HONG KONG: EXECUTIVE DOUBLE-HATTING AND DEEMED EMPLOYMENT RISKS

Having executives work across group companies is common as it can allow operational and cost efficiencies while keeping the underlying employment relationships simple. In its recent decision in Yung Wai Tak Abraham William v Natural Daily (NZ) Holdings Ltd [2020] HKCFI 2067, the Court of First Instance of the High Court (“CFI”) found a group List Co liable for employment claims made by the employee of its subsidiary despite there being no written employment contract between the employee and the List Co. Companies should revisit any group resourcing arrangements to ensure they are properly structured and documented to avoid similar deemed employment risks.

Background

The Appellant (“Employee”) was employed as a company secretary by the second Defendant, Nation Resources Ltd. (“Subsidiary”), pursuant to a written employment contract with the Subsidiary (“Employment Contract”). The Subsidiary is a wholly owned subsidiary of the first Defendant, Natural Dairy (NZ) Holdings Ltd. (“List Co”), a company listed on the Hong Kong Stock Exchange. The Employee was dismissed shortly after the liquidation of both companies commenced. The Employee filed a claim in the Labour Tribunal against the Subsidiary and the List Co as joint employers for a sum of nearly HK$1 million, including unpaid wages, statutory severance payment, payment in lieu of notice and a salary adjustment payment.

Employment arrangements

During the recruitment process, the Employee responded to a job advertisement issued by the List Co and was interviewed by the List Co at an office shared between the List Co and the Subsidiary. After his employment commenced, the Employee exchanged emails with his colleagues and had business cards made stating his position as the List Co’s Company Secretary. When the Employee’s salary was reviewed, it was confirmed by a letter issued by the List Co. Only very few documents were issued by the Subsidiary, namely the Employee’s tax demand notes, MPF records, and pay slips.

It was not disputed that the Employee’s primary duties were to serve as the Company Secretary of the List Co. The Subsidiary did not have any substantial business or operations. There was no employment contract signed with the List Co, although the Listing Rules suggest that as a matter of best practice, a company secretary should be an employee of a listed company. The Employment Contract did not require the Employee to perform duties for the List Co or any other group companies. In addition, no secondment agreement or other outsourcing documents were in place to document the arrangement of the Employee’s work for the List Co.

The CFI’s decision on appeal from the Labour Tribunal

The Employee appealed to the CFI against the Labour Tribunal’s decision that the List Co was not his employer. The CFI overruled the Deputy Presiding Officer’s decision based on the following:

1. The Employment Contract did not contemplate duties for the List Co so a separate employment relationship with the List Co must exist. The CFI examined two clauses commonly found in employment contract templates (as summarised below) and held that the Employee was not contractually obliged to be seconded to perform duties for the List Co. Accordingly, the fact that the Employee worked substantially for the List Co in the absence of such terms in the Employment Contract, suggests that he was employed by the List Co under a standalone employment contract. The CFI did not comment on any terms of this separate employment contract.
   1. The first clause states that the Employee was to “report to and take instruction from the Board of Directors or any person or persons designated by them…serve the [Subsidiary] as a [company secretary]…and perform “such other duties as the Company may assign to or vest in [the Employee] from time to time.” The CFI held that “any persons” referred to senior executives or external consultants authorised by the Subsidiary but could not be inferred to extend to the Board, directors or senior management of the List Co or another group company. In addition, the term "such other duties" has to be read in conjunction with the contractual position (i.e. the Company Secretary role for the Subsidiary) and cannot be inferred to mean duties for the List Co or other group companies.
   2. The second clause states that “…the [Employee has] no other agreements or undertakings, written or oral, with the [List Co and its subsidiaries] regarding compensation or your employment.” The CFI held that this clause merely operated to prevent the List Co or other group companies from being sued by the Employee for liabilities owed by the Subsidiary. Nevertheless, this could not operate to stop the Employee from directly claiming the List Co under a standalone employment contract, which was found after adopting the “overall impression test” as set out below.
2. The totality of evidence showed that the List Co was an employer of the Employee. Applying the test laid down in Poon Chau Nam v Yim Siu Cheung [2007] 10 HKCFAR 156, the CFI held that the overall impression was that the List Co was the Employee’s employer, as shown by abundant contemporaneous evidence throughout the employment relationship (as summarised in the Employment Arrangements above).
3. There was insufficient evidence that the Employee was seconded by the Subsidiary to the List Co. As a matter of fact, there was no supporting documents (such as, secondment agreement, Board resolutions and meeting minutes) or any oval evidence from witnesses that proved the existence of a secondment arrangement of Employee from the Subsidiary to the Employee.
4. The absence of an employment relationship with the List Co did not align with regulatory requirements. Paragraph F.1.1 of Appendix 14 Corporate Governance Code and Corporate Governance Report of the Main Board Listing Rules states that the company secretary should be an employee of a listed company. There was no report or disclosure from the List Co that this rule had not been complied with. The CFI thus held that there was a rebuttable presumption that the Employee was the List Co’s employee, and that it has not been rebutted by any contrary evidence.

Key takeaways

Group companies should review their intra-group resourcing arrangements in light of the decision to ensure that the practical arrangements and underlying employment documents reflect the intended legal relationships.

Care must also be taken that the contemporaneous records throughout the employment relationship, such as, the recruitment notices, interview records, offers and contracts of employment, salary reviews or bonus letters, business card, pay slips, MPF, and tax records reflect the underlying employment relationships.

Further, when an employer seconds its employees to a member of its group companies, the employment contract or ancillary documentation, such as a secondment letter, has express terms setting out the secondment arrangements including the duties performed as part of the secondment, reporting lines and the parties’ agreement as to the underlying legal relationships (i.e. no employment relationship between the host entity and the secondee).

Finally, companies should review any regulatory requirement or presumptions regarding the employment of key executives or officers and, if these may be deviated from, the decision to do so should be documented or reported appropriately.

For more information, please contact Gareth Thomas, Tess Lumsdaine, Giselle Yuen, or your usual Herbert Smith Freehills contact.