Bonuses, commissions, wages — What’s in a name?

By DLA Piper | Wednesday, 17 Apr 2019

As the fiscal year has come to an end for many companies, it is now time to look back and review a recent interim decision of the Court of First Instance (“CFI”) concerning end-of-year bonuses.

It is often an exciting time for employees in Hong Kong when employees start receiving or calculating the value of their bonuses — whether in the form of a 13th month or a discretionary bonus.

However, it is also relatively common for disgruntled employees to resign the day after cashing their cheque. And, in some cases, for the employee (or, more likely the new employer) to buy out their notice period allowing them to leave early.

This can cause a headache for HR when it comes to calculating the employee’s termination payments. A key question is: should the employee’s bonus form part of their “wages” for the purposes of payments such as statutory severance payment, statutory long service payment and payment in lieu of notice?

A recent interim judgement of the CFI (Qantex Capital Markets Ltd v Dimitri Philippides [2019] HKCFI 143) has placed this issue under the spotlight. Although the CFI made no decision on the merits and the case is still to be set down for trial, the decision serves as a useful reminder to employers that discretionary bonuses are seldom straightforward in Hong Kong, and they require careful drafting to minimise the risk of any disputes.

From the decision, here are the practical tips that in-house counsel and HR practitioners would do well to bear in mind:

1. If a bonus is intended to be discretionary, ensure this is consistently and clearly stated in all employment documents (e.g. employment contract, internal policies, employee handbook). Even if the company is willing to commit itself to payments every year, make sure the documentation states that the bonus rules can change from year to year, and any payment in one year does not mean that there will be a payment in the following year, nor at the same or similar amount.

2. The clearer and more transparent the payment methodology is, the more likely it is the bonus will be regarded as a contractual entitlement.

3. Even if a bonus is discretionary, discretion should still be used in a rational, proper manner, and in good faith. Convey the message of awarding bonuses strategically and with good business reasons, and make sure to keep proper records of the decision-making process.

4. If a bonus is paid in instalments, include wording in the employment documents to effect that the company still treats bonus as an annual benefit for the purposes of any statutory entitlements under the EO.

5. Clearly specify which payments are to be treated as “wages” for the purposes of the EO. In the majority of the cases, it will be the employer who is arguing for a restrictive interpretation, and that bonuses should not fall within the definition. The arguments employed by QC were particular to the facts of the case given that the former employees had resigned and sought to buy out their notice.

 

Authors:

Helen Colquhoun, Partner and Head of Employment, Hong Kong

David Smail, Senior Associate, Employment  

DLA Piper

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning them to help clients with their legal needs around the world.

Bonus Commission Wage Discretionary Thirteenth Month Buy Out Notice Period