Riding the Third Wave of COVID-19

By Helen Colquhoun and David Smail | Monday, 20 Apr 2020

Like the virus, it seems the issues faced by employers and HR practitioners come in waves. First came health and safety — how to spot the virus, what to do if someone tested positive in the workforce and contingency plans. Second came business continuity and the mass remote working experiment we have all been engaged in for some months now. The third wave was on the horizon and is now firmly coming in to shore — cost cutting. Although the number of cases in Hong Kong are again starting to decrease, the impact on business has been deep and hard hitting.

The good news is that employers have a number of tools available to help them ride this third wave and can, with the right and communication strategy, make it to the shore without crashing.


Furlough / Unpaid Leave

One of the more curious by-products of the pandemic is that we are all now much more familiar with the term “furlough”. This is a concept that originates from the US and allows employers to put employees on a period of unpaid leave during a downturn, with financial support being provided by the government. This is a not a term many will be familiar with on this side of the world and many countries, including Hong Kong, do not formally recognise the term.

However, employers and employees in Hong Kong are generally free to take periods of unpaid leave for as long as they see fit provided this is done with the consent of both parties. The key is consent. If unpaid leave is pushed through unilaterally (i.e. without employee consent), there is a risk of the employee bringing claims including unreasonable variation of employment terms, failure to pay wages and constructive dismissal. Failure to pay wages is a criminal offence in many countries (including Hong Kong) and there can be personal liability for directors, officers and senior managers in certain circumstances.

The wording of the communications with employees is critical and must be handled sensitively.

During the period of unpaid leave, employees will continue to accrue service for the purposes of their statutory service-related benefits. Employees will also continue to be entitled to take statutory rest days and the 12 statutory holidays.


Reduced Pay / Working Hours

Asking employees to take a pay cut or agree to a reduction in working hours is possible but again this requires employee consent.

In the current climate, some employers are seeking to rely on “unilateral variation” clauses i.e. a clause in the employment contract that allows the employer to make changes to the employee’s terms and conditions without their consