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The Hong Kong Court of Appeal affirms employees’ unfettered statutory rights to be paid their entitlements.

27 August 2020

In this Court of Appeal case of Xu Yi Jun v GF Capital (Hong Kong) Limited (CACV 502 & 577 / 2019), the Court considered whether an employer can withhold a bonus payment after the payment due date for reasons of alleged gross misconduct that had occurred prior to, and whether an employer can offset its unliquidated claim for damages against the bonus in legal proceedings.

Employment cases rarely reach the Court of Appeal in Hong Kong, and this decision handed down on 12 August 2020 affirms the employees’ rights to be paid their wages and any other sums due to the employee without delay.

Facts

Ms Jun was employed by GF Capital (Hong Kong) Limited (“GF Capital”), a company regulated and licensed in Hong Kong by the Securities and Futures Commission (“SFC”) to conduct regulated activities including advising on corporate finance. Ms Jun was employed as the managing director of the Structured Finance Department. Her employment commenced on 1 March 2016 and was terminated by her voluntarily on 13 August 2017 by serving two months’ notice on 14 June 2017.

She brought a claim against GF Capital for payment of her 2016 guaranteed bonus in the sum of HKD7,800,000 (“Bonus”). Her employment contract contains a bonus clause (“Bonus Clause”) which states: -

Guaranteed Bonus

In addition to the annual bonus and sign-on bonus referred to in clauses 4 and 5 above, we will grant you a guaranteed bonus of HK$7,800,000 (“2016 Guaranteed Bonus”) for the calendar year ending 31 December 2016. The 2016 Guaranteed Bonus is payable to you irrespective of your performance or the performance of the Group during the calendar year. Any annual bonus in excess of the 2016 Guaranteed Bonus shall be calculated and payable to you in accordance with clause 4 above. The 2016 Guaranteed Bonus will be vested in the following calendar year and payable in full on the payment date of your monthly basic salary in March 2017 (the “Due Date”). If your employment with the Company is terminated voluntarily by you without cause or you have been found guilty of any gross misconduct, in either case before the Due Date, any outstanding payments of the 2016 Guaranteed Bonus will be forfeited.

The last sentence of the Bonus Clause in bold above was the main subject of contention between the parties.

By way of background, Ms Jun had submitted a proposal for a project that involved making a loan to a Hong Kong company to fund its investment in a target company by way of a convertible bond. This HKD120 million loan was approved by GF Capital’s Structured Finance Committee and was made the following day. Six months later, the company whom the loan was made to was ordered to cease trading by the SFC. It became apparent that the borrower would default on the loan. GF Capital then launched an investigation into the project that was proposed by Ms Jun to determine whether there was any misconduct on her part.

The payment date of the bonus was in March 2017 (“Due Date”), however GF Capital did not pay her at this time because they had not completed their investigation. Upon completion of their investigation in May 2017, they had identified certain failings of Ms Jun during the project. Ms Jun did not respond to these findings and resigned shortly after by giving two months’ notice to terminate her employment. She then brought proceedings to claim the payment of her bonus with interest.

Issues and Findings

The main issues the Court considered included the following:-

  1. What the proper construction of the Bonus Clause should be
  2. Whether GF Capital’s claim for damages may be set off against the bonus, or whether the entitlement to set off is excluded under section 32 of the Employment Ordinance

Issue 1 – What the proper construction of the Bonus should be

Ms Jun argued that in order for GF Capital to forfeit her bonus for any gross misconduct, it is necessary for there to be a finding of gross misconduct before the Due Date. She argued that the layout and the commas placed around the qualifying phrase “in either case before the Due Date” that this phrase refers to “[having been] found guilty of any gross misconduct”.

She also contended that the Bonus Clause was put in place to entice her to join GF Capital by offering her an attractive bonus that was (a) not performance based (b) payable on an agreed date not subject to any (particularly indefinite) deferral and (c) only forfeitable in very clear-cut circumstances.

GF Capital argued that so long as there is a finding of gross misconduct which had occurred prior to the Due Date, it didn’t matter that the finding was concluded after the Due Date. The Court disagreed with GF Capital. The Court held that the natural and ordinary meaning of the clause was clear, and that there was no need to resort to the contra proferentum rule (i.e. where there is any ambiguity or doubt about the meaning of a term, the words will be construed against the party who drafted the relevant term). The Court held that there must be a finding of gross misconduct before the Due Date in order for GF Capital to be entitled to forfeit the Bonus.

Issue 2

GF Capital brought a counterclaim against Ms. Jun for breach of her express contractual duties, implied common law duties of fidelity to act faithfully and in the best interests of GF Capital and to exercise reasonable care and skill in the performance of her duties. As a result, GF Capital claimed it had suffered loss and damages substantially exceeding the amount of Ms. Jun’s claim and GF Capital proposed to set off such amount against any liability found due to Ms. Jun.

Ms Jun argued that GF Capital is not entitled to set off its unliquidated claim against the Bonus as it is statutorily excluded under section 32 of the Employment Ordinance, which provides:-

“No deductions shall be made by an employer from the wages of his employee or from any other sum due to the employee otherwise than in accordance with this Ordinance.”

Section 32 contains very limited circumstances in which an employer can deduct from an employee’s “wages”. As the Bonus is expressly excluded from the definition of “wages” under the Employment Ordinance, none of these limited circumstances applied. Given that section 32 expressly prohibits deductions “from any other sum due to the employee”, the Court held that GF Capital was not permitted to exercise an equitable set off by raising a claim for unliquidated damages against its liability to pay the Bonus.

Key takeaways for employers:

  • Employers should review the terms of employment entered with employees to ensure that all of the employment terms are clear, unambiguous and accurately reflect what is intended between the parties.
  • In this particular case, had GF Capital completed its investigation in time and formed a view that it had sufficient grounds to summarily dismiss the employee prior to the payment date, GF Capital could have rightfully forfeited the Bonus pursuant to the Bonus Clause and the law. It would then be up to the employee to consider whether the summary dismissal was wrongful and bring a claim on that basis. If an employer is investigating an employee’s conduct which may give rise to summary dismissal, it should review the terms of the employee’s employment contract to ascertain whether there are any bonuses or other incentive payments that may be triggered by a certain payment date.
  • Deduction from an employee’s wages can only be done in very limited circumstances, which are set out in the Employment Ordinance, and an unlawful deduction is a criminal offence. Before any deductions are made, an employer should ensure that the deductions are permitted and that the amount to be deducted does not exceed the maximum limits prescribed under the law.

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