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Employment Matters to Consider in Economic Downturn

By Jade Tang

Hong Kong economy faced a heavy blow first by a series of protests and social events stemming from the controversial Extradition Bill in 2019, now followed by the coronavirus epidemic since January 2020.  There is even mounting global concern now as tourism slows, consumer spending weakens and supply chains stall.

Hong Kong recorded an unemployment rate of 3.4% between November 2019 and January 2020, peaking in more than 3 years.

The Organization for Economic Cooperation and Development (“OECD”) said that global growth could plummet to just 1.5% in 2020, far less than the 3% originally projected before the virus surfaced. OECD also warned that Japan, Europe and the United States could plunge into recession if the situation worsens.

Employers’ strategies  

Facing a glum economic outlook, employers may consider a number of strategies to minimize expense and maximize income.

  1. Downsizing

To withstand the challenges of recession, the most common and quickest solution is to begin with direct cost-cutting. Companies may axe certain operations, or at least temporarily suspend non-critical business activities.  Reducing headcounts is also a viable solution in essential teams or departments that cannot be closed.    

  1. Alternative work arrangements

As economist Wayne Cascio says, “Morale is the first casualty of downsizing.” Business leaders who wish to take a more long-term approach to reducing expenses can consider alternatives, such as requesting employees take annual leave or unpaid leave, or suspending work for a certain period.

These options can ease pressure on the need of severance payment due to downsizing, minimizing attention or criticism from trade unions or media. The temporary adjustment will help businesses survive financial pressure while easing employees’ panic over potential redundancy. Cathay Pacific Airways Ltd launched a voluntary unpaid leave program last December with positive reception; more than 1,000 customer service staff have applied for unpaid leaves.

  1. More alternatives

Apart from the above, some employers may consider renegotiating remuneration packages with employees. Employers taking this approach will need to think outside of the box, and offer incentives that shift the focus away from monetary awards to employee recognition.

For instance, employers can offer non-monetary compensation, including flexible work hours or insurance packages in return for a lower salary. An example is that Linklaters provides a scheme launched in 2017 which allows German non-partners to take a reduced salary in return for a fixed 4-hour week, which won praise from both partners and participating fee earners. 

  1. Others

Other cost-minimizing strategies are available to employers, such as negotiating a lower rent with landlords of the office spaces, negotiating prices with service or product suppliers, and reviewing programs or pay practices that do not offer enough return on investment etc.

Employers’ obligations when considering above strategies

  1. Downsizing

Employers need to be aware of implications of redundancy. First of all, there are severance costs for redundancy in Hong Kong for employees employed under a continuous contract for not less than 24 months. 

Although under the Employment Ordinance (Cap. 57 of the Laws of Hong Kong), severance payment can be offset against the following payments already made to the employees, employers should be careful on the calculation and to what extent such payments can be made offset:

  1. Gratuities based on length of service or occupational retirement scheme benefits (excluding any part attributable to employee's contributions) have been paid to the employee; or
  2. Accrued benefit (excluding any part attributable to employee's contributions) has been paid to the employee, or is being held in a mandatory provident fund scheme by the employee.

On redundancy, employers still need to observe any notice period requirements under the employment contract. If an employment contract does not provide for notice periods, the Employment Ordinance provides that the length of notice required to terminate an employment contract shall be not less than one month for a continuous without or after probation period or a payment in lieu of the notice period required.

Any employer making redundancy of employees without notice or payment in lieu is a breach of the Employment Ordinance. 

  1. Alternative work arrangements

A substantial, fundamental and unilateral variation in the terms and conditions of employment arising from the employer's conduct has been found sufficiently serious to amount to a repudiation or fundamental breach going to the root of the contract. This would warrant an employee terminating his contract of employment without notice or payment in lieu, on the ground of constructive dismissal under common law.  Such an employee can claim for termination compensation from the employer.

As such, if employers wish to implement alternative work arrangements, it should seek consent from employees first. Both parties should have a mutual understanding of the new work arrangement in order to avoid future disputes or possible labor action, and to achieve a win-win situation.

Employers should also notify the provider of MPF of any change of contribution if necessary, and draw attention to employees of any such changes. In any event, employers still need to comply with statutory requirements such as payment of wages and MPF contribution etc. unless an employment contract has been terminated. This is to avoid claims surrounding constructive dismissal. 

As long as the employment contract is not terminated, the length of years of service of the relevant employee being affected by any alternative work arrangements, like non-pay leave or suspension of work should not be affected in principle.   

  1. Renegotiate remuneration package

An employee employed under a continuous contract can claim remedies for unreasonable variation of the terms of the employment contract against the employer if, in the absence of an express term in the contract allowing for such variation, the employer unilaterally varies the terms of the employment contract (including reducing the employee's wages or benefits) other than for a valid reason as specified in the Employment Ordinance. 

Any such variation or change in the terms and conditions of an employment contract should be mutually agreed upon by both the employer and employees before it is implemented, to avoid claims by employees in unreasonable variation.   

Maximizing manpower efficiency during off-peak period 

To make the most use out of available employees during down seasons, corporations can divert resources and manpower to tasks that usually cannot be done during peak business seasons, such as:

  1. Back-office maintenance and other practical matters

Businesses should plan the practical elements like staffing, inventory, back-office maintenance and supplier during off season. It is important to review and analyze business data to prepare for the next peak season, or to predict consumer trends and demands in your market for the coming year.

  1. Keeping social media accounts alive to attract clients and customers

It helps to keep the followers of a business around so that they remember your business when sales are active again. Businesses can work on marketing strategy to maximize traffic and interactions on social media accounts.

  1. Diversifying clientele

Businesses can partner with other companies who needs their services or products at other points in the year. For example, a company selling summer clothes can target consumers in other parts of the world during winter in its locality.

If you have any question and wish to discuss further regarding the topic discussed or on other employment issues, please contact [email protected].

This article is for reference only. Nothing herein shall be construed as any formal 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.

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