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Be wary on minefield of 'discretionary' bonus payments

Published on Friday, 06 Dec 2013
Pattie Walsh

The Situation
As we approach the end of the calendar year, many employees will be starting to calculate the value of forthcoming bonuses. For many international businesses, the global future remains uncertain. The delicate balance of rewarding staff and keeping star performers happy, while keeping a vigilant eye on costs, is a tricky one for business leaders to manage.

In Hong Kong, the law relating to bonuses or end-of-year payments is often misunderstood. The Employment Ordinance was drafted with the traditional Lunar New Year bonus in mind for staff on relatively modest monthly incomes. The complexities of global bonus plans and payments were not in the minds of those drafting the law back in 1968. But it is critical to understand that all annual bonuses or payments – no matter how sizeable nor complex in approach – must comply with its somewhat rigid approach.

The Law
In essence, any bonus payable under Hong Kong law is deemed a contractual entitlement of the employee and covered by the ordinance, unless it is clearly stated to be a discretionary payment. This amounts to a statutory presumption that, in the absence of a clear statement that the payment is discretionary, it will be deemed to be contractual.

Even if the bonus is stated to be discretionary on the face of the written documents, the courts will look at the way the bonus operates in practice. In the often-quoted case of “Wong Huey Lan versus Colgate Palmolive (HK) Limited [2002]”, the Court of First Instance confirmed that a bonus scheme calculated by reference to the achievement of operating targets was not a purely discretionary bonus, notwithstanding the fact it was described as being “discretionary”.

The significance of a bonus being caught by the ordinance is that the ordinance prevails over any rules or plans put in place to govern the operation of the bonus, and will always take priority over any contractual term. This cannot be avoided as there is a clear prohibition on contracting out of the protection of the ordinance.

While there is a lot of legal detail in this area, the two critical points are: firstly, if an employee works throughout the bonus year, he or she will effectively “bank” the bonus sum due and the amount should be paid. This is the case even if the person does not meet any plan or bonus rules which try to introduce payment qualifying conditions. Secondly, employees terminated during the bonus year are entitled to a pro-rata payment, save where the termination was for serious misconduct or occurs less than three months into the bonus year.

Steps to Follow
Below are some practical pointers to manage bonus law risks in Hong Kong.

If a bonus is intended to be discretionary, ensure this is clearly and consistently stated on all documentation. Even if the business is content to commit to certain payments and an agreed approach in any given year, make sure it is clear that the rules can and will vary year to year. Be clear that labelling a payment discretionary will not mean it will be accepted. What happens in practice is what counts.

The clearer the criteria for payment triggers, and the more transparent the methodology to calculate any payments, the more likely it is the payment will be deemed to be a contractual entitlement.

While making bonuses and payments more discretionary gives a business more flexibility in deciding who and what to pay, this must be considered in the light of the remuneration strategy. Is a genuinely discretionary payment an effective tool to attract and retain staff who want some certainty about what they will get paid if they perform well?

Approaching staff groups and market challenges in a strategic way, not “one size fits all”, is often a sign of a sound remuneration strategy. Discretionary bonuses are subject to legal rules and limits. Bosses must use discretion in a rational, proper manner, in good faith. Courts usually respect an employer’s right to an opinion unless the basis is obviously discriminatory or irrational. Decisions should be justifiable not only to the individual involved, but also in case of a legal challenge. Keep good records of the decision-making process.

DLA Piper is a global law firm with 4,200 lawyers located in more than 30 countries throughout the Americas, Asia-Pacific, Europe and the Middle East. 

Pattie Walsh is a partner and head of DLA Piper’s Asia-Pacific Employment practice. She writes extensively for legal and HR publications, with a particular focus on multi-jurisdictional employment work.

The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.

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