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If your job is under threat in Hong Kong, here’s what you need to know about redundancy law

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With redundancies becoming all too common in Hong Kong financial services, it’s worthwhile to know where you stand, legally speaking, if your job disappears. Jennifer Van Dale, partner, and Sonia Wong, associate, both from Baker & McKenzie, answer our questions about redundancy law and practice in Hong Kong.

Is there a requirement in HK for employers to legally justify redundancies and if so, what reasons do they need to provide?

There is no requirement in Hong Kong for employers to legally justify redundancies. The term “redundancy” is used when employers close their business, dismiss staff to reduce headcount or relocate them to another location. There is a presumption of redundancy after two years of service.

When an employee is made redundant, he/she will be entitled to a statutory severance payment if he/she has been employed under a “continuous contract” for at least two years immediately prior to dismissal. An employee is deemed to have a continuous contract after working for the same employer for the preceding four weeks for at least 18 hours in each of those weeks.

As such, if an employee has been employed for less than two years and is dismissed, the employer does not need to specify the reasons for the dismissal, and no statutory severance will be due.

If an employee has been employed for more than two years and is dismissed, he/she is presumed to have been dismissed by reason of redundancy, and a statutory severance payment will be due, unless the employer can prove to the contrary (i.e. the dismissal was not due to redundancy).

Furthermore, an employee having more than two years of service will be protected against dismissal without a “valid reason” as defined under the Hong Kong Employment Ordinance. If the employer cannot prove that the dismissal was due to a “valid reason” (such as redundancy or the conduct, capability, or qualifications of the employee), the employee may be awarded a “terminal payment” by the Labour Tribunal if he/she sues the employer and wins. The terminal payment is generally calculated the same way as the severance payment (see below). An employee cannot be entitled to both a severance payment and a terminal payment.

Where an employee has been employed for not less than five years and is dismissed, he/she will be entitled to either (a) a statutory severance payment (if the dismissal is by reason of redundancy); or (b) a statutory long-service payment (if the dismissal is for reasons other than redundancy so long as the employee is not summarily dismissed eg for gross misconduct). The long-service payment is calculated in the same way as a severance payment. An employee may be entitled to a severance payment or a long-service payment, but not both.

What is the statutory minimum notice period for redundancies?

The notice period is as agreed but must be at least seven days. If an employee is subject to probation, during the first month of the probationary period, either party may terminate the contract without giving notice or making a payment in lieu. After the first month of the probationary period, the Employment Ordinance requires that at least seven days notice (or payment in lieu) be given by either side if it wishes to terminate the contract. Generally parties agree the length of notice in the offer letter or contract with not less than seven days’ notice. If there is no explicit agreement on notice, the Employment Ordinance deems the notice period to be one month (except during any probationary period).

What is the statutory minimum calculation for redundancy payments?

In addition to outstanding wages, payment for accrued but untaken annual leave, payment in lieu of notice, and other entitlements such as pro-rata bonus, an employee having not less than two years of service under a continuous contract will be entitled to statutory severance payment, calculated as follows:

Two thirds of either the last full month’s wage or HK$22,500 (whatever is lower) multiplied by years of service (pro rata for any incomplete year). An employee may also elect to use his/her average wages in the last 12 months for the calculation. There are specific regulations regarding the definition of “wages” and their calculation rules. There is an overall limit on the amount of the statutory severance payment of HK$390,000.

As discussed above, the long-service payment is calculated in the same way as a severance payment. The employer can set off any benefit which has accrued from its contributions to the employee’s pension fund against the severance/long-service payment.

According to law, what are the main steps that employers must take during a redundancy process?

There is no mandated procedure in Hong Kong to be used in a redundancy process. Generally, we recommend that the following steps be carried out:

1.      Determine the optimal time for the employee to leave;

2.      Determine termination entitlements and prepare the termination letter;

3.     It is usual practice in Hong Kong to meet with the employee in person to give notice of the termination. There are no requirements to consult with the employee or explore alternatives to redundancy. At the meeting the employer should inform the employee that his/her position is being made redundant and that employment will therefore terminate. We recommend that the employee be provided with the termination letter at the end of the meeting. There is no prescribed minimum period of time for the employee to consider the termination letter. Employers typically do not allow employees any more than a few days to consider.

4.      Obtain the signed termination letter from the employee; and

5.      Notify the relevant authorities, such as the Inland Revenue Department and the Immigration Department (if the employee is on a working visa sponsored by the employer).

What are the consequences for employers who fail to comply with redundancy laws? What kind of compensation can employees claim, and is the amount capped?

An employer who without reasonable excuse fails to pay statutory severance payment is liable to prosecution and, upon conviction, to a fine of (currently) HK$50,000. Also, an employer who wilfully and without reasonable excuse fails to pay a termination payment (such as outstanding wages, payment in lieu of notice, payment in lieu of any untaken annual leave etc.) when it becomes due is liable to prosecution and, upon conviction, to a fine of HK$350,000 and to imprisonment for three years.

An employee can file claims with the Labour Department and/or the Labour Tribunal for severance and termination payment (together with interest). Also, if an employee has been employed under a continuous contract for not less than two years, and is dismissed other than for a “valid reason” as defined under the Employment Ordinance, the Labour Tribunal may order a reinstatement or re-engagement (if both the employer and the employee agree to it). Alternatively, the Labour Tribunal may make an award of “terminal payments” to be payable by the employer to the employee as it considers fair and appropriate. This effectively means that the employee will be entitled to a pro-rated severance/long-service payment.

In addition, employees from certain protected categories (such as employees on paid sick leave or maternity leave) who are dismissed will be entitled to additional compensation defined by the Employment Ordinance.

Statutory minimums aside, what is the standard practice for making redundancies and calculating payments at banks in Hong Kong?

It is the market practice in Hong Kong for employees at banks to have notice periods ranging from one to six months (depending on the job). Therefore, many employees are paid payment in lieu of notice ranging from one to six months’ average wages, when the employees are made redundant and not required to serve through the notice period (or put on garden leave).

Multinationals often pay severance based on more generous terms such as full salary (ie not capped at HK$22,500). In addition, many banks offer not to set off the statutory severance against the employee’s pension fund. Some banks offer an additional ex-gratia payment in exchange for a release of claims.

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