Restraints on Employee’s Activities Post-termination

Frequently employers seek to impose post-termination restrictions (“PTRs”) on employees in order to restrain the post-termination activities of the employees with the aim of protecting the employer’s businesses. Post-termination restrictions are often used by employers to restrict an employee from:-

•    joining competitors;
•    poaching employees;
•    soliciting clients or customers; or
•    dealing with clients or suppliers.

Whether or not a PTR is enforceable is a common question posed by both employers and employees who are considering joining a competitor, a competitor seeking to poach an employee as well as employers seeking the enforcement of the PTR against a recently departed employee.

Enforceability of PTRs

PTRs which amount to restraint on trade are prima facie void and unenforceable. The courts will enforce such PTRs only where it can be shown such restrictions are for the reasonable protection of the employer’s legitimate interests and are no wider than reasonably necessary.

The courts have emphasised that the application of familiar principles is highly sensitive to the individual facts of each case. Accordingly, precedents provide guidance to enforceability but are not determinative in determining whether such restraints are reasonable. The court will take into account the nature of the employment, the employee’s role within the employer and the time for which the restraint is sought to be imposed and geographical area to which the restraint applies. 

Consequences of a PTR being held unreasonable

If a PTR is held to be unreasonable, it will be struck down and will not be enforced unless the offending parts can be severed without changing the character of the clause. The courts cannot enforce a restriction of lesser extent which would have been reasonable or rewrite a defective covenant so that it becomes enforceable.

Drafting PTRs

An employer should ensure that the PTRs are drafted to mitigate the risk that they are open to challenge or held unenforceable. The following should be kept in mind when drafting PTRs:-

•    The onus is on the party seeking to rely on the PTR to show that it is reasonable and enforceable.
•    Any ambiguity or uncertainty in the drafting of the PTR gives rise to significant risk that a party against whom the PTR is enforced may choose to challenge its enforceability.
•    The language used in the PTR should be crafted keeping in mind the specific position, seniority and influence of the departed employee, as well as the connections and the shelf-life of the confidential information and knowledge retained by that departed employee.
•    Any requirement for the departed employee to serve a period of gardening leave may reduce the length of the PTRs considered to be reasonable.
•    The PTR should be clear, precise and reasonable as to duration and geographic scope.
•    In drafting PTRs it should also be borne in mind that the party seeking to enforce the PTR would have the onus of establishing sufficient evidence to obtain on an interim basis an injunction restraining the employee’s breach of such a PTR.

A recent case last year in the UK Supreme Court, which is likely to be followed in Hong Kong, provided some helpful guidance on restrictive covenants. In this case, Tillman v Egon Zehnder [2019] UKSC 32, the employee argued that her employer Egon Zehnder had sought to apply an overly wide and restrictive non-compete covenant on her.  The court found that part of the covenant did amount to an unreasonable restraint of trade, and struck it out, but it recognized at the same time that the rest of the restrictive covenant was fair. In its ruling, the court confirmed that it was possible to sever and remove troublesome parts of a restrictive covenant whilst leaving the remainder intact.  In addition, the court warned against employers drafting overly wide covenants in the first place, indicating that such employers could face additional cost penalties if the court found that their contracts “cast an unfair burden on others to clean them up”. 

Confidential Information

Frequently when drafting an employment contract an employer will seek to protect its confidential information prevent misuse by departing employees. Often such provisions will be without time limitation and such restrictions are considered a legitimate provision for the protection of the employer’s proprietary rights in its confidential information.

For further information on PTRs confidential information and other employment law related matters, please do not hesitate to contact us.

Prelude
With the worldwide economy being hit hard with the COVID-19 pandemic, employers, irrespective of the scale of the business, have been forced to reduce costs to survive this economic ice age. With the diminished demand for labour force due to the stagnant economy, it is always tempting for employers to start cutting costs by downsizing the labour force or making alternative working arrangements with their employees (including requesting the employees to take no pay leave or to have a pay cut). Employers should, however, beware of constructive dismissal in the course of implementing such downsizing plan or alternative working arrangements; otherwise the additional costs incurred thereof might outweigh the costs saved by these costs-cutting measures. 

Constructive dismissal – General legal position
Subject to the factual matrix of each particular case, common circumstances which give rise to a claim for constructive dismissal include but not limited to unilateral variation of the contract of employment (for example, reduction in wages or substantial reduction in working hours), failure to pay wages, failure to provide reasonable amount of work, failure to pay statutory entitlements and discriminatory conduct at workplace etc.
In the event of constructive dismissal, an employee may terminate his employment contract without notice or payment in lieu of notice. In such case, although the employee is the party who terminates the employment contract, such dismissal is referred to as a “constructive dismissal” because the laws construe the employee’s termination of employment as a de facto dismissal by his employer. That being said, such finding might be rebutted by acts of the employee pointing to the otherwise.

