Although Hong Kong’s employment laws are relatively straight forward and similar to the UK, there are a number of unique provisions that companies hiring workers should be aware of. We spoke with the employment team at RPC to understand more.
What is the importance of employment status in Hong Kong?
Whether a worker is an independent contractor or an employee is one of the most contested issues in employment law. In order to qualify for most statutory rights, protections and entitlements, the worker would need to be hired as an employee.
If the worker is hired as an independent contractor, the hiring company is only bound by contractual terms of the consultancy agreement or contract for services. Parties are, by and large, free to agree terms of the working relationship and generally only bound by the terms expressly agreed.
Where the worker is hired as an employee, he/she is entitled to basic protections, entitlements and rights which are predominantly found in the Employment Ordinance (EO). These rights include the right to buy out notice periods, paid statutory holidays and annual leave, severance or long service payments, sick pay, maternity/paternity leave, rest days and some protection against dismissal.
In addition to the rights conferred by the EO, there are a number of statutory obligations on companies hiring employees. These are set out in the EO and include maintaining employment records, filing obligations to the Inland Revenue Department, taking out insurance to cover liabilities for employees’ work injuries and making monthly contributions to a compulsory saving scheme (pension fund).
Whilst the protections, benefits and obligations under the EO aren’t typically burdensome (eg employers should pay wages on time), the consequences of breaching statutory provision are potentially more serious than many other jurisdictions (including in the UK), and depending on the type of breach, may result in civil liability and/or criminal prosecution for employers and/or directors and other senior officers of the company.
Can the contracts expressly exclude the Employment Ordinance and be governed by foreign law?
It is not possible to contract out of the EO in a Hong Kong employment contract.
In the case of Cantor Fitzgerald Europe v Jason Jon Boyer, the Court of First Instance held that the employer could not attempt to get around the protection afforded by the EO to employees working in Hong Kong by choosing a foreign law. The court reasoned that such attempt would be struck down by section 70 of the EO, which provides that any term in the employment contract which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by the EO shall be deemed void.
Are all employees entitled to minimum employee benefits prescribed by the Employment Ordinance?
An employee’s rights under the EO will vary depending upon whether he/she is employed under a ‘continuous contract’, ie by the same employer for four weeks or more, working at least 18 hours each week.
If so, this entitles them to certain benefits under the EO, including annual leave, paid statutory holidays, paid sick leave, and maternity/paternity leave. It is extremely important for companies to ensure that they are properly providing and paying these benefits and entitlements, since an employer who without reasonable excuse fails to grant and pay for such entitlements on time commits a criminal offence.
When and how should wages be paid?
Wage calculation and payment is a thorny area in Hong Kong employment law. Getting it wrong may result in heavy criminal sanctions. Directors, managers, company secretaries and other similar officers can be held personally liable for the wage offence if it is proved that the offence is committed with their consent or is attributable to their negligence. If in doubt, employers should err on the side of caution and speak to local practitioners well versed in this niche.
The calculation of wages has a knock-on effect on employee’s payment entitlements to annual leave pay, holiday pay, sickness allowance, maternity/paternity leave pay, severance payment/long service payments and payment in lieu of notice (see below), which are calculated with reference to the daily average wage in the preceding 12 months.
Although what amounts to a wage is defined in the EO, this has not stopped employers from trying to creatively structure employees’ compensation to prevent certain payments from being classified as wages. Most typically, companies will label certain payments as a ‘discretionary’ and argue that they are therefore not wages. In the event of a dispute, courts in Hong Kong will adopt the principle of substance over form and will look at how the ‘discretionary’ payment was assessed, ignoring any labels attached to such payments. As such, a ‘discretionary’ label does not preclude a court from finding that the relevant payment amounts to a wage.
In Hong Kong, wages must be paid on time and there are very limited situations in which an employer is lawfully permitted to make a deduction from an employee’s wage (for example, deductions for unauthorised absence from work or contributions to the Mandatory Provident Fund). Late payment of wages and/or unlawful deduction of wages is taken seriously in Hong Kong, and an employer who fails to pay wages on time without a reasonable excuse commits a criminal offence and is liable to a maximum fine of HK$350,000 and imprisonment for three years.
Are there any automatic transfer of employees if there is a change of business ownership?
Unlike in many jurisdictions (such as the UK), upon a change of business ownership the employees of a business will not be automatically transferred to the buyer (ie the new employer) and the buyer is not obliged to employ the existing employees of the business.
To effect the transfer of employees on a change of business ownership, the existing employer must lawfully terminate the employment contracts with its employees first before the new employer enters into fresh employment contracts with them. The continuity of the employee’s employment is generally preserved upon such transfer for the purposes of calculating statutory benefits.
Do employers need to give reasons for the dismissal?
