An extract from The Executive Remuneration Review, 8th Edition

Employment law

Hong Kong employment law is broadly similar to English employment law but is less regulated, and there are some significant differences that employers need to be aware of when operating in this jurisdiction. Employment law in Hong Kong is governed primarily by the Employment Ordinance, which applies to all employees (with limited exceptions such as family members in small businesses) and to secondees on foreign employment contracts. There is no at-will concept in Hong Kong, and employment is contractual and must be terminated in accordance with contractual terms or as otherwise provided by law.

i Confidential information

Hong Kong law recognises and protects trade secrets and confidential information, but information that is public or that forms part of an employee's own knowledge is generally not protected. The duty of fidelity or fiduciary duties will protect an employer during an employment relationship, but it is recommended that contractual provisions or a non-disclosure agreement are used to expressly protect company property (including information) during the post-employment period.

ii Corporate transfers

There is no automatic right of transfer in Hong Kong; therefore, employees must be dismissed by the seller and re-engaged by the buyer. Termination triggers the payment of statutory and contractual entitlements including severance. In Hong Kong, the term severance has a specific legal meaning (i.e., it is payable only to certain employees when the reason for dismissal is redundancy) and should not be used to refer to a termination package in general.

On transfer, there are statutory provisions that, if followed, negate the requirement to make payments to employees if the transfer is connected to the sale of a business or is within a single group of companies. To satisfy the requirements, the buyer must offer employment on terms and conditions that are the same or no less favourable than the previous employment, recognise prior service, and make this offer at least seven days prior to the transfer.

There are no statutory rules applying to a change in control of a company; therefore, contractual terms will govern entitlements, etcetera, where these exist.

iii Deductions

It is not permissible for deductions to be made from an employee's salary unless they fall within one of the authorised categories set out in the Employment Ordinance. This means, for example, that employers will need to administer share incentive plans differently to ensure that employee contributions come directly from an employee's personal bank account in order to avoid criminal liability under the Employment Ordinance.

iv Garden leave and notice periods

The effectiveness of garden leave clauses is affected by a mandatory term in the Employment Ordinance, which allows both employers and employees to make a payment in lieu of notice to terminate the employment contract. This right cannot be overridden by any contractual provision, including a garden leave clause. Another significant mandatory term is an employee's right to serve notice at any time. This means that contractual provisions seeking to restrict when notice can be served (at the expiry of a fixed period, for example) will be overridden by the Employment Ordinance. Therefore, the importance of having enforceable post-termination restrictions cannot be overstated.

v Post-termination restrictions

Employers typically include post-termination restrictions in their standard employment contracts for senior executives. The four common types of post-termination restrictions are:

  1. non-competition;
  2. non-solicitation of employees;
  3. non-solicitation or non-dealing with customers; and
  4. non-solicitation of suppliers.

If the post-termination restrictions are held to be enforceable, then an employer may be able to obtain an injunction to enforce the terms or obtain monetary damages.

The Hong Kong courts take a similar approach to the English courts when analysing post-termination restrictions. The restrictions must be confined to protect the employer's legitimate business interests and should go no further than necessary to protect that interest, and any restriction should not unduly injure the interests of an employee or the public. Restrictions must be reasonable in terms of duration, scope and geographical application. The courts will consider a broad range of factors when analysing whether a restriction is reasonable, which include:

  1. the seniority of the employee;
  2. whether the employee had access to key confidential information;
  3. the duration of restraints and the scope of prohibited activities; and
  4. whether any payments were made during the restricted period (this is not a requirement, but will form part of the analysis).

The Hong Kong courts adopt a stringent approach when assessing the enforceability of post-termination restrictions. Employers should be mindful of the need to produce convincing evidence to support the reasonableness of any restrictions. In a recent high-profile financial services case, the court conducted a detailed examination of restrictions imposed on four employees, which ranged from three to 12 months in duration. The court found all the restrictions unenforceable either on the basis that there was no breach or that the employer had failed to provide cogent evidence to justify the length of the restriction, or the drafting was too wide or ambiguous.

Unlike in other jurisdictions, such as mainland China, there is no obligation to make payment during a post-termination restraint period. The Hong Kong courts have held that payment will not render an otherwise unenforceable restriction reasonable and enforceable. The courts have also held, however, that payment could be of assistance in borderline cases.

vi Termination

Termination generally takes place by one party giving the contractually agreed notice to the other. If no notice is agreed in a signed employment contract, the Employment Ordinance deems it to be one month. Either party is entitled to terminate with immediate effect by making a payment in lieu of notice.

An employer may terminate a contract of employment without notice or payment in lieu if the employee commits certain statutorily defined misconduct in relation to his or her employment, or on any other ground provided by common law. This is referred to as summary dismissal in Hong Kong, and it does not include termination for poor performance. Employers need to exercise care when summarily dismissing employees, particularly when employees are highly remunerated. The High Court recently awarded an employee damages of over HK$15.8 million in a case for wrongful dismissal and breach of the implied duty of trust and confidence. The case was quite unusual in its facts, but it does serve to highlight the need for employers to verify core facts and to gather supporting evidence prior to summarily dismissing, as the potential cost implications of failing to do so may be significant.

An employee may resign without notice or payment in lieu and claim constructive dismissal if the employer commits a repudiatory breach of contract, such as unilaterally reducing salary or undermining the mutual trust and confidence of the employment relationship. Post-termination restrictions do not survive the employee's dismissal in breach of contract.

