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The Risks of Breaking a Hong Kong Employment Contract Before It Commences

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Prelude

It is not at all surprising in Hong Kong for job applicants to back out of the already accepted job offer and accept a better job offer with a more competitive remuneration package. In practice, usually the innocent employer would save themselves the hassle of chasing after the defaulting recruits and simply find a substitute from the job market, especially for those junior or middle-level positions. However, this may not always be the case and the recent judgment handed down by the Court of Appeal in the Hong Kong case Law Ting Pong Secondary School v Chen Wai Wah [2021] HKCA 873 demonstrated clearly that not honouring a signed employment contract may come with a price even before commencement of the employment. 

Overview of the case facts

The case of Law Ting Pong Secondary School started off at the Hong Kong Labour Tribunal and was argued all the way up to the Court of Appeal. 

In gist, this case concerned a teacher who was offered employment by a local secondary school. On 17 July 2017, this teacher was given (a) an Offer of Appointment; (b) the Conditions of Service for Teachers; and (c) a Letter of Acceptance in respect of his then potential employment with the school. The teacher signed and returned the Conditions of Service and the Letter of Acceptance to the school on the same day. The Letter of Acceptance stated that:- 

“I accept the appointment offered in your letter dated 17th July 2017 in accordance with the attached Conditions of Service for Teachers in Law Ting Pong Secondary School.

I also understand that once I accept this contract, the conditions of the new contract will come to [sic] immediate effect e.g. I need to give three months’ notice to terminate my employment with the school.

I confirm that I have read and understood all the above conditions and hereby agree to abide by them.”

The Conditions of Service stated that the period of employment would be “from 1st September 2017 to 31st August 2018”. Under the Conditions of Service, the teacher was required to give the school three months’ notice in writing, or payment in lieu of notice, or a combination of both in order to terminate the employment contract “in order to terminate my [i.e. his] employment with the school” [Emphasis Added] (the “Termination Provisions”). In August 2017 the teacher backed out of the contract. The school then claimed against the teacher for payment in lieu of notice pursuant to the Termination Provisions. 

The school succeeded at the Labour Tribunal and was awarded damages in the sum of HK$139,593 (equivalent to 3 months’ payment in lieu of notice). 

The teacher subsequently appealed against such decision and the same was overturned by the Court of First Instance. The Court of First Instance held that the Letter of Acceptance did not form part of the specified terms offered by the school to the teacher, as, inter alia, the Conditions of Service did not make any reference to the Letter of Acceptance. Accordingly, the employment should be read as only starting on 1 September 2017 in accordance with the terms of the Conditions of Service, and hence the teacher was not liable to make any payment in lieu as his employment had not commenced at the time when he back out of the employment contract.

Thereafter, the school further appealed against the decision of the Court of First Instance and the Court of Appeal restored the decision of the Labour Tribunal. The judgment of the Court of Appeal can be summarised as follows:-

