Terminating the Employment Relationship

The termination of an employment contract can be brought about in a number of ways, for example, by exercising a contractual or statutory right to terminate, by mutual agreement or by operation of law.

In the absence of any ‘unfair dismissal’ regime in Hong Kong, terminating an employment contract is generally considered to be fairly straightforward. However, the Employment Ordinance (Cap. 57) does provide remedies to employees in certain circumstances and, therefore, it is important that employers are aware of their contractual, statutory and common law obligations.

Q1: Under what circumstances is an employer entitled to validly terminate a contract of employment?

The Employment Ordinance provides that if an employee has been employed for more than two years, it shall be a valid reason for the employer to dismiss the employee by reason of:

• conduct;
• capability or qualifications;
• redundancy or other genuine operational requirements;
• contravention of the law (i.e. illegality); or
• any other reason of substance, which, in the opinion of the court or the Labour Tribunal, was sufficient cause to warrant the dismissal of the employee.

It should be noted that while a dismissal that does not fall within one of the potentially valid reasons would be an act of “unreasonable dismissal”, it does not necessarily follow that the employee will be entitled to additional compensation for such dismissal.

Q2: Are employers and employees subject to minimum periods of notice to terminate the employment relationship?

Subject to certain restrictions, the Employment Ordinance allows the employer and employee to agree their respective notice periods.  The relevant considerations – which only apply to employee’s employed on “continuous contracts” – when determining the period of notice are as follows:

• If the employment contract includes a probationary period, during the first month of the probationary period, either party can terminate the contract without any notice, notwithstanding anything to the contrary in the contract.
• With the exception of the first month of any probationary period, the notice period cannot be less than 7 days.
• In the absence of any express agreement, the default period of notice by either the employer or the employee is one month. If either party wants to be able to enforce a notice period other than for one month, the period of notice must be stated in an employment contract that is signed by both the employer and the employee.

The period of notice required by each party does not have to be the same.  It is, therefore, possible that an employer has the right to terminate on limited notice (e.g. one month) but the employee must give a longer period of notice (e.g. three months) and vice versa.

A continuous contract is a contract of employment for more than 18 hours per week over a four-week period.

Q3: What rights does the employer and the employee have once notice has been given? Under what circumstances can an employee be put on garden leave?

Once notice has been given, the employer has the right to:

• require the employee to work out the notice period;
• make a Payment in Lieu of Notice (“PILON”), effectively “buying-out” the notice period (or part thereof) and bringing forward the termination date; and/or
• if the contract of employment allows, the employer may also require the employee to serve the notice period on garden leave or require the employee to undertake other duties.

The employer may apply two or three of the above during the course of the notice period.  Save in the case of gross misconduct or constructive dismissal (see below), a termination without adequate notice or PILON will be considered to be a “wrongful dismissal”.

In the case of the employee, after notice has been given, Hong Kong law uniquely allows employees the right to make a PILON for all or part of the notice period.  This right is absolute and an employer cannot reject notice or prohibit or limit the right for the employee to make a PILON.

The Employment Ordinance strictly governs how the PILON is to be calculated.  Specifically, it must be calculated with reference to the employee’s average daily wages earned during the previous 12 months (“ADW”).

“Wages” is also strictly defined by the Employment Ordinance and, in summary, includes all remuneration, earnings, allowances, commissions, overtime pay, tips and service charges, however designated or calculated, payable to an employee in respect of work done or to be done under the contract of employment.

Q4: Under what circumstances can either party immediately terminate the employment contract without giving notice or making a PILON?

The Employment Ordinance strictly governs the circumstances when an employer is entitled to terminate an employee without notice or PILON i.e. “summary dismissal”. Section 9 of the Ordinance states that an employer may terminate an employment contract without notice or PILON if an employee:

• wilfully disobeys a lawful and reasonable order;
• misconducts himself, such conduct being inconsistent with the due and faithful discharge of his duties;
• is guilty of fraud or dishonesty;
• is habitually neglectful in his duties; or
• any other ground on which he would be entitled to terminate the contract without notice at common law.

The above is often collectively referred to “gross misconduct”.  The degree of the misconduct must, however, be high especially in the case of a single act of misconduct.  As observed in Tsang Tak Chi v China Wall Ltd HCLA No. 33/98:

… summary dismissal is a very serious step to take against any employee.  It is the “capital punishment” in that if the dismissal is justified, the employee will be deprived of all the protection provided by the Employment Ordinance.  There will be no wages in lieu of notice, no annual leave pay, no severance payments, no end of year payment, no long service payment no matter how long the employee has been in employment.            

