Employee bonuses in Hong Kong

Introduction

Bonuses are often used by employers as part of employees’ remuneration packages. They are particularly common in the financial services industry and also for senior staff, often with detailed and elaborate rules.

Structuring bonuses

There are no specific legal restrictions on how a bonus scheme can be set up or structured. There is a wide range of different bonus schemes ranging from the mandatory/contractual bonus to the purely discretionary bonus.

Mandatory/contractual bonuses are usually fixed by reference to an amount, a percentage of salary or some other formula and, where they are paid on an annual basis, are likely to be considered as an “end of year payment” under the Employment Ordinance (EO).

It is also common for bonus schemes to be expressed to be entirely at the employer’s discretion. The scheme may (or may not) then set out some of the factors that may be taken into account by the employer when deciding if and, if so, how much bonus to award. Typically, the factors that an employer might take into account when exercising discretion include the employer’s profitability, and the employee’s individual performance, conduct and contribution.

Operating a bonus scheme

Whilst a bonus scheme may state that an individual is only entitled to such bonus as the employer may in its absolute discretion decide, the employer is under a legal duty to exercise its discretion in a manner which is not irrational, perverse or otherwise unreasonable.

Any category of employee can bring a claim challenging the level of their bonus, but the courts have held that an employer had a very wide contractual discretion and the burden of proving that no rational employer would have paid the bonus paid was a very high one.

With a guaranteed bonus, the employer’s duties will depend upon the exact wording of the bonus. If the bonus guarantees that an individual is entitled to a set amount so long as certain criteria are fulfilled, the employer needs to only verify those criteria.

Implied anti-avoidance term

It is common for a bonus scheme to contain a clause stating that, in order to be eligible for the bonus, an employee must still be actively employed by the employer on the payment date. The recent decision of Tadjudin v Bank of America has, however, shed some doubts on the effectiveness of such a clause. In that case, the Court of Appeal agreed with the Court of First Instance that an anti-avoidance term could be implied into the plaintiff’s contract of employment, to the effect that her employer could not terminate her employment in order to avoid paying her a discretionary bonus. The Court of Appeal also upheld the inference drawn by the Court of First Instance based on its findings of fact that there had been a breach of the implied term, as one of the employer’s dominant intentions in dismissing the plaintiff was to avoid her becoming eligible for the bonus.

This decision does not imply an anti-avoidance term into every Hong Kong employee’s terms, as it was decided on its specific facts. It remains to be seen whether this decision will be followed by the courts in Hong Kong in the future.

We suggest that employers carefully assess the facts before any dismissal as to whether they could give rise to an inference that there is a dominant intention to avoid an employee being eligible for bonus. An employer is likely to be best placed to defend an allegation that it has breached an implied anti-avoidance term if it has a genuine reason for dismissal (which is unrelated to bonus) and has followed a well-documented process with oversight of decisions by HR or another manager. Employers should also review template employment terms and policies, and consider including express provisions to make clear that their rights are not qualified by any implied anti-avoidance term.

Termination

Whether, as a matter of contract, an employer has to take a bonus into account when calculating an employee’s termination payment may depend upon the terms of the bonus scheme and the reason for the termination of employment. Most schemes will make it clear that there is no entitlement to a bonus if the employee is dismissed for gross misconduct.

In Hong Kong, it is important to bear in mind that where the bonus is caught by the “end of year payment” provisions, a pro rata payment is required where the employee has worked for three or more months in the year and is not terminated summarily or by way of resignation. Provisions in any contract which purport to prevent a pro rata payment are void.

Further information on bonuses in Hong Kong is available from our International Employment Issues feature here.