Career Advice Legal Case studies for employers

Cost of firing staff could soon put bosses on the hot seat

The Background

Hong Kong has traditionally been known as a relatively “employer friendly” regime. Unless the employee is a protected one – for example, if they are pregnant or on paid sick leave – it is currently relatively easy for an employer to dismiss an employee without cause and without having to pay a significant amount of compensation.

To make Hong Kong a little more “employee friendly”, the Legislative Counsel recently proposed two significant changes to Hong Kong employment law which, if passed, are likely to lead to increased difficulties and costs for employers who arbitrarily choose to sack members of staff.

The First Change

The first of these proposed changes is an amendment to the remedies available to an employee who has been unreasonably dismissed by their employer.

Under the existing provisions, if an employee is found by the Labour Tribunal to have been unreasonably dismissed – i.e. dismissed without a valid reason such as misconduct, incapability, or redundancy – the Labour Tribunal may either make an order for terminal payments (statutory payments that an employee is entitled to upon termination, which will have usually already been paid to the employee) or make an order for reinstatement/re-engagement but only if the employer consents. This means that an employee, particularly one who has already been paid their terminal payments, has very little incentive to bring this type of claim, because the only remaining remedy available to them is an order for reinstatement/re-engagement which the employer can refuse without consequence.

The proposed change envisages that, in a situation where the Labour Tribunal considers that reinstatement/re-engagement of the employee is appropriate, it will be able to make a compulsory order for reinstatement/re-engagement without securing the consent of the employer. In the event of non-compliance with the order, the employer will be ordered to pay a further sum of three times the employee’s monthly wages, capped at HK$50,000.

This will make it more difficult for employers to dismiss an employee without having a recognised good reason. Consequently, employers would be more likely to seek to construct, in advance, a “fair” reason for dismissal, such as by compiling a record of unsatisfactory performance, or accept the practical need to pay the employee up to HK$50,000 in exchange for a waiver of claims.

The Second Change

The second proposed change currently being debated (as part of the wider debate relating to the overhaul of the Mandatory Provident Fund (MPF) scheme) is to abolish the employers’ right to offset MPF contributions made by the employer against severance or long-service payments due to some departing employees. Currently, when an employer makes either a severance or long-service payment, it has the right to offset the amount of such payment by the sum it has contributed over time to that employee’s MPF fund. This can be done by either reducing the payment amount by the total contribution size, or by paying the full amount of the payment and then applying to the MPF provider for reimbursement of the employer’s contributions. This invariably means that employees often walk away with little or no severance or long-service payment despite years of service.

The change currently being debated would mean that this offset mechanism would be abolished and employees would be entitled to receive their full severance or long-service entitlement as well as their MPF fund in full. The maximum amount to which an employee is currently entitled in respect of their severance or long-service payment is HK$390,000, so the proposed change could significantly increase the cost of terminating a long-serving employee’s contract.

It is not clear yet if these proposed changes will become law and, if so, when, but clearly these proposed changes could be significant for employers.

Herbert Smith Freehills has 2,800 lawyers and 460 partners in over 20 offices globally. It advises on dispute resolution and employment, among other areas.

Gareth Thomas is head of the Hong Kong commercial litigation team and responsible for the Greater China employment practice.

Tara Grossman is a senior associate in the employment practice and has a wide range of experience in employment matters.

EDITOR’S NOTE: The information in this article should neither be relied on as legal advice nor 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.