is calculated or determined;
- the nature of the payment;
- whether the entitlement to the payment is contractual;
- whether the payment is gratuitous in nature and payable only at the employer's discretion; and
- how the parties themselves view the payment.
Employers should also bear in mind that their practices in determining bonus payments will be relevant in any dispute.
For further information on this topic please contact Patricia Yeung at Howse Williams by telephone (+852 2803 3688) or email (firstname.lastname@example.org). The Howse Williams website can be accessed at www.hwbhk.com.
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