Employees with more than two years of service are protected against dismissal without a valid reason as defined in the Employment Ordinance. The implications for wrongful termination or dismissal without a valid reason are low value from a financial perspective; however, in the event of an unreasonable dismissal (or unlawful variation in terms of employment), the employer may be ordered to reinstate or re-engage the employee, or to make a terminal payment.

Under the Employment (Amendment) (No. 2) Ordinance 2018, which came into effect on 19 October 2018, the Labour Tribunal may order the compulsory reinstatement or re-engagement of an employee who has been unreasonably and unlawfully dismissed without the need to first secure the employer's agreement. Previously, both an employer and employee's consent was required to make such an order.

If the employer does not reinstate or re-engage an employee as required by the order, the employer must pay a penalty to the employee, in addition to any termination payments (as described below), amounting to three times the employee's average monthly wages (subject to a ceiling of HK$72,500). The employer commits an offence if he or she wilfully and without reasonable excuse fails to pay the further sum.

If there is an underlying risk of an allegation that termination was for a discriminatory reason then care should be exercised, as there is no upper limit on damages in such claims. In Hong Kong, discrimination is unlawful on the grounds of sex, marital or family status, pregnancy, disability or race.

While no statutory protections apply to an employee's sexuality, in June 2019, the Hong Kong Court of Final Appeal unanimously delivered its second landmark ruling in favour of the LGBT+ community, affirming that same-sex couples who are legally married overseas (same-sex marriage is not currently lawful in Hong Kong) are entitled to the same spousal employment and tax benefits enjoyed by heterosexual married couples in the circumstances under consideration. This decision will particularly be significant to employers who frequently hire employees from overseas.

In principle, there is no impediment to obtaining a full release from an employee against all employment liabilities. The level of payment to be made under any release agreement will depend upon the individual circumstances of the matter.

vii Bonuses

It is common for a bonus to form part of the total compensation package of a senior employee. There is no statutory requirement to pay a bonus in Hong Kong but, depending upon the manner in which the bonus wording is articulated, certain types of bonuses will be subject to regulations in the Employment Ordinance.

If a bonus is annual, it is likely to fall within the definition of an end-of-year payment under the Employment Ordinance unless it is paid solely at the employer's discretion. The Hong Kong courts have interpreted this to mean that the decision whether to make a bonus payment must be discretionary. Bonuses that are not guaranteed but are based on performance formulas are not discretionary under Hong Kong law and will be regulated by the Employment Ordinance.

There are specific payment rules in the Employment Ordinance for end-of-year payments. The most significant one is that a prorated payment must be made to employees who are dismissed after three months' service in the bonus year (discounting any probationary period, and excluding cases of summary dismissal). It is not possible for employers to contract out of these payment rules, for example by requiring an employee to be in active employment on the payment date.

If a bonus is not annual, it will not be an end-of-year payment, but if it is payment for work that has been or will be done, it will fall within the definition of wages under the Employment Ordinance irrespective of whether it is discretionary. This means that the bonus will increase the value of certain statutory payments (such as annual leave pay and sick leave pay), which are based on average wages earned in the 12 months prior to the start of the annual leave or sick leave, or a similarly relevant date. This will have a significant upward effect on statutory payments for employees whose incomes are primarily derived from variable payments. Therefore, it is advisable to adopt bonus schemes that are both genuinely discretionary and annual as they are neither end-of-year payments nor wages in accordance with the Employment Ordinance.

The payment (or failure to make payment) of discretionary bonuses often results in employment disputes. An employer is required to exercise its discretion reasonably and in good faith, and not irrationally or perversely such that no reasonable employer would have exercised the discretion in such a manner. This has been interpreted to mean that employers may take into account only those factors specified in the contract when determining whether to pay a bonus.

Following a Court of First Instance decision, employers operating discretionary bonus schemes in Hong Kong will need to be more cautious when dismissing employees part way through a bonus cycle. This is particularly so in circumstances where the employer is unlikely to be able to show a genuine reason for the dismissal and the termination would prevent the employee from becoming eligible for a discretionary bonus. In Sunny Tadjudin v. Bank of America, National Association, the Court found that an implied term of anti-avoidance in relation to bonuses can exist in a contract of employment and did exist in Ms Tadjudin's contract. The Court held that the Bank was in breach of this implied term when it terminated the employment of Ms Tadjudin in a manner that prevented her being eligible for a bonus for 2007 under the Bank's performance incentive programme.

The Court found that the implied term of anti-avoidance existed after a careful examination of the terms in the employment contract and the way in which the bank operated its discretionary bonus scheme, including its commitment to pay for performance and the lack of business efficacy without the implied term. As a result of this decision, there is a risk that the anti-avoidance term will be implied in employment contracts and all relevant circumstances will be taken into account in determining whether it exists. To avoid this risk, the anti-avoidance term may be specifically excluded by an express contractual term, although this has not yet been tested in court.

The Court of Appeal recently upheld the Court of First Instance's finding of the implied anti-avoidance term in Ms Tadjudin's employment contract, but importantly clarified that this was a finding based on the particular facts and circumstances of this case, and it did not mean that this term should be implied in employment contracts generally. It would be prudent for employers to tread carefully when dismissing employees part way through a bonus cycle while a body of case law on this implied term develops.