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Unlawful leaving penalties can hamper retention aims

Published on Saturday, 22 Nov 2014
Kathleen Healy, partner – employment, pensions and benefits practice, Freshfields
Laura Chapman, senior associate – employment, pensions and benefits practice, Freshfields

The Challenge

Despite continued uncertainty in the global economy, the employment market in Asia is heating up. A recent salary survey from recruitment company Hays suggests that more than four in 10 employers expect their staff levels to increase in the year ahead. What’s more, 95 per cent of employers said that skill shortages had the potential to hamper the effective operation of their business.

Another trend has emerged in Asia in recent years – a newfound savviness among employees at all levels and a willingness to “shop around” for better offers, even if not actively looking for a new job. In real estate terms, this all adds up to what would be called a “seller’s market”. There is a quiet war for talent going on all around you in this marketplace.

Employers are increasingly faced with the challenge of not just attracting top talent, but retaining them without letting their wage costs spiral out of control. This is easier said than done.

Increasingly, employers are looking to provide innovative benefit packages and are trying to find ways of creating “employee value” through career progression options and other non-cash incentives. This confluence of circumstances means that employers, now more than ever, need to get creative in how they fight the war for talent.

The Options

In some quarters, there can be a temptation to revert to old habits and look to create an employment contract laden with penalties for high-performers who seek to move on. Perhaps the classic example of this is fixed-term contracts or “bond” periods during which the employer attempts to tie an employee into their employment for a certain period of time.

In such cases, there may be clauses which require the employee to pay damages to the employer if they move on before the expiry of the stipulated period, or there is simply no right in the contract for the employee to resign during that period. These might seem like good solutions on the face of it and in the right circumstances can be very effective. However, there may be a number of pitfalls to such an approach.

First, employers cannot force an employee to continue to work if they refuse to do so. In other words, there is no remedy of specific performance for employment contracts. The most an employer can hope for is an award of damages. There is also the risk that any clause that is punitive to the employee in case of breach may be unenforceable if it amounts to an unlawful penalty.

Further, in many jurisdictions, including Hong Kong, the courts can imply a reasonable period of notice into an employment contract, even where there is not an express one. That means many of the weapons companies think they have access to can be very difficult to uphold in court. However, there are still options that create a disincentive to leave that remain perfectly legal.

The Stick and the Carrot

Clawback and malus, as they’re called, were originally used to stop employees “stacking” performance into one bonus period at the expense of the next one – and, ultimately, to try and limit risky short-term behaviours.

These days, they are increasingly being used to stimulate retention and to act as a deterrent to employees jumping ship to a competitor.

Clawback in this context refers to a provision that allows employers to recover part or all of an incentive payment after it has been paid. Malus, on the other hand, allows employers to reduce any bonus entitlement before payment.

The inclusion of a clawback or malus in respect of incentives can diminish the temptation of employees to “leave with a bang” on the day after bonuses have been paid out. In combination with staggered bonus payment schedules, this can create fewer windows of opportunity when it makes more financial sense than usual for an employee to move on.

However, as with all punitive contract mechanisms, there is a fine line between validity and otherwise. If these clauses are deemed excessively harsh or are in nature a penalty, they can be held to be unenforceable. It is therefore important to get the drafting right.

Some companies and sectors are ceding ground when it comes to moving away from disincentives, and choosing to focus on the carrot rather than the stick. Silicon Valley has long battled the issues we see in Asia relating to a skills shortage because of the sector’s characteristics – a group of employees with highly transferable skills and commercial savvy, who are prepared to readily switch loyalties. Female talent in particular is sought-after in this male-dominated sector.

When chosen strategically, perks allow companies to reinforce their employment brand beyond rates of remuneration – often at lesser expense.

Various companies in that hi-tech market are offering “baby bonuses” for new parents employed in their companies and financially backing options for fertility treatment and adoption. Reports have even emerged of one technology giant planning to offer oocyte cryopreservation to women in its company – that is to say, the freezing of their employees’ eggs for later use.

The Conclusion

This is the time to be strategic and creative. The biggest mistake employers make when worrying about retention is to do it after somebody has already joined the company. It is far easier to build incentives and disincentives into the employment relationship before it has commenced.

In formulating your next employment contract, it makes sense to stick to the basics and avoid creating accidental penalties for employees – and in turn, allowing them to leave at will.

If companies work within those confines, they will go a long way to bolster employee loyalty and retention.

 


Kathleen Healy is a partner in Freshfield’s expanding Employment, Pensions and Benefits practice in Asia and specialises in advising on Asia-Pacific employment and HR projects.
Laura Chapman is a senior associate in Freshfield’s Employment, Pensions and Benefits team based in Hong Kong. She has a broad range of experience advising employers on both contentious and non-contentious employee matters throughout the Asia-Pacific region.

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