  1. The Offer of Appointment, the Letter of Acceptance and the Conditions of Service were given to the teacher together when the school’s offer of employment was made, thus the terms of all the three documents were accepted as a “package deal”. Accordingly, it must be plain and reasonably understood by the teacher, that the school was offering (and only ready to offer) employment on the basis set out in all the three documents. It follows that the Letter of Acceptance formed part of the contract between the school and the teacher, thus should be taken into consideration for adjudication of the matter. 
  2. A reasonable person shall take the Letter of Acceptance to mean that the terms of the employment contract would come into immediate effect such that the teacher would have to give 3 months’ notice to terminate the same. This shall be obvious as the notice requirement under the Termination Provision was specifically used as an example of the terms of the employment contract taking immediate effect.
  3. Further, the fact that the period of employment would start from 1 September 2017 only meant that the teacher’s performance of teaching duties was to commence on a future date. In general, a valid contract had legal effects, for example, as to repudiatory or anticipatory breach, and was enforceable immediately when it was made, irrespective of the time of performance. Hence, although performance of teaching duties would commence on a future date (i.e. 1 September 2017), as from 17 July 2017 (i.e. the date of signing the contract) both parties were both legally bound to perform their obligations under the contract.
  4. In response to the defendant teacher’s argument that the amount required to terminate the employment contract under the Termination Provision was wholly disproportionate to the monetary loss that the school might suffer and any legitimate interests of the school (thus is a penalty clause and unenforceable), the Court ruled that a clause could only be a penalty if it operated upon a breach of contract (i.e. a liquidated damages clause). The payment of a sum in lieu of notice under the Termination Provisions was a contractually agreed method of lawful termination of the employment contract; it was not in the nature of damages for breach of contract. It was therefore a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance, thus not a penalty clause.
  5. The Court further completed the analysis by commenting that the Termination Provisions would still be enforceable even if the same was a liquidated damages clause. On this issue, the Court of Appeal clarified the test to determine whether a clause was a penalty clause was, whether the relevant clause was out of all proportion to the innocent party’s legitimate interest in enforcing the contract; and that the innocent party could have a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation. In applying the test, the Court shall first identify the legitimate interest of the innocent party that is being protected by the clause, then move on to assess whether the clause is out of all proportion to such legitimate interest by considering the circumstances in which the contract was made. 
  6. Accordingly, the teacher was ordered to, inter alia, pay to the school HK$139,593, being payment in lieu of 3 months’ notice.
Takeaways

The case of Law Ting Pong Secondary School suggests that once the employment contract is signed, the agreed notice under its termination provision has to be observed, even before the commencement of the employment.

However, it is arguable that Law Ting Pong Secondary School turns on its specific facts that the employer school has made it explicit on the Letter of Acceptance that the conditions of the employment contract came to immediate effect upon execution and the notice requirement under the Termination Provision was specifically used as an example for illustrating the same. 

Further, it is also not certain as to what the Court’s decision would be if any probation period is provided for in respect of the relevant employment. It seems the Court did not pay any regard to Section 6(3A) of the Employment Ordinance (Cap.57) when reaching its decision in Law Ting Pong Secondary School, which provides that:-

“Where in any contract of employment, whether in writing or oral, it has been expressly agreed that the employment is on probation and the contract makes provision for the length of notice required for its termination such contract may be terminated —
(a) notwithstanding the length of notice provided for in the contract, by either party at any time during the first month of such employment without notice or payment in lieu;

(b) by either party at any time after the first month of such employment by giving to the other party notice of the agreed period, but not less than 7 days.”

In light of the Court of Appeal’s decisions in Law Ting Pong Secondary School, it seems the legal position in such scenario could possibly be, albeit awkward, (a) the employee will be required to give notice equals to such length as stated in the employment contract if he chooses to back out of the contract; and (b) no notice is required if he chooses to terminate his employment in the first month of his probation by operation of Section 6(3A) of the Employment Ordinance (which kicks in following the commencement of the employment).

How can OLN help?

As can be seen, it would be advisable for employers to clearly and expressly document in its employment contract the notice period and/or the termination mechanism if the employee fails to show up on the commencement date of employment as agreed. The degree of clarity required in this regard can be very demanding. 

We have practical experience in helping employers with the drafting and review of employment-related documentation to ensure the same complies with the employment law regime in Hong Kong and latest development on the same, so as to protect employers’ interest.
 
On the other hand, we also assist, from time to time, employees on the review of employment-related documentation and advise employees on any potential legal consequences arising from their employment contracts.

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

July 2021

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.

Hiring Hong Kong Employees, Contractors & Interns: The ‘No Tears’ Approach

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To conserve cash and operate as cost-efficiently as possible, many startups and SMEs will try to grow their teams by engaging independent contractors, interns and other unpaid workers. 

Although these alternatives may seem appealing, employers do not have unlimited freedom to choose how they fill vacancies. Any individual who is essentially performing the work of an employee may be regarded legally by the Labour Tribunal and courts as an employee of that business, which could result in the business being liable for unpaid salaries and other employment entitlements.

