In the recent case of Lo Wai Keung v Hannover Ruck SE, the Hong Kong Court of First Instance addressed a significant point of law regarding the termination of employment contracts and the implications of making a payment in lieu of notice. The case revolved around the termination of Mr. Lo's employment by his employer and whether such termination, effected by a payment in lieu of notice, constituted a termination without notice. This determination was crucial in deciding Mr. Lo's entitlement to share awards under the company's scheme. The court's analysis provides valuable insight into the interpretation of employment contract terms and the legal consequences of different modes of termination.
Background
Mr. Lo Wai Keung, the Claimant, was employed by Hannover Ruck SE (“Hannover”), the Respondent. His employment was terminated by a letter dated 10 December 2020, which stated that his employment would end on 31 December 2020. In the exit interview, Hannover informed Mr Lo that his employment was being terminated for performance issues given he had disregarded the company's internal guidelines and policy. Instead of asking Mr Lo to work out his six months' notice period, Hannover opted to make a payment in lieu of notice. Mr. Lo challenged the termination and brought a claim against his former employer in the Labour Tribunal. After a four-day trial, the Labour Tribunal found in favour of Hannover. Mr Lo then sought to appeal the decision on the basis that the Tribunal had made a mistake in finding that his employment was terminated without notice and sought to recover damages and an entitlement to share awards under the company's scheme.
The Share Award Scheme
The share award scheme in question included specific conditions under which an employee could retain their entitlement to share awards upon the termination of their employment. Clause 4(1)(ii) of the scheme conditions states that an employee would retain a right to payment of the value of already allocated share awards following the expiry of an applicable vesting period, unless the termination of the employment contract was based upon "extraordinary cancellation without notice" due to reasons of conduct or any other compelling reason that was the fault of the employee. The interpretation of this clause was central to the dispute, as Hannover argued that the termination by a payment in lieu of notice fell within this provision, thereby disentitling Mr. Lo from claiming the value of the share awards.
The Point of Law on Appeal
The primary legal question on appeal was whether the termination of Mr. Lo's employment by payment in lieu of notice constituted a termination without notice. The Tribunal found as a matter of fact that Mr. Lo's employment was terminated for conduct related issues. However, Hannover made payment in lieu of the 6 months' notice period. As Mr. Lo did not work his notice period, pursuant to Clause 4(1)(ii) of the scheme conditions, he was not entitled to the share awards even though he was not summarily dismissed. Mr. Lo appealed this decision, arguing that a termination by way of a payment in lieu of notice should not be considered termination without notice.
Court's Analysis
The court's analysis focused on the interpretation of sections 6, 7, and 9 of the Employment Ordinance, which distinguish between termination of contracts of employment by notice, by payment in lieu of notice, and summary dismissal without notice.
The court referred to English case law for guidance, particularly the judgments in Gothard v Mirror Group Newspapers Ltd and Delaney v Staples. These cases shed light on the nature of a payment in lieu of notice, emphasising that such payments are considered damages for breach of contract rather than wages for work done. The court highlighted that when an employer terminates an employment contract by making a payment in lieu of notice, the employment relationship ends immediately, and the payment is treated as compensation for the employer's failure to provide the requisite notice period.
In Gothard v Mirror Group Newspapers Ltd, Lord Donaldson stated that if an employee is dismissed without notice but with money in lieu, the payment is regarded as damages for breach of contract, and the employee is not employed during the notice period. Similarly, in Delaney v Staples, Lord Browne-Wilkinson explained that a payment in lieu of notice is not considered wages, as it is not remuneration for work done under the contract of employment. Instead, it is a payment to extinguish any claim for damages for wrongful dismissal.
Applying the above principles, the court concluded that a termination by a payment in lieu of notice is equivalent to a termination without notice. The court reasoned that if the termination by payment in lieu was considered termination with proper notice, there would be no breach of contract and no need for damages. However, the very nature of a payment in lieu of notice indicates that it is a substitute for notice, effectively dispensing with the notice requirement. Under Hong Kong law, section 7 of the Employment Ordinance enshrines the statutory right for employers and employees to terminate contracts by making a payment in lieu of notice. In contrast, there is no equivalent statutory right under UK legislation. Consequently, in the UK the practice of making a payment in lieu of notice is recognised as a common law right.
Implications of the Decision
The court's decision has significant implications for employers and employees regarding the interpretation of termination clauses in employment contracts. By affirming that a termination of an employment contract through making a payment in lieu of notice constitutes termination without notice, the court clarified that such terminations could trigger clauses that disentitle employees from certain benefits, such as share awards, if the termination is due to the employee's conduct or fault.
For employers, this decision underscores the importance of carefully drafting employment contracts and understanding the legal consequences of different modes of termination. Employers need to be aware that opting for a payment in lieu of notice may have implications on the employee's entitlements under various schemes and benefits.
For employees, the decision highlights the need to be vigilant about the terms of their employment contracts and the potential impact of a termination of employment by way of a payment in lieu of notice on their rights and benefits. Employees should seek legal advice if they face termination under such circumstances to ensure their entitlements are protected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
