Jurisdiction - Hong Kong
Preparing Employment Contracts – Key Things People Tend to Overlook.

15 March, 2012


Legal News & Analysis – Asia Pacific – Hong Kong – Labour & Employment

Many employment-related disputes can be avoided if the employment agreement is carefully prepared and the terms and conditions of employment are clearly set out. This article aims to highlight certain areas which people tend to overlook in preparing an employment agreement.
A. Notice Period 
Under Hong Kong law, an employer and an employee may agree the notice period required in terminating the employment relationship. Under the Employment Ordinance ("EO"), the agreed period shall not be less than 7 days (save and except during the first month of the probation period in which no notice or payment in lieu of notice is required). However, if the termination notice period is not agreed, the notice period during the probationary period is deemed to be 7 days (save and except during the first month of the probation), and after the probation period, 1 month.
There is no provision in the EO requiring that the notice periods required on the part of an employer and on the part of the employee have to be the same. In fact, it has been confirmed in the case Kwong Wai Ling Candy vs. Hotel Panorama o/b Hotel Panorama Company Ltd (HCME1/2011) that the notice period imposed on an employer may be shorter than that imposed on an employee.
In the case Kwong Wai Ling Candy vs. Hotel Panorama o/b Hotel Panorama Company Ltd (HCME1/2011), the employment contract only stipulated the notice period required on the part of the employee but not the employer. The employer terminated the employment of the employee during the fifth month of the probation period by making payment in lieu of 7 days' notice. The employee disagreed and claimed that the employer should make payment in lieu of 1 month notice instead.
The case was first heard in the Small Claims Tribunal, in which the adjudicator ruled that the notice period required on the part of employer should also be the same as that of the employee though the employment agreement did not expressly say so. The case was appealed to the High Court, and the Judge considered that as there was no agreed termination notice period on the part of the employer, and under the EO, the employer was only required to give a termination notice period of not less than 7 days. The Judge further confirmed that although the termination notice periods required on the part of the employer and the employee were different, it was not in contravention of the EO.
B. Fixed Term Contract
Sometimes, the parties only agree to enter into an employment agreement for a fixed term period, ranging from a few months to a few years. If an employer wishes to terminate the employment relationship before the expiration of the fixed term period without any material breach of the employment contract on the other party, there is a risk that the employee shall claim damages against the employer for the unexpired portion of the fixed term on the ground of wrongful termination, unless there is a break clause in the employment agreement (see Horkulak v. Cantor Fitzgerald International [2004] ICR 697). An employer may need to consider whether they wish to include a provision in the employment agreement giving a right to both parties (or only the employer) to terminate the employment relationship during the fixed term period.
C. Entire Agreement
It is not uncommon that the parties will negotiate the contents of the employment agreement and there may be different versions of the employment agreement before it is finally executed. In order to ensure that the employment agreement contains all the agreed terms, and to avoid possible arguments that any other terms shall apply, it is advisable to expressly provide in the employment agreement that it contains the entire understanding between the parties in relation to the employment relationship, and it supersedes any prior understanding or agreement (whether written or oral) in relation to the same.
D. Garden Leave
In order to avoid a leaving employee to have knowledge of the latest business secrets of the company, a lot of employers prefer to put the leaving employee on garden leave during the notice period. However if the employer is not granted such a power under the employment agreement, it may be subject to challenge that the employer is not entitled to do so even if it is paying full payments to the employee during the garden leave period because under common law, an employee has a right to work, especially for those positions requiring updated acquaintance to the market, and putting the employee out of market would adversely affect his skills (see William Hill Organization Ltd v Tucker [1998] IRLR303).
E. Bonus Payment
Some employers grant annual bonus to their employees on the condition that they shall remain in employment at the time of payment. However, such condition may not be enforceable if the annual bonus is of a contractual nature and falls within the definition of "End of Year Payment". Under the EO, generally speaking, if the employee's employment is terminated by the employer (otherwise than by way of summary dismissal) during the payment year, he/she is entitled to a pro-rated amount of the annual bonus, even if there are contractual provisions to the contrary.
In the case of Wong Huey Lan vs. Colgate-Palmolive (HK) Limited (HCLA77/2001), the claimant's employment was terminated by the defendant on the ground of redundancy. The claimant was subject to an annual incentive plan, under which in order for an employee to receive the bonus, he/she has to meet certain pre-determined targets and his/her performance should reach certain level. It was also set out in the plan that the employer had an option to cancel the plan if its business performance was poor. The claimant asked for a pro-rated amount of the annual bonus but the employer considered that she was not entitled to the same as the bonus was of a discretionary basis. The court considered that although the assessment criteria involved certain discretionary elements (e.g. the employer has the right to set the operating target, assess the performance of the employee and to cancel the plan), the discretion can only be properly exercised with regard to clearly identifiable objective criteria. The court considered that the plan was more of a formulaic incentive payment rather than a discretionary bonus and fell within the definition of "End of Year Payment". Therefore, the claimant was entitled to receive a pro-rated amount of the bonus.
If it is the employer's intention to grant discretionary bonus, it should expressly stipulate in the employment agreement that the bonus is paid at the sole discretion of the employer. It is not advisable to set out any detailed guidelines as to the entitlement or calculation of the same.
F. Hours worked
The Minimum Wage Ordinance ("MWO") has been in place since 1 May 2011. Under the MWO, employers will be required to pay to each employee an amount of wages in every wage period (taken to be one month unless the contrary is proved) at least equal to :
"Statutory minimum wage = minimum hourly wage rate (currently fixed at HK$28) x No. of hours worked"
It is therefore important to ascertain the number of hours worked by each employee, and it is advisable to clearly set out in the employment contract the normal business hours of the employer.
In computing the number of hours worked, an employee is considered to be "at work" if he/she attends a place of employment in accordance with the contract of employment or with the agreement or at the direction of the employer. It is very common in Hong Kong for employees to work beyond the normal business hours, whether or not they are requested to do so by the employers. In order to avoid possible arguments as to whether those overtime hours should be treated as "hours worked", an employer may clearly set out in the employment contract that unless an employee is requested to work beyond the normal business hours by the office manager in writing, any hours of work beyond the normal business hours will not be treated as "hours worked" under the MWO.
Employers should also note that any payments made to an employee for any time that is not "hours worked" (e.g. rest day pay) would not be counted as part of the wages payable to the employee. In this regard, it is advisable to set out in the employment agreement as to whether rest days are paid or unpaid to avoid future disputes.
In view of the examples set out above, one can see that if an employment contract is not carefully drafted, it will easily lead to unnecessary misunderstanding and disputes. It is therefore beneficial to both employers and employees if they pay special attention in preparing their contracts or seek legal assistance in relation thereto.
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