This article breaks down the main legal requirements for hiring employees, independent contractors and interns and offers tips to ensure your business is entering into legal work arrangements.

Hiring employees

In Hong Kong, a person hired as an employee will typically be someone whose skills and experience will be needed on a continuous, long-term basis and is prepared to make herself available according to the needs of the business. The long-term nature of the role means that employers can rely on employees for the continuity that contractors and interns are unable to provide.  

Legally, employers need to be aware of the following:

  • employees have employment status under Hong Kong employment laws which entails very specific entitlements that must be met by the employer (e.g., minimum wage, MPF contributions, statutory holidays, leaves of absence, maternity protection, notice periods for termination, severance, etc).
  • any worker who has been employed continuously by the same employer for four weeks or more, with at least 18 hours worked in each week will generally be regarded as an employee.
  • regardless what your employment contract with the worker says regarding salary, vacation leave, notice and severance arrangements, as an employer you have to comply with statutory minimums for each of these as prescribed by various Hong Kong employment laws.
  • all employees covered by the Employment Ordinance, irrespective of their designated job titles or working hours, are entitled to the statutory rights and protections mentioned above. The Ordinance makes no distinction between “permanent”, “temporary”, “full-time”, “part-time” employees vs. “gig” workers.
  • as an employer, you will have statutory obligations with respect to reporting salary and reporting termination of employment to the IRD for the purpose of tax collection. 

Hiring independent contractors or consultants (“contractors”)

Typically, a contractor will be a person who can provide your business with short-term, niche expertise. They could be anything from a project-based programmer to an interim CFO or CTO. And he or she might work on your premises or off-site depending on your requirements and theirs. However, legally there are a number of features that set them apart from employees:

  • contractors have no employment status. Their relationship with your business will not be regulated by Hong Kong’s employment laws or the MPF scheme and they will not be entitled to receive benefits offered to your employees.
  • the relationship between your business and the contractor is dictated almost solely by the contract between the parties so your business may terminate the agreement with the contractor at any time (subject to the terms in the contract) and will have obligation to provide notice or compensation upon terminating the contractor’s service. 
  • unlike employees, there is no statutory requirement to pay contractors at least the minimum wage. You are free to agree whatever payment terms that make sense and are acceptable to the contractor.
  • contractors are responsible for the input they provide, including the success or failure of their deliverables. They usually retain control over when, how and where work is completed.
  • contractors are allowed to contract with other companies at the same time.
  • contractors generally use their own equipment (unless otherwise stipulated in the contract), which reduces your overhead costs.
  • contractors submit invoices to the company to receive payment for the work. 
  • your business is not responsible for reporting the contractor’s income to the Inland Revenue Department (IRD) much less withholding or collecting taxes on that income.

What happens if we get it wrong?

The unique flexibility that contractors have, in terms of legal requirements, makes them a convenient alternative to hiring an employee to perform the same role. Unfortunately, startups sometimes fall into the trap of thinking that they have an independent contractor relationship with a worker and nothing to worry about because they have an agreement that says as much. The same applies to founders, who often mistakenly believe that somehow they are either independent contractors or exempt from Hong Kong’s minimum wage and employment laws. However, if an employee-employer relationship is found to exist in substance, whatever title the worker has been given will be irrelevant. The IRD and the courts will ignore it and again, the business could be on the hook for unpaid salaries and employment benefits. 

Hiring interns

As mentioned above, Hong Kong employment laws generally don’t differentiate between different categories of employment per se. Contrary to popular belief, interns are not a ‘magical’ category of worker that exists outside of the law. Subject to certain exceptions below, interns are employees who are also entitled to rights and protections in Hong Kong employment laws. First, let’s distinguish between paid and unpaid interns. Unpaid interns are essentially a special category of workers that are exempt from the minimum wage. There are essentially two sub-categories:

  • Student interns
  • Work experience interns (“WEI”)

The main differences between them are that whereas a student internship has to be endorsed by or part of the intern’s programme of study and forms a component of the programme, a WEI internship need not be endorsed or related to the intern’s programme of study. If a student internship meets the legal criteria, the intern can be any age when starting the internship. However, with WEI internships, the WEI must be 26 years or younger when the internship commences.