Immediate dismissal of an employee by reason of one single act of misconduct, in my view can only be justified in very exceptional circumstances.  It may also be necessary to balance the impact of the summary dismissal on the employee with the effect of the employee’s “misconduct” on the employer to decide if summary dismissal is justified. 

An employee also has the right to bring the employment contract to an immediate end, without notice or PILON.  This is often referred to as “constructive dismissal”.  A constructive dismissal arises under common law where an employee resigns in response to a fundamental breach of the employment contract by the employer.  As with gross misconduct, the hurdle that must be cleared for there to be a valid breach by the employer is very high.

The Employment Ordinance also provides for statutory constructive dismissal in circumstances where wages are not paid to an employee for more than one month after they were due.

Q5: Under what circumstances are employees protected from termination of employment?

The Employment Ordinance prohibits the termination of employment in the following circumstances:

• Pregnancy & Maternity Leave – pregnant employees and employees on statutory maternity leave are generally protected from being given notice of termination. Limited exceptions to the protection against termination rule apply in the case of: (i) gross misconduct by the employee; or (ii) where the employee is subject to a probationary period, during the first 12 weeks of the probationary period – provided that the reason for termination is not related to the pregnancy.
• Sickness Absence – employees who are on sickness absence for which statutory sick leave is payable are protected from termination. This protection from termination does not apply to termination due to gross misconduct.

The Employees’ Compensation Ordinance provides additional protection from termination in the event that the employee has suffered a workplace injury.  The protection from termination applies until the investigation into the workplace injury has been completed.  Contrary to the protections granted under the Employment Ordinance, the protection from termination under the Employees’ Compensation Ordinance is not subject to any exceptions.

The dismissal of an employee who is protected from termination is an act of “unlawful dismissal” and, in addition to civil remedies, it also a criminal offence.

Q6: What payments are due from an employer to the employee in the event of termination?

The payments that are due on termination, typically comprise:

• Payment in lieu of notice – if the employer does not require an employee to serve his entire notice period, the employer will need to make a PILON to “buy-out” all or part of the notice period.
• Accrued untaken annual leave – if an employee has accrued annual leave that has not been taken as at the date of the termination, the employee is entitled to receive payment in lieu. Payment is calculated with reference to ‘ADW’.
• Pro-rata End-of-Year Payment – where an employee: (i) is entitled to receive a contractual end-of-year payment; (ii) terminated by the employer other than for gross misconduct; and (iii) has served for more than three months of the bonus year, then the employee is entitled to receive a pro-rata end-of-year payment.

“End-of-year payment” is defined by the Employment Ordinance as any annual payment (whether described as “thirteenth month payment”, “fourteenth month payment”, “double pay”, “end of year bonus” or otherwise) or annual bonus of a contractual nature, but does not include any annual payment or any annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer.

• Statutory Severance – if an employee has 2 years of continuous employment and the reason for termination is redundancy, the employee is entitled to a statutory severance payment as follows:

[2/3 last month’s wages (capped at HK$22,500 per month)] x no. years’ service

• Statutory Long Service Payment – if an employee has 5 years’ service and is terminated by the employer other than due to redundancy or gross misconduct, the employee is entitled to a statutory long service payment. The statutory long service payment is calculated in the same manner as the statutory severance payment.

MPF Set-Off – it should be noted that in the event that a statutory severance and long service payment is payable by the employer, the employer is entitled to set-off the payment against the contributions the employer has made to the employee’s MPF / ORSO.  The set-off provision is due to be repealed – further information can be found in our recent article “Abolishment of MPF Offsetting Mechanism: is it finally here?”.

Q7: What recourse does an employee have if he has been ‘wrongfully’, ‘unreasonably’ and / or ‘unlawfully’ terminated?

Any breach of the Employment Ordinance and almost all breaches of an employment contract must be litigated by the employee or employer in the Labour Tribunal, which has exclusive jurisdiction of such claims.

Typically claims before the Labour Tribunal are for financial compensation.  However, provided very strict criteria are met, it is also possible for the Labour Tribunal to make an order for re-instatement or re-engagement. Further information can be found in our previous article ”Reinstatement or Re-engagement: Adding Teeth to the Employment Ordinance?”.