Employment agreements often provide for a bonus described as a discretionary bonus. Though employers intend to reserve the right to refuse to pay a bonus by so describing the bonus, under Hong Kong employment law, depending on how the contract is drafted and how the bonus arrangement is structured and operated, an employer may nevertheless become bound to pay a bonus. If you would like to understand your bonus entitlement as an employee under Hong Kong employment law or if you would like more information about how the Employment Ordinance and common law may operate to create bonus liability for your business or how to structure a bonus scheme, please contact one of our employment lawyers.
Though employees in Hong Kong have no legal entitlement to an annual bonus, Hong Kong employment contracts typically provide for such a bonus, often paid at the end of the Chinese Lunar New Year. Under the Employment Ordinance, where such an annual bonus is contractual in nature, meaning the employer is obliged to pay it, it is regarded as an “end of year payment”. End of year payments often amount to 1 or 2 month’s wages and are thus known sometimes as a “thirteenth month payment”, “fourteenth month payment”, “double pay”, “year end bonuses” or “end of year bonus”.
The Employment Ordinance specifically distinguishes a bonus which is an end of year payment from a bonus which is discretionary bonus, meaning a bonus of a gratuitous nature or which is payable only at the discretion of the employer. The Employment Ordinance presumes that, unless stated in writing to the contrary in the employment contract, an end of year payment is not of a gratuitous nature and is not payable only at the discretion of the employer. In other words, Hong Kong law assumes that annual bonuses are end of year payments which an employer is obliged to pay unless the employment contract otherwise provides.
End of Year Payments
Where an employee is entitled to an end of year payment, the Employment Ordinance provides for the amount, payment and timing of the payment if the employment contract is silent on these matters. Most significantly, subject to certain requirements as to the length of employment, the Employment Ordinance provides for the end of year payment to be pro-rated where the employment terminates during the payment period, unless either:
the employment is terminated by the employee (other than on the basis of constructive dismissal), or
the employment is terminated for cause by the employer (i.e. on the basis of summary dismissal).
An employee’s right to receive the pro-rated amount of his end of year payment is a statutory right which the employer cannot contract out of or override by express provisions in the employment contract. In other words, any term or condition of an employment contract seeking to waive the employee’s right to such pro rata payment or to reduce the amount of such pro rata payment will be void to the extent inconsistent with the Employment Ordinance.
It is common for Hong Kong employment contracts to specifically and expressly describe any bonus as “discretionary” or “gratuitous” in nature, with the idea of reserving for the employer the right to decide whether to pay any bonus and the amount of any bonus. However, whether such a bonus is in fact a discretionary bonus or an end of year payment depends on more than the mere label given to the bonus. For example, in one case, the employer and employee entered into a contract allowing the employer to make a deduction from the employee’s bonuses if he failed to perform satisfactorily. The court regarded the bonus entitlement as a contractual one given that there would be no need for the parties to provide the employer a power to make a deduction from bonuses had they been discretionary.
Discretion as to Amount of Bonus
For a “formulaic” bonus scheme in which the employer reserves its discretion to decide the amount of payment only, any payment under such bonus scheme will likely be contractual.
Routine and regular payment of bonuses over an extended period of time may transform an unwritten discretionary bonus into a contractual one.
Exercise of Contractual Discretion
Where an employment contract provides an employer with the sole and absolute discretion to pay a bonus, the employer’s discretion is nevertheless subject to oversight by a court. Under Hong Kong employment law, following English case law, an employer should not exercise its discretion irrationally, perversely or capriciously.
The court may intervene if no reasonable employer would have exercised its discretion in that way. The threshold is somewhat different from requiring the employer to act reasonably, as the court tends to be reluctant to substitute its own view with that of the employer.
Effect of Termination of Employment on Bonuses
In respect of a discretionary bonus, the employer may provide in the employment contract that no bonus will be paid if notice of termination of employment has been given. However, the courts may imply a term into the employment contract that the employer will not terminate an employee’s employment to avoid paying a bonus.