Startups may agree with a WEI to treat the first 59 days of the internship, calculated on a calendar basis from the start date, as exempt student employment and if so, during that period, the employer will be exempted from paying the statutory minimum wage. However, for any period of employment beyond the first 59 days, a WEI is entitled to be paid at least the minimum wage. It is important to note that a WEI cannot have more than one exempt student employment period within the same calendar year whether with the same employer or not. 

Internships that meet the student internship requirements allow the intern to work in the business lawfully without being paid at all. Unlike WEI internships, there are no time limits exempting minimum wage requirements. 

This brings us to paid interns. Describing anyone in Hong Kong as a “paid intern” is a bit of a misnomer since a paid intern could be someone who actually meets the above legal definition of unpaid intern (but who your business has generously decided to pay) as well as an employee who doesn’t meet those criteria and who you must pay at least minimum wage to. 

The important thing to remember is that unless you have been shown proof that a candidate meets all of the relevant criteria for unpaid intern, it is safest to assume that this person will be joining your team as a paid employee. 

Please note that as an employer, you will be required to contribute to the paid intern’s MPF if she has reached age 18 and has been continuously employed for 60 calendar days or more. When in doubt, seek clarification from an experienced lawyer before hiring such candidates because if it turns out that any don’t meet all of the criteria, you could be liable for back-pay, unpaid MPF contributions as well as some serious legal penalties if they have already started working. 

Remember your workplace health and safety obligations

As a business, your startup or SME not only owes health and safety obligations to your employees, but also to any unpaid workers on the premises. Always remember that you have an ongoing duty to ensure their health and safety.

What agreements do we need?

Regardless of which position you are looking to fill on your team, you will need a properly drafted agreement that defines the position, responsibilities, remuneration and any benefits during the engagement. If you’re a startup, you will probably need legal advice on how to include equity (in the form of shares or share options) within the remuneration package for your employees. 

Don’t forget to include confidentiality provisions and IP protections in these agreements

Startups more often than not forget to put suitable confidentiality and IP protections in their internship agreements and the confidentiality provisions in their independent contractor agreements are also often useless. It’s best to take a risk management approach to these provisions and tailor them to the specific risks that each business faces. Speak with your lawyer and she will help put what you need in place. 

Generally speaking, unless otherwise provided for in your contract, any person that works for your business will own the intellectual property rights for whatever they develop, whether it be software code, graphics, logos, marketing materials, or simply ideas. Accordingly, it is vitally important that as an emerging business, you ensure that employment contracts, internship agreements and certain independent contractor agreements contain assignments of legal and moral (attribution) rights to your business.

July 2021

Hong Kong has Granted First-ever Standard Patent by Original Grant

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The Intellectual Property Department granted the first ever original grant patent (OGP) on 4th June 2021, within 14 months after the date of filing of the original patent application by the applicant. 

The OGP was introduced as part of the patent system reform in 2019 to provide inventors an additional route to obtain standard patent protection saving the need to file the patent application first in the designated jurisdictions outside Hong Kong and then having it re-registered in Hong Kong.

For details on the OGP and the rest of the patent reform, please refer to our earlier article “New patent system in Hong Kong.”

If you have any questions in relation to patent protection of your invention in Hong Kong or other intellectual property protection, please feel free to contact our IP team at info@oln-ip.com.

July 2021

Wearing Red Soles has a Price

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Distinction, that was the key. The day Louboutin took his assistant’s nail polish in 1993 and painted the sole of the shoe he was making, he was telling the entire world, or at least the European Union, that shoes with red soles must be Louboutin’s. 