If the employee has been employed for less than 24 months in a continuous contract, no reasons need to be given for dismissal. The employer simply needs to give the requisite notice or payment in lieu of notice.
After 24 months, an employer will need to justify its dismissal with one of the five ‘valid reasons’ under the EO. These include redundancy or other genuine operational requirements of the employer; conduct/misconduct of the employee; the employee’s capability or qualifications for performing their work; contravention of the law; or any other substantial reason which a court or the Labour Tribunal would deem sufficient.
However, there are certain situations where it is unlawful for an employer to dismiss an employee. This include where an employee is pregnant, on statutory paid sick leave, who are giving evidence in proceedings related to the enforcement of EO, work accidents or breach of work safety legislation, who take part in trade union membership and activities, or who are suffering a work-related injury entitling them to compensation under the Employees’ Compensation Ordinance.
What payments need to be made to employees upon termination?
Within seven days of termination, the employer must pay the employee all terminal payments due. These may include any accrued wages, payment in lieu of notice (if any), unpaid annual lave, holiday pay, maternity/paternity or sickness allowance, long service payments or end of year bonus, and any other contractual payments such as bonuses and commissions.
In addition, an employee who has been employed for at least two years and dismissed by reason of redundancy is entitled to statutory severance payment. An employee who has been employed for not less than five years under a continuous contract and is dismissed or retires at or above the age of 65 is entitled to long service payment. Both of these payments are calculated by reference to a statutory formula and subject to an overall cap of HK$390,000.
What is the minimum notice period given to terminate an employment contract?
This very much will depend on the length of service.
Regardless of any contractual agreement, during the probation period, an employee’s employment may be terminated without notice during the first month of their employment. After the first month, the employee is entitled to notice as set out in their employment contract (which must be at least seven days).
Where an employment contract does not provide for a notice period and/or the employee is not required to undergo a period of probation, the employee is entitled to at least one month’s notice of termination.
Depending on the seniority of the employee, for most professional services industries, notice periods would typically be between one and six months. For other industries, the contractual notice periods are generally shorter with one week to one month being most common.
In Hong Kong, both employers and employees have a statutory right to terminate the employee’s employment immediately by undertaking to make a payment in lieu of notice. No advance warning is necessary and neither the employer nor employee can object to a termination by payment in lieu of notice.
This unique statutory right has resulted in competitors of employers offering to buy out key employee’s notice periods and having those employees work for them the very next day.
Given that employees can buy out their notice period at any time, how should GCs best protect their company from a departing employment joining a competitor?
Reasonably drafted post-termination restrictive covenants (‘PTRs’) in employment contracts are enforceable in Hong Kong so long as it reasonably protects the employer’s legitimate business interests. PTRs must be agreed in writing and courts in Hong Kong will not fashion relief for an ex-employer who has not troubled to agree PTRs with their employees.
Our case law in Hong Kong is plagued with examples of employers who had ample justification to restrict competition by a former employee but who brought defeat on themselves by either (i) failing to include such restrictions in the employment agreements – whether at the start of the employment relationship, during any contract variation, as a condition to any non-wage payment, or in termination agreements or (ii) failing to satisfy the court that the restriction is reasonable and proportionate to the employer’s legitimate business interests.
Whilst the law is very similar to the UK, the application of the law is very different. Perhaps taking into account the smaller geographic region in Hong Kong, the market size and impact on both the employer and the employee, courts in Hong Kong do not generally uphold a long temporal restriction on non-competes. However, by way of comparison, where the PTR does not affect the ability of a working person to earn a living (such as a non-solicitation or a non-poaching restriction), the court is generally more liberal in its enforcement.
About the authors:
Andrea Randall is a Hong Kong employment lawyer and advises on both Hong Kong and English law. She has significant and extensive experience in high profile complex litigation, including multi-jurisdictional disputes. She undertakes all types of employment law work. She advises both employer and employees on contentious and non-contentious matters and is regularly instructed in civil proceedings as well as criminal prosecutions. She practiced in a City firm in London before relocating to Hong Kong.
Randall has been ranked in all major legal directories including The Legal 500, Chambers & Partners, AsiaLaw and the Doyle’s Guide. Randall is also recognised as an Elite lawyer in China’s Elite 100 Lawyers (Foreign Firms). Randall is fluent in English and Cantonese.
Yuki Chiu’s practice is a mixture of commercial litigation, arbitration, and contentious and non-contentious employment matters. Chiu assists Randall in a wide range of employment law matters, including advising on employment contracts and complex deferred remuneration schemes, enforceability of post-termination restrictive covenants, termination and separation agreements. On the contentious side, Chiu has worked on a number of matters in relation to claims involving breach of contract, discrimination, personal injury, retirement, and repayment of bonuses. Chiu acts for both employers and employees with a particular focus in matters involving the legal and financial sectors.
Chiu is fluent in English, Cantonese and Mandarin.