Hong Kong: Recovering bonuses from employees – part 2

In a previous article we discussed circumstances where an employer may seek damages against an employee who has engaged in serious misconduct or been seriously negligent at work. In the recent case of Xu Yi Jun v GF Capital (Hong Kong) Ltd [2020] HKCA 663, the Court of Appeal considered whether it is permissible for an employer to withhold an employee’s guaranteed bonus to set-off a claim against the employee for losses it claimed to have suffered as a result of the employee’s misconduct.

Background

The Plaintiff was a former managing director of the Structured Finance Department of the Defendant, GF Capital (“GF”). The Plaintiff brought a claim against GF for HK$7,800,000, being the sum of guaranteed bonus payable to her for the year of 2016 under her employment contract (“Bonus”). Under the terms of the employment contract, the Bonus would be forfeited if she resigned or was “found guilty of any gross misconduct” before 31 March 2017.

In April 2016, GF had, upon the Plaintiff’s recommendations, advanced a loan to a borrower to fund its investment in a target company. The target company was subsequently ordered by the Securities and Futures Commission to cease trading and it became clear that the borrower would default on the loan. GF then commenced an investigation into whether the Plaintiff had properly discharged her duties. It also determined to delay payment of the Bonus pending its completion of its investigation. The investigation was completed in May 2017 and identified certain failings of the Plaintiff. The Plaintiff resigned shortly after.

Claims

The Plaintiff’s claim alleged that, in not paying the Bonus, GF had breached the terms of the employment contract as well as sections the Employment Ordinance relating to the timing of payment of wages and end of year payments or, section 32 of the Employment Ordinance which restricts deductions that can be lawfully made from wages.

GF claimed that the Plaintiff was not entitled to the Bonus as she had engaged in gross misconduct prior to 31 March 2017. It also counterclaimed that the Plaintiff was in breach of her express contractual duties, implied duties of fidelity and her duty to exercise reasonable care and skill in the performance of her employment and that the Plaintiff’s breach of these duties had caused GF to suffer loss and damage which it claimed it could set-off against any liability to the Plaintiff for the Bonus.

Issues considered by the court

The matter proceeded to the Court of Appeal where the key issues for determination were:

1. the proper construction of the terms in the employment contract relating to the Bonus; and,
2. whether GF’s unliquidated claim for damages could be set off against the Bonus, or whether the entitlement to set-off is excluded contractually and/or statutorily under section 32 of the Employment Ordinance.

On the first issue, the Court held that on their plain and natural meaning, the terms of the employment contract only permitted GF to forfeit the Bonus if there was a finding that the Plaintiff had engaged in gross misconduct before 31 March 2017 (which there was not).

In relation to the set-off claim, section 32 of the Employment Ordinance relevantly provides:

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 term “any other sum due to the employee” was found to encompass an end of year payment, such as the Bonus in the present case.

The Court rejected GF’s argument that an equitable set-off was not a “deduction” as it did not extinguish or reduce any claim by an employee for wages, but simply precluded the exercise of a right to claim where the connection between the claims would make this manifestly unjust. In disagreeing with this argument, the Court held that it could not have been the legislature’s intention to remove the protection against set-off and allow an 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”. Section 32 of the Employment Ordinance was found to prohibit GT from exercising a set-off against its liability to pay the Bonus.

Key takeaways

Incentives are commonly adopted by employers, particularly in the banking and financial services sector, to regulate conduct and drive culture. The decision in Xu Yi Jun is a reminder to employers that they must be cautious in drafting contractual bonus terms to ensure the terms:

• not only provide rights to an employer to forfeit or reduce a bonus, but also permit sufficient flexibility to permit payment to be withheld pending an investigation or disciplinary process; and
• clearly indicate the circumstances and the point in time where a right of forfeiture arises. This is particularly the case in the context of employment disputes where courts may construe contractual terms which restrict employees’ benefits narrowly, and are ready to interpret statutes which provide employee protections broadly. Any argument which seeks to undermine statutory protections provided to employees will be approached by the courts cautiously.