Statutory obligations to fulfill when terminating an employee

A press release issued by the Labour Department on 31 May 2024 revealed that the director of a Hong Kong registered company has been prosecuted for failing to comply with the Employment Ordinance (EO). The director pleaded guilty and was sentenced to two months' imprisonment including a two year suspension. Additionally, the director was ordered by the court to pay HK $510,000 in outstanding wages to the affected employees.

The company willfully and without reasonable excuse contravened the requirements of the EO, failing to pay the wages of two employees in lieu of notice totaling about HK $445,000 within seven days after termination of employment. In addition, they failed to pay the awarded sums of approximately HK $510,000 to the two employees within 14 days after the date set by the Labour Tribunal (LT). The director involved was prosecuted and convicted for his connivance or neglect in the above offences.

A representative of the Labour Department said, “This ruling will send a strong message to all employers, directors, and responsible officers of companies that they are obligated to pay wages to employees within the statutory time limit stipulated in the EO and the awarded sums as ordered by the LT or the Minor Employment Claims Adjudication Board (MECAB). The Labour Department will not tolerate these offences and will spare no effort in enforcing the law and safeguarding employees' statutory rights.”

EO Guidelines

In accordance with the EO, the termination payment must be made to an employee when terminating their employment or when their contract ends. This includes the following:

Outstanding wages;
Payment in lieu of notice (if any);
Payment in lieu of any annual leave not taken, and any pro-rated annual leave pay for the current leave year;
Any outstanding end-of-year payment, and a pro-rated end-of-year payment for the current payment period or annual bonus;
Long service payment or severance payment (if appropriate); and
Any other payments due under employment contract, such as gratuities or compensation for termination.

The employer must make the full termination payment (except for any severance payment) to the employee as soon as possible, but no later than seven days after the date of terminating their employment or the date the contract ends.

The employer must make the severance payment within two months of receiving notice from the employee that they want to claim severance payment.

If the employer does not pay the employee within this prescribed time limit, interest must be paid on the outstanding wages. In addition, under the EO, the Labour Tribunal and the MECAB may order an employer to pay an employee specific entitlements (such as wages, an end-of-year payment, maternity leave pay, paternity leave pay, severance payment, long service payment, sickness allowance, holiday pay, or a termination payment). If the employer fails to pay the awarded amount within 14 days of the due date without a 'reasonable excuse,' they can be prosecuted and, if convicted, fined up to HK $350,000 and imprisoned for up to three years.

‘Unreasonable’ and ‘unlawful’ dismissal

Employers should be aware that under the EO, an employee may claim compensation for unreasonable and unlawful dismissal. This provision has been in effect since October 2018, when the Employment (Amendment) (No. 2) Ordinance 2018 regarding reinstatement or re-engagement orders for unreasonable and unlawful dismissal became law. According to this amendments, if an employee was unreasonably and unlawfully dismissed on or after 19 October 2018 and makes a claim for reinstatement or re-engagement, the Labour Tribunal may order the employer to do so without securing the employer’s agreement.

According to the EO amendment, dismissal is considered ‘unreasonable’ when an employee is dismissed for any reason other than a valid reason specified by the EO; it is considered ‘unlawful’ when it also violates the law. For more details, see table 1.

Table 1: Definition of unreasonable dismissal and unlawful dismissal
Unreasonable dismissal - Dismissal for reasons other than the following:	Unlawful dismissal - Dismissal that is unreasonable and against the law:
The conduct of the employee	During pregnancy or maternity leave
The capacity or qualifications of the employee for performing their work	During paid sick leave
Redundancy or other genuine operational requirements of the business	After a work-related injury and before compensation is determined, settled, or paid under the Employees’ Compensation ordinance
Statutory requirements (i.e., when it would be against the law to allow an employee to continue to work in their original position or to continue with the original terms of their employment contract)	Because the employee is exercising their trade union rights
Other substantial reasons	Because the employee is giving evidence for the enforcement of relevant labour legislation
	Because the employee has done or has been called to do jury service
	On the grounds of gender, marital status, pregnancy, family status, race, or disability

Further Statutory Entitlements

Even if the Labour Tribunal does not make an order for reinstatement or re-engagement, it may still order the employer to make a payment to the employee as follows:

An award of terminal payments deemed fair and appropriate by the Labour Tribunal
An award of compensation up to HK $150,000

If an order is made and the employer does not reinstate or re-engage the employee, the employer will have to pay the employee a further sum amounting to three times the employee’s average monthly salary. This sum is capped at HK $72,500 and must be paid on top of the other monetary remedies ordered by the Labour Tribunal.

