HONG KONG - Terminating a relationship with an employee: What are an employer’s obligations?

Global Employer Services News February 2023

Terminating a relationship with an employee: What are an employer’s obligations?

Hong Kong’s Labour Department issued a press release on 21 November 2022 stating that a Hong Kong registered company has been prosecuted for failing to meet the requirements of the Employment Ordinance (EO). The company was convicted at Kwun Tong Magistrates' Courts on 21 November and fined HKD 90,000. The company was also ordered to pay an outstanding sum of about HKD 280,000 to two terminated employees.

The press release also revealed that the company had failed to pay a total of about HKD 260,000 to the two employees in line with the outstanding EO wages and payment in lieu of notice within seven days after terminating their employment contracts, as well as the awarded sum of HKD 280,000, to be paid within 14 days of the date set by the Labour Tribunal.

A representative for the Labour Department said: “This ruling will disseminate a strong message to all employers that they have to pay wages to employees within the statutory time limit stipulated in the EO, as well as the sums awarded by the [Labour Tribunal] LT or the Minor Employment Claims Adjudication Board [MECAB]. The Labour Department will not tolerate these offences and will spare no effort in enforcing the law and safeguarding employees’ statutory rights.”

Employment Ordinance

The EO provides that termination payments that must be made to employees when terminating their employment or when their contract ends usually includes the following:

  • Outstanding wages
  • Payment in lieu of notice (if any)
  • Payment in lieu of any annual leave not taken, and any prorated annual leave pay for the current leave year
  • Any outstanding end-of-year payment, and a prorated end-of-year payment for the current payment period or annual bonus
  • Long-service payment or severance payment (if appropriate)
  • Any other payments due under the employment contract, such as gratuities or compensation for termination.

The employer must make the full termination payment (except for any severance payment) to the employee as soon as practicable, but no later than seven days after the date of the employment termination or the date when the contract ends.

The employer must make the severance payment within two months of receiving notice from the employee that they want to claim a severance payment.

If the employer does not pay the employee within the time frame mentioned above, the employer must pay interest on the outstanding wages. In addition, under the EO, the Labour Tribunal and the MECAB may order an employer to pay an employee specific entitlements (such as wages, an end-of-year payment, maternity pay, paternity pay, a severance payment, a long service payment, sickness allowance, holiday pay or a termination payment). If the employer fails to pay the award within 14 days of the date it is due and it does not have a “reasonable excuse,” the employer can be prosecuted and, if convicted, fined up to HKD 350,000 and imprisoned for up to three years.

Employers should also be aware that under the EO, an employee may claim compensation for unreasonable and unlawful dismissal. This has been the case since October 2018, when the Employment (Amendment) (No.2) Ordinance 2018 regarding reinstatement or re-engagement orders for unreasonable and unlawful dismissal came into force. According to the EO amendment, if an employee was unreasonably and unlawfully dismissed on or after 19 October 2018 and that employee makes a claim for reinstatement or re-engagement, the Labour Tribunal may order the employer to reinstate or re-engage the employee. There is no need to secure the employer’s agreement.

What is “unreasonable” or “unlawful” dismissal?

According to the EO amendment, dismissal is “unreasonable” when an employee is dismissed for anything other than a valid reason set out in the EO. Dismissal is “unlawful” when it is also in contravention of the law. For more details, see Table 1.

Table 1

Definition of unreasonable dismissal and unlawful dismissal

An order of reinstatement or re-engagement requires the employer to treat (or re-engage) the employee in all aspects as if the employee had not been dismissed, either in a role and on terms comparable to the employee’s original terms of employment or in another suitable role.

Even if the Labour Tribunal does not issue an order for reinstatement or re-engagement, the tribunal may still order the employer to make a payment to the employee as follows:

  • An award of terminal payments as considered fair and appropriate by the Labour Tribunal
  • An award of compensation up to HKD 150,000.

If the employer does not reinstate or re-engage the employee as required by the Labour Tribunal’s order, the employer will have to pay the employee an additional sum amounting to three times the employee’s average monthly salary. This sum is capped at HKD 72,500 and must be paid in addition to the other monetary remedies ordered by the Labour Tribunal.

The eight relevant statutory entitlements are:

  • Holiday pay
  • Annual leave pay
  • Sickness allowance and related provisions
  • Maternity pay and related provisions
  • Paternity pay
  • End-of-year payments
  • Payment in lieu of notice
  • An additional sum for failing to comply with an order to reinstate or re-engage the employee due to unreasonable and unlawful dismissal.

To calculate these payment amounts, the revised mode of calculation of relevant statutory entitlements is applied to work out the average salary earned by an employee in the 12-month period leading up to the specified dates, as stipulated by the E(A)O 2007. If an employee was employed for less than 12 months, the calculation is based on the shorter period. If an employee has been wrongfully dismissed, additional items are included in the calculation with respect to three relevant statutory entitlements (see Table 2).

Table 2

The court case mentioned in in the Labour Department’s press release, and its relevant penalty clause, serve as prominent examples of how important it is to comply with the EO’s statutory requirements when terminating a relationship with an employee. Any conviction for violation of the EO’s statutory requirements could result not only in a financial loss but also in damage to a company’s reputation.

Table 3 lists the key points to consider when terminating an employment relationship with an employee:

Table 3

Key points to consider upon termination

We believe the Labour Department will continue to introduce amendments and reforms to enhance employment protection and employee benefits. It is therefore important for employers and employees alike to keep abreast of the changes in the Employment Ordinance, as these will influence their actions in various ways.

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Joseph Hong
Portia Tang
BDO in Hong Kong