Unilateral variation of the terms of employment
The relevant general legal position in Hong Kong is that an employer may not unilaterally vary the terms of employment (including imposing a substantial reduction in working hours (thus a reduction in pay) and requesting its employees to take on no pay leave), unless the relevant employment contract contains an express provision allowing the employer to do so. In the absence of any express provision to that effect, any unilateral variation of the terms of employment can therefore amount to constructive dismissal. This allows the employee to terminate their employment contracts without the need to give notice or payment in lieu of notice to the employer, and to bring common law claims for damages against the employer for any loss suffered by them as a result of the constructive dismissal. Damages which can be recovered by the employees might include:- (a) the amount which the employees would have earned has their employment been terminated with proper notice (including any outstanding wages, payment in lieu of notice, end of year payment, annual leave pay, holiday pay, bonus payment and other benefits and other payments due under the employment contract); (b) damages for breach of implied term of trust and confidence which the Court may assess the same by considering the potential loss of salary and contractual benefits on the employees’ part caused by the constructive dismissal; and (c) the legal costs of the claims.

In addition, section 32A(1)(b) of the Employment Ordinance (Cap. 57 of the laws of Hong Kong) (“EO”) confers upon an employee who has been employed under a continuous contract the right to claim remedies for “unreasonable dismissal” in the circumstances where his employer unilaterally varies the terms of his employment contract by the reason that his employer intends to extinguish or reduce any statutory right or benefit conferred upon such employee by the EO. 

Section 32A(3) of the EO further presumes that “the variation of the terms of the contract of employment by the employer as referred to in that subsection [i.e. section 32A(1)(b) of the EO] shall, unless a valid reason is shown for that variation within the meaning of section 32K, be taken to be a variation of the terms of the contract of employment by the employer by reason that the employer intends to extinguish or reduce any right, benefit or protection conferred or to be conferred upon the employee by this Ordinance [i.e. the EO]”.

Given that section 32K(c) of the EO specifically sets out that a dismissal, or the variation of an  employment contract, may be regarded as valid in the circumstances where the same is resulting from the redundancy of the employee or other genuine operational requirements of the business of the employer, it is therefore arguable that the COVID-19 pandemic triggers the application of section 32K and protects the employer from the statutory claim of “unreasonable dismissal”.

Notwithstanding the foregoing, the provisions under section 32K of the EO may only protect employers from the statutory claim of “unreasonable dismissal”. The general legal position remains that employers may not unilaterally vary the terms of employment on their employees in Hong Kong, unless the relevant employment contracts contain an express provision to allow the employers to do so. 

Requesting for voluntary resignation by the employees
It is commonly seen that an employer would ask an employee to resign “voluntarily” for face saving or in return for a favourable reference letter; otherwise the employment would still be terminated by the employer by way of dismissal.

 If an employer gives notice to an employee requiring him to resign, or giving him the option to resign or be dismissed, and subsequently the employee tenders his resignation, the Court is likely to characterize such termination as constructive dismissal rather than a resignation. That being said, the situation could be quite different in circumstances where an employer wishes to give an employee the genuine option of being able to resign rather than being dismissed by way of summary dismissal. 

Discriminatory conduct at workplace
Under the anti-discrimination laws in Hong Kong, an employer is prohibited from treating an employee less favourably in relation to employment on the grounds of an employee’s sex, disability, family status, or race. An employee may treat himself as constructively dismissed if he is subjected to discrimination or victimization conduct by his employer under the Sex Discrimination Ordinance (Cap. 480 of the laws of Hong Kong), the Disability Discrimination Ordinance (Cap. 487 of the laws of Hong Kong), the Race Discrimination Ordinance (Cap. 602 of the laws of Hong Kong), or the Family Status Discrimination Ordinance (Cap. 527 of the laws of Hong Kong), if it can be shown that the conduct complained about is initiated, encouraged or tolerated by the employer.

It is not unusual for an employer to consider (subject to the employee’s consent, if the circumstances may require):- (a) requesting some or all employees to take no pay leave; (b) requesting some or all employees to lower their working hours thus the salary on a pro-rata basis; or (c) implementing lay-off, in order to manage its costs in the time of COVID-19 pandemic. However, when implementing any of these costs-cutting measures, an employer is prohibited from selecting the employees pertaining on the employees’ sex, disability, family status, or race; otherwise, that could amount to constructive dismissal. 

How can OLN helps?
As can be seen, the downsizing of labour force by an employer in the time of the COVID-19 pandemic could easily give rise to constructive dismissal. We have practical experience in helping an employer with the implementation of temporary employment measures during the time of the COVID-19 pandemic and the review relevant documentation to ensure the same complies with the employment law regime in Hong Kong and to protect the employer from any potential claims. 

On the other hand, we also assist, from time to time, an employee on the review of the employment measures implemented by employers and advise the employee to take appropriate legal actions against the employer if any of the employment measures are in contravention of the employment laws.

If you have any question regarding the topic discussed or other employment issues, please contact our senior associate Mr. Victor Ng at victor.ng@oln-law.com or our associate Ms. Barbara Kwong at barbara.kwong@oln-law.com for further assistance.

Shall you be interested to download this article as a brochure, please click on the following link: Constructive dismissal in a nutshell in the time of COVID-19 pandemic

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.