Hong Kong Employment Law Update.

In this update we write about three interesting recent Court decisions concerning:

 

(a) resignations shortly before an employee's start date;
 

(b) ramifications from the non-payment of wages; and

 

(c) whether salaries tax is payable on bonus scheme shares issued to an ex-employee.
 

(a) Law Tin Pong Secondary School ("school") v Chen Wai Wah ("C") [2021] HKCA 873

 

In the above case the Court of Appeal ("CA") overturned a decision of the High Court, and restored a judgment from the Labour Tribunal.

 

Facts

 

Some details and comments about the case are set out in our 2019 update (see).In summary, the issue was whether or not a teacher, C, hired on 17 July 2017 to start work on 1 September 2017 could walk away from his obligations to report for work without serving his notice period of 3 months or making a payment in lieu of notice to the school.
 

On 17 July 2017 the school gave C: (i) an offer of employment where the period of employment was expressed as 1 September 2017 to 31 August 2018; (ii) Conditions of Service; and (iii) a letter of acceptance ("Letter") which provided once the offer was accepted on C signing and returning the Letter, a new employment contract would exist and C would then need to give 3 months' notice to terminate his employment. On the same day, C signed and returned to the school a copy of the Letter.
 

This dispute arose when C informed the school on 22 August 2017 that he would stay with his current employer (this is a scenario we come across frequently). C apologized for changing his mind and offered to pay the school its expenses to re-advertise his job. He refused to pay anything else.
 

A replacement for C was found quickly who started work on 5 September 2017. The school then sought 3 months' wages from C in lieu of him serving his notice period.

 

Lower Courts
 

The Labour Tribunal had little hesitation in granting the school's claim but the High Court found otherwise after strictly interpreting what comprised the employment contract and finding the Letter and its notice provisions had no contractual effect thereby allowing C to back out from the job with impunity.

 

CA

 

The CA disagreed and held that all three documents provided to C on 17 July 2017 formed the employment contract. The Letter was the only way C could accept the job offer and, viewing the circumstances as a whole, legal effect must be given to its contents, in particular the statement that once C accepted the offer a new employment contract would come into effect which included the obligation to give 3 months' notice of termination.

 

C also argued that him needing to make a payment in lieu of notice was a penalty clause and therefore unenforceable because the amount of the payment, HK$139,593, was disproportionate to the school's losses: (i) C was due to commerce work on 1 September 2017, his replacement started 4 days' later and until then Money lending regime: more stringent regulatory measures Hong Kong employment law update C's duties were performed by existing staff, so the school suffered no losses; and (ii) as C's replacement was a candidate known to the school and it did not incur any re-advertisement costs.

 

The CA held that the school's claim was for the recovery of a debt arising from a contractually agreed method for a lawful termination so the doctrine of penalties was not engaged.

 

Nonetheless, considering penalties thereafter, the CA held that the test to be applied to determine whether a clause was a penalty is:

 

“… whether the … provision is a secondary obligation that imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. … compensation is not necessarily the only legitimate interest that the innocent party may have1 ."

 

The CA found the school had a duty of care to its many students and it was important for it to have suitable, steady and a sufficient number of teachers on its staff at all times. A teacher's departure is highly disruptive to its students, so the school had a legitimate interest to enforce the performance of its employment contracts. Accordingly, the 3 months' notice period and the payment in lieu provisions weren't out of all proportion to the school's legitimate interests of maintaining a stable workforce in the face of problems and difficulties appointing replacements.
 

Conclusions

 

The CA's decision is in-line with the comments made at the end of our earlier update.

 

In our opinion this decision has general applicability.

 

The CA has therefore made abundantly clear that an employment contract comes into existence as soon as it is accepted and it is enforceable immediately thereafter even though time for its substantive performance would be in the future. So should an employee back out of a job shortly before their commencement date the employer concerned will in all likelihood be entitled to make a claim for a payment in lieu of notice of the employee serving their notice period.

 

(b) Official Receiver v Wong Ping Kuen ("W") [2021] HKEC 2635

 

W was a director of JV Fitness Limited ("J") between 15 December 2015 to 5 May 2016 when he resigned. Despite his resignation, W continued to act as de facto director and chief executive officer until 13 July 2016 when J went into liquidation.
 

As such, W was responsible for J's operations, financial affairs, decision making and was the sole signatory of its bank accounts. He therefore decided when J's employees' wages were paid.

 

In breach of the Employment Ordinance2 , W failed to make arrangements for J to pay 550 of J's employees their wages worth over HK$17 million in total. W's failures resulted in him being criminally prosecuted by the Labour Department, which issued 101 summonses against him3 .
 

W also: (i) failed to ensure the due payment of J's MPF contributions; (ii) allowed J to continue trading while insolvent selling the public memberships which J could not hope to fulfil; (iii) breached various record keeping provisions4 ; and (iv) repaid his own company the sum of HK$10.2 million from J's funds in June 2015.