A common employment dispute is whether a bonus is a discretionary bonus and if so, whether the employer has properly exercised discretion
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International businesses including banks, insurance companies, hedge fund managers and private equity firms with New York and London offices frequently second staff to their Hong Kong offices. Some of these businesses may wish to standardize employment terms for their senior staff regardless of which country staff may be located. When such staff are located in Hong Kong, can they choose to follow employment law in their home office rather than the Employment Ordinance? In this article, we examine the current state of the law. If you are interested in finding out more about how our employment lawyers can advise on this or other Hong Kong employment law issues, please contact us.
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Given the global nature of business and finance, it is not uncommon for international businesses to transfer senior staff from one office in one country to another office in another country. Their employment contracts may include a choice of law provision which specifically states that the contract is governed by the law of their home office, purporting therefore to exclude the application of Hong Kong employment law and, in particular, employee protections under the Employment Ordinance. Are these choice of law clauses valid and enforceable against employees located in Hong Kong?
Surprisingly, the Hong Kong law leaves the position in doubt, with 2 different decisions of the Court of First Instance arising from disputed termination of employment contracts taking diametrically opposite positions, one ruling that a choice of foreign law clause in a global employment contract is valid to disentitled an employee from the right under the Employment Ordinance to give notice of termination of employment and the other ruling that a choice of foreign law clause in a global employment contract cannot disentitle an employee from exercising this right.
On November 28, 2007, in HSBC Bank plc v. Steven Andrew Wallace (“HSBC Case”), the Court of First Instance judge held that an employee who had been seconded to Hong Kong by his English employer and who had lived and worked in Hong Kong for the previous 3 years would likely be unable to avail himself of the protections of the Employment Ordinance. This was because his contract of employment specified that it was to be governed by English law. In consequence, the employee was likely not entitled to terminate his employment contract by payment in lieu of notice as allowed by the Employment Ordinance. Instead, the employee was likely to be required (consistent with English employment law) to serve out the full six month notice period specified in his employment contract.
However, on February 29, 2012, the Court of First Instance judge in Cantor Fitzgerald Europe vs. Boyer (“Cantor Case”) decided not to follow the HSBC Case, holding that certain sections of the Employment Ordinance have an overriding effect, meaning that the employer and employee could not contract out of them through a choice of law provision which designates the law of a different jurisdiction to govern their employment contract. As a result, the judge found that the employees in question could benefit from the protections afforded by the Employment Ordinance. As a result, even though the employees had been seconded to Hong Kong by their employer, there were entitled to terminate their employment contracts by payment in lieu of notice.
At issue in the HSBC Case was whether the choice of law provision in the contract of employment was enforceable or whether it ran afoul of s.70 of the Employment Ordinance, which reads:
"Any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by this Ordinance shall be void."
Section 70, entitled "Contracting Out", is intended to prevent parties from contracting out of the numerous employee protection provisions of the Employment Ordinance. It would almost certainly prohibit a Hong Kong employer from enforcing an employment contract which requires employees to sacrifice statutory entitlements to such benefits as annual leave, severance or long service payments.
The employee in the HSBC Case argued that the choice of law provision in his contract with HSBC Bank should be treated as any other term in a contract of employment. In other words, the employee argued that the choice of English law reduced the employee's rights, benefits and protections and thus, the choice of law clause violated s.70 of the Employment Ordinance and was unenforceable. To enforce it would be to strip s.70, and to a large extent the Employment Ordinance itself, of its authority.
The judge in this case disagreed. He found that s.70 of the Employment Ordinance notwithstanding, the choice of law provision was likely valid and English law likely governed the parties' contract.
The judge began his analysis by affirming choice of law, namely that parties to a contract are, subject to certain exceptions, entitled to choose the law governing that contract. As a result, there was a presumption that English law applied to the employment contract at issue which could only be overridden in two instances:
if the Employment Ordinance were an "overriding statute," as defined below; or
if the parties had no connection with England so that the invoking of English law was done to evade the protections of the Employment Ordinance.
Whether rightly or wrongly, the judge gave no consideration to the fact that the employee had been living and, more significantly, performing his duties under the employment contract in Hong Kong for more than 3 years, and that the terms of his secondment required him to remain in Hong Kong for an additional 2 years. Nor did the judge consider that the company for which the employee worked under the terms of the secondment was incorporated and based in Hong Kong.
An "overriding" statute is one which has such a strong social or economic imperative that it will be considered to apply, within its own terms, even to a contract which is otherwise governed by foreign law. Whether a statute is an "overriding" statute is a matter which may be expressly spelt out in the statute or, failing that, which may be decided by the courts based on whether the connections with Hong Kong are sufficiently strong and relevant to trigger the application of the statute.
The judge found that the Employment Ordinance was not an overriding statute because it did not contain express language saying that it was one. In reaching this conclusion, he compared the language of the Employment Ordinance with that of the English Employment Rights Act of 1996, which states that "for the purposes of this Act it is immaterial whether the law which (apart from this Act) governs any person's employment is the law of the United Kingdom, or of a part of the United Kingdom, or not." Finding no similarly strong language in the Employment Ordinance, the judge found that it was likely not an "overriding statute" and that it would be incapable of overriding the presumption that English law applied.
