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Hong Kong Court of Appeal upholds bonus payment and restricts employers’ right to make deductions

  • Hong Kong
  • Employee benefits
  • Employment law

27-10-2020

Hong Kong legislation allows employers to make deductions from wages “and other sums” on a very limited basis. Recently the Court of Appeal considered whether and employer could make a deduction from an employee’s contractual bonus.

In the recent case Xu Yi Jun v GF Capital (Hong Kong) Limited (CACV 502 & 577 / 2019) the Court decided on (1) the interpretation of a bonus forfeiture clause in an employment contract and (2) the permissibility of an equitable set-off against an employee’s bonus.

Background Facts

The case relates to a former employee’s (“Employee”) claim against her former employer (“Employer”) for HK$7.8million (about US$1 million), being the guaranteed bonus for the year 2016 (“Bonus”) payable under her employment contract (“Employment Contract”).

A bonus forfeiture clause in the Employment Contract reads: “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 Employee resigned after an investigation into her conduct and the Employer did not pay the Bonus. After termination, the Employee brought proceedings against the Employer to claim payment of the Bonus. The Employer’s defence and counterclaim alleged that (1) the Employee was not entitled to receive the Bonus by virtue of her gross misconduct which occurred before the Due Date (the “Misconduct”), and (2) with respect to the Misconduct, the Employer suffered loss and damage substantially exceeding the amount of the Employee’s claim (the “Counterclaim”).

Key Issues and Rulings

  • Proper Construction of the Bonus Forfeiture Clause

    The Employee argued that she was entitled to the Bonus and the Employer could invoke the bonus forfeiture clause to forfeit the Bonus only if a finding of the Employee’s gross misconduct was made before the Due Date.

    The Employer contended that it was not necessary for there to be a finding before the Due Date, so long as the gross misconduct had occurred before the Due Date. In other words, the qualifying phrase “before the Due Date” refers to “gross misconduct” rather than “[having] been found guilty of any gross misconduct”. The Employer suggested that this interpretation of the contract would make more business common sense.

    However, the Court agreed with the Employee’s construction and held that the natural and ordinary meaning of the bonus forfeiture clause was clear, and did not flout business common sense.

  • Set-off Against Bonus

    The Employer sought to exercise an equitable set-off on its Counterclaim against its liability to pay the Bonus.

    The Employee contended that the Employer’s unliquidated claim may not be set off in the above manner because set-off is statutorily excluded. Specifically, section 32(1) of the Employment Ordinance provides that:

    “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.”

    The Court opined that the wordings “any other sum due to the employee” in section 32(1) should not only refer to “wages” but is sufficiently wide to cover an end of year payment such as the Bonus.

    The Court further held that, given section 32(1) applies to the Bonus, the wordings of section 32(1) do not permit the Employer to exercise an equitable set-off by raising a claim for unliquidated damages against its liability to pay the Bonus. It commented that:

    “The legislature could not have intended to remove the protection against set-off and permit the employer to deprive the employee temporarily of the right to payment of a sum due to him until the final resolution of the employer’s claim for unliquidated damages against the employee for bad or negligent work.”

Implications for Employers

  • At the contract drafting stage, care should be given to make sure the wordings of the employment contract accurately reflect the intention of the employer. The Court’s reading of the bonus forfeiture clause is an example showing its general reluctance to deviate from the natural and ordinary meaning when interpreting a contract.
  • Further, in this case the alleged misconduct was first uncovered in October 2016, more than six months before the Due Date for payment of the Bonus in March 2017. If the employer had conducted its internal investigation more promptly and concluded that there was gross misconduct before the Due Date, it could have avoided paying the Bonus. It is a point which internal investigators of employers should watch out for.
  • The phrase “any other sum due to the employee” in section 32(1) of the Employment Ordinance is generally wide enough to cover most, if not all, monies due to the employee, including end of year payments. Employers may make deductions of sums due to the employee only in accordance with the limited exceptions set out under section 32(2) of the Ordinance.
  • Where legal proceedings are initiated by an employee against an employer and the employer has a counterclaim against the employee, the employer cannot set off its claims against it liability to pay any sum due to the employee.