In 2021, the French shoe designer is suing Amazon for trademark infringement… again. 

The worldwide well-known online marketplace is offering High Heeled shoes with red soles, similar to those protected by Louboutin’s trade mark.

The case has been referred by the Luxembourg Court to the Court of Justice of the European Union.

The Red Sole Monopoly recognised in 2018 

Louboutin’s red is well protected: on 12th June 2018, the Court of Justice of the European Union ruled in Case C-163/16 Christian Louboutin and Christian Louboutin SAS v Van Haren Schoenen BV that a trade mark consisting of a colour applied to the sole of a shoe may be registered in the EU. 

The Court held that a sign, such as that at issue, cannot, in any event, be regarded as consisting ‘exclusively’ of a shape, where the main element of that sign is a specific colour designated by an internationally recognised identification code. 

Previously, the Paris Court of Appeal had also considered that the application of a colour to a specific location on a product constituted a distinct and protectable trademark. 

Therefore, in the European Union, only Louboutin is allowed to paint the sole of its shoes with the bright red number 18.1663TP in the Pantone colour chart. 

Louboutin vs Amazon  – Chapter 1, Belgium

Marketplaces like Amazon are online sales platforms connecting buyers and sellers. 

Let’s say that a seller other than Louboutin wishes to offer Red Sole Shoes through Amazon. Should Amazon be liable for trademark infringement by a seller on the platform? 

Is the storage of counterfeit goods for sale considered an infringement of trade mark rights in the European Union? 

Amazon was sued by Louboutin in Belgium in order to engage its liability. 

In August 2019, Amazon was found directly liable for the counterfeiting of the red Louboutin sole by a Brussels Court even though Amazon was only in charge of the storage and shipping of the products. 

However, in April 2020, in Coty vs Amazon case, the Court of Justice of the European Union excluded any liability of Amazon judging that only the seller and not the platform has the purpose of offering those goods for sale.

National Courts within the European Union are bound by the Court of Justice of the European Union decisions. Based on the recent Coty Vs Amazon C 567/18 decision, the Brussels Court of Appeal partially overturned Louboutin’s decision in June 2020. Therefore, Louboutin lost its case. 

Louboutin vs Amazon – chapter 2, Luxembourg 

Amazon is evolving, mainly through new services launched during the pandemic. Nowadays, Amazon not only stores and ships the products, but also promotes and advertises counterfeit products through its “Fulfilment by Amazon” offer. This new era of online services could be considered as the platform’s active involvement in the sale of infringing products.

Louboutin has sued Amazon before the Court of Luxembourg. The novelty of the case compared to the 2020 Belgian lawsuit is the “Fulfilment by Amazon” offer.

Is the use of a sign identical with a trade mark in an advertisement displayed on a website attributable to its operator if, in the perception of a reasonably well informed and reasonably observant internet user, that operator has played an active part in the preparation of that advertisement or if that advertisement may be perceived by such an internet user as forming part of that operator’s own commercial communication?

Is the shipment, in the course of trade and without the consent of the proprietor of a trade mark, to the final consumer of goods bearing a sign identical with the mark constitutes a use attributable to the shipper only if the shipper has actual knowledge that that sign has been affixed to those goods?

Is such a shipper the user of the sign concerned if the shipper itself or an economically linked entity has previously made an active contribution to the display, in the course of trade, of an advertisement for the goods bearing that sign or has taken the final consumer’s order on the basis of that advertisement?

The Court of Justice of the European Union was seized on those terms by the Luxembourg Court on the 8th of March 2021. 

Given the reasoning of the previous ruling by the Court of Justice of the European Union, we foresee a different issue for Amazon this time. Since Amazon is now actively promoting the goods, the Court of Justice of the European Union might consider that the platform The expected judgement will be crucial for Amazon services in the entire European Union. 

Are you considering exporting your products to the European Union? OLN’s French Practice and IP Department can assist you to make sure you are not infringing EU trademark law. 

Written: June 2021