The judge further noted that the employee could not likely show that the invoking of English law was intended to evade the protections of the Employment Ordinance because there was a genuine connection between the parties and England. The employer, HSBC Bank, was a UK incorporated and based company. It contracted with the employee in England and then, by mutual agreement, seconded him to its Hong Kong subsidiary, HSBC Markets (Asia) Limited. Thus it did not appear that the choice of English law was artificially devised to evade the protections of the Employment Ordinance. To the contrary, according to the judge, it made "good sense that a group of companies spread out all over the world [i.e., the HSBC group] would want to employ its senior executives under one umbrella and one governing law."
The judge's ruling came on an interlocutory application for an interim injunction. Its findings are not absolute, but are based on the likelihood that the employer will prevail on the same issues at a full trial. Because it is a Court of First Instance decision, it does not carry the same precedential authority as a decision of a higher court. Nonetheless, it remains valid law unless and until it is overturned at trial or on appeal.
However, there are certain potential weaknesses in the judge's reasoning which should be noted before decisions of practical import, such as the drafting and execution of multinational employment agreements, are taken in reliance upon it.
While it is true that a statute will not generally be held to apply to a matter governed by foreign law unless a contrary intention appears, there is no requirement that the contrary intention be expressly stated by legislation. In this regard, the judge's decision omitted a crucial line of analysis.
When a statute is silent as to whether it is an overriding statute or not, it is the function of the courts to determine from the public policy reasons underlying the statute whether the statute is or is not overriding. In the case of an employment statute, it would seem to follow that the courts should look at whether the connections of the employer and employee with the local jurisdiction (e.g., Hong Kong in the current case) are strong enough to trigger the application of such public policy. Yet the judge completely ignored the policy rationale underlying the Employment Ordinance, failing to consider whether that policy was sufficiently significant, and the parties' connection with Hong Kong sufficiently strong, to justify extending the Employment Ordinance's protection to the employment contract in issue. As previously noted, the fact that the employee had been living and performing his duties under the employment contract in Hong Kong for 3 years and was expected to continue in the same capacity for an additional 2 years in no way factored into the judge's decision.
The judge in this case disagreed with the reasoning of the HSBC case, and since he was not bound by the HSBC case, decided not to follow the same.
In the Cantor case, the employer seconded several employees from the UK to Hong Kong. The secondment letters provided that the employment was governed by English law "save for any mandatory laws of Hong Kong". As indicated above, English law does not give an employee a right to terminate his employment by making payment in lieu of notice unless the employment contract states so. On the other hand, the Employment Ordinance provides that an employee may at any time terminate his employment contract by giving to the employer notice of an intention to terminate and he may terminate the contract by making payment in lieu of notice.
The judge held that given s.70 of the Employment Ordinance, these provisions should be treated as overriding provisions, which form part of the "mandatory employment laws of Hong Kong" binding on the employer. The judge pointed out that one cannot attempt to get around the protection afforded by the Employment Ordinance to employees working here through the expedient of choosing a foreign law, and such attempt will be struck down by s.70.
The judge relied on s.4 of the Employment Ordinance to support his conclusion. Section 4(1) provides that, unless exempted, the Employment Ordinance applies to every employee engaged under a contract of employment, to an employer of such employee and to a contract of employment between such employer and employee. Under these exemptions, the Employment Ordinance does not apply to:
a person who is a member of the family of the proprietor of the business in which he is employed and who dwells in the same dwelling as the proprietor;
an employee as defined in the Contracts for Employment Outside Hong Kong Ordinance (i.e. manual employees and non-manual employees with monthly wages not exceeding HK$20,000 employed to work outside Hong Kong for foreign employers who are not in Hong Kong and not carrying on a business in Hong Kong); or
a person who is serving under a crew agreement, or on board a ship which is not registered in Hong Kong.
The judge reasoned that the deliberate carving out of such contracts suggests that the Hong Kong Employment Ordinance “was intended to apply to all employments in Hong Kong, including employments governed by some law other than Hong Kong law”.
Since the HSBC case and the Cantor case were both handed down by the Court of First Instance, we are now faced with two conflicting legal authorities which have no overriding effect on each other.
The HSBC Case decision suggests that freely-chosen choice of law clauses may be enforced so long as the parties have a sufficient connection with the chosen jurisdiction to show that they are not merely trying to escape application of the Employment Ordinance. For an international business transferring senior staff from a New York or London office to a Hong Kong office, the ruling opens up the possibility of using a New York or London standard employment contract to govern the relationship of the staff member following the transfer to Hong Kong. Equally, the ruling opens up the possibility of using a New York or London standard employment contract to govern the relationship of all executives of a certain level of seniority.
In contrast, the Cantor Case decision suggests that a choice of law clause may not be enforceable if the parties attempt to contract out certain mandatory employment provisions under the Employment Ordinance. Therefore, an expat employee whose employment contract is governed by foreign law may also enjoy the protection under the Hong Kong employment law.
Given the conflicting legal authorities, employers who are drafting their employment contracts should consult with competent counsel to ensure that the conflict between the HSBC Case and the Cantor Case is properly addressed. Skilful draftsmanship and tactical positioning may be able to preserve the choices afforded by the HSBC Case decision, even if that decision is subsequently rejected or modified by a higher court.
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