A very common condition is that the person must be employed at the date of payment of the bonus and not have given (or received) notice of termination. This condition puts the employee at risk of what is known as a tactical termination, where the employer terminates their employment for the sole purpose of avoiding payment of the bonus. It is common therefore for employees to ask whether Hong Kong law gives them any protection against this.
Protection for an employee is likely to come in the form of an anti-avoidance restriction. This will be intended to prevent an employer terminating a person’s employment solely for the purpose of avoiding an obligation to make a payment to an employee that would have been due but for the termination.
Anti-avoidance protection can arise from the employment contract (in an expressed or implied term) or by virtue of a legislative provision - in Hong Kong’s case, through the Employment Ordinance Cap 57 (EO).
Compared to other jurisdictions, employers in Hong Kong have broad rights to terminate employees’ work contracts. Few, if any, employers are likely to agree to limit their right to terminate a person’s employment by including anti-avoidance terms in their employment contract. Consequently, very few employment contracts in Hong Kong contain express anti-avoidance terms.
The most common contractual solution is not to limit the employer’s right to end someone’s employment but instead to make the bonus payable (either in full or pro rata) if the employer terminates the employment before the bonus is due, unless such termination is for cause. So the employee is only a risk if they resign or are guilty of serious misconduct.
The Employment Ordinance
The Employment Ordinance (EO) does have an anti-avoidance regime. Part VIA of the EO (sections 32A – 32Q) provides that where an employer terminates, without a valid reason, the employment of someone who has worked for at least two years, they will be treated as dismissing the employee for the purpose of avoiding making payments due to that employee. Part VIA then provides the employee with remedies, including payment by the employer of such sums that the employee would have received but for the termination. The major problem with this regime is that the only payments that can be awarded to the employee are statutory entitlements (such as long service leave). The EO therefore provides no protection for non-statutory payments such as bonuses.
An implied term?
If express terms in the contract and the EO provide no assistance, then the only avenue open to the employee is to argue that an anti-avoidance term is implied into the employment contract. There are several implied terms in every employment contract, unless expressly contradicted: for example, an employee owes their employer a duty to act in the employer’s best interests during the term of the employment. However, such universally implied terms are really only part and parcel of the nature of the employment relationship; without such terms being included in the contract, the relationship between the parties would not be one of employer and employee.
Convincing a court that an additional term should be implied into a contract is never an easy task. Common law jurisdictions have developed a stringently applied five-stage test that a contractual term must pass before it can be implied. As part of this test, the term in question must be shown to be necessary for the business efficacy of the contract (ie the contract will not operate as intended by the parties unless the term is included) and must not contradict any of the express conditions in the contract or legislative policy as set out in the relevant statutes. Where the contract is thorough and carefully drafted – as is generally the case for high-end professional employees – a court will be even more reluctant to imply terms, assuming that the drafters will have included all the clauses intended by the parties.
Further, unless otherwise provided by statute, implied terms cannot be included in a contract that contains an “entire agreement clause” (ie a clause that specifies that the written agreement represents the entirety of the agreement between the parties) where that clause specifically excludes implied terms.
Against this backdrop, it will be very hard to imply an anti-avoidance term into an employment contract. For a start, it is difficult to see how such a term could be necessary to make an employment contract operate. Secondly, an implied term is arguably at odds with the express contractual right generally given to employers to terminate a staff member’s employment on the giving of a designated period of notice. In addition, an implied anti-avoidance term may contradict the statutory regime provided by the EO, which also allows an employer to terminate a person’s employment on designated notice. Finally, as discussed above, the EO deals with anti-avoidance in Part VIA of the EO. It could be argued that the legislature has already provided employees with all the protection deemed necessary.
Court of Appeal decision
Despite these difficulties, though, it seems that the Hong Kong courts are at least willing to entertain the possibility of an implied anti-avoidance term in an employment context. In a recent case before the Court of Appeal, the court was unwilling to rule that a claim brought by an employee – and which relied entirely on the existence of such an implied term – was sufficiently unlikely to succeed that it should be rejected without the need for a full trial.
This “success” should not be put too highly, however. The Court of Appeal thought that whether such a clause could be implied in any particular instance would be highly fact sensitive. As a result, the employee in the present case should be given the opportunity to make the necessary facts good at trial. Further, the Court of Appeal recognised that anti-avoidance was an emerging area of the law; most of the relevant cases have only been argued in the last few years. Generally speaking, courts should be slow to reject arguments based on developing or transitional areas of the law without a formal trial, so that those new arguments have a forum in which to be properly considered.
Nevertheless, the decision is still a significant step forward for an implied anti-avoidance term. The Court of Appeal rejected arguments suggesting that such a clause could not be implied in any circumstance into employment contracts because it conflicted with either the employer’s right to terminate on notice or the statutory anti-avoidance scheme provided by the EO.
The Court of Appeal accepted that the employer in this case had the express right to terminate the staff member’s employment on notice. However, the court took the view that the anti-avoidance term that the employee sought to imply would operate to protect them against attempts to avoid paying the bonus. In that sense, the Court of Appeal thought that the anti-avoidance term, if implied, would not be inconsistent with the express termination clause.
The Court of Appeal also rejected the idea that Part VIA of the EO provided the highest level of anti-avoidance protection that Hong Kong lawmakers meant to give employees. While this argument was accepted by the court below, the Court of Appeal rejected it. In the Court of Appeal’s view, the EO set out the lowest level of protection that an employee must receive in Hong Kong, but it did not prevent the common law developing (for example, through implying the existence of anti-avoidance terms) to provide the employee with a greater level of protection than that afforded by the EO.
Uncertainty for employers
The message for employers as a result of the above is uncertain. It is certainly possible that, in time, the trial judge in the case will reject the idea that an anti-avoidance clause was implied into the contract. However, if the trial judge does come to that conclusion, it will be because of the wording of the particular employment contract and not on the basis that the concept of an anti-avoidance clause is contrary to the employer’s right to terminate or because the implied term clashes with the legislative regime.
Clearly, it is a good idea to ensure that employment contracts contain an entire agreement clause that specifically excludes additional implied terms. Further, where a person’s employment is terminated in circumstances where bonus payments will consequently be forfeited, the employer should remember to keep a paper trail documenting the reasons for the termination. This is to reduce the chances of an employee suggesting that the termination was carried out solely to avoid making bonus payments, and that the employment contract contains an implied anti-avoidance term.
However, employers should be aware that there is case law to suggest that where employees are striving to achieve a bonus, there may well be an implied term that the employer will not frustrate the employee’s attempt to achieve that financial reward. Indeed, the implied term may go so far as to suggest that the employer has an obligation to co-operate with the employee to help achieve the bonus.