The eight relevant statutory entitlements are: holiday pay, annual leave pay; sickness allowance and related provisions; maternity pay and related provisions; paternity pay; end-of-year payments; payment in lieu of notice; and a further sum for failing to comply with an order to reinstate or re-engage the employee due to unreasonable and unlawful dismissal. To calculate these payment amounts, the revised mode of calculation of relevant statutory entitlements is applied to determine the average salary earned by an employee in the 12-month period leading up to the specified dates, as stipulated by the E(A)O 2007. If an employee was employed for less than 12 months, the calculation is based on the shorter period. If an employee has been wrongfully dismissed, additional items are included in the calculation with respect to three relevant statutory entitlements (see table 2).

Table 2
Statutory Entitlement	Additional item included when calculating the 12-month average salary in the case of wrongful dismissal.
Sickness allowance	A further sum equivalent to seven days’ wages as compensation payable by an employer for wrongfully dismissing an employee on sick leave.
Maternity pay	A further sum equivalent to one month's wages as compensation payable by an employer for wrongfully dismissing an employee on maternity leave.
Further sum for non-compliance with an order of reinstatement or re-engagement for unreasonable and unlawful dismissal	Three times the employee’s average monthly salary (capped at HK $72,500) on top of the monetary remedies payable to the employee as ordered by the Labour Tribunal.

Key requirements during termination

The court case mentioned in this article, and its relevant penalty clause, serves as a prominent example of the importance of complying with the statutory requirements of the EO when terminating a relationship with an employee. Any conviction for violation of the statutory requirements of the EO could result not only in monetary loss but also in damage to the company’s reputation.

Table 3 lists the key points to consider when terminating an employment relationship with an employee:

Table 3: Key points to consider upon termination
Key point	Comments
Correctly calculate wages and statutory entitlements in the termination payment to an employee, based on the requirements specified in the EO.	Use the revised method of calculating the eight relevant statutory entitlements based on the average salary earned by the employee in the 12-month period leading up to the specified dates, as stipulated by the E(A)O 2007. If an employee has been employed for less than 12 months, the calculation is based on the actual period of employment.
Make the payment to the employee as soon as possible, but no later than seven days after their employment contract ends.
Pay the employee any sum awarded by the Labour Tribunal or MECAB within 14 days of the date set.
Do not terminate an employee by summary dismissal without a valid reason set out in the EO.	Any employer may summarily dismiss an employee without notice or payment in lieu of notice if the employee: 1. Deliberately disobeys a lawful and reasonable order; 2. Is guilty of misconduct; 3. Is guilty of fraud or dishonesty; or 4. Habitually neglects their duties.
Strictly adhere to the terms and procedures specified in company policy, employee handbooks, and employment contracts when dealing with misconduct, disciplinary, or performance issues that may trigger a summary dismissal.	Make sure you follow the relevant procedures when taking disciplinary action, including: 1. Serve verbal and written warnings to the employee concerned; 2. Allow a period for the employee to improve; 3. If there is no improvement, serve notice of termination to the employee; 4. Investigate and seriously consider all the surrounding factors as well as the employee’s clarifications on the issues observed; 5. Seek professional and legal advice before concluding that summary dismissal is appropriate.
Do not dismiss an employee in contravention of the EO’s restrictions on terminating an employment contract.	An employer must not dismiss an employee: 1. Who is confirmed pregnant; 2. Who is on paid sick leave; 3. Because they have given evidence or information in a proceeding or inquiry related to enforcing the EO, a work accident or a breach of work safety law 4. Because they are a member of (or active in) a trade union 5. Who is injured at work before entering into an agreement with the employee on employer’s compensation or before a certificate of assessment has been issued.

We believe that the Labour Department will continue to introduce amendments and reforms to enhance employment protection and employee benefits. Therefore, it is important for employers and employees alike to keep abreast of the changes in the Employment Ordinance, and consider these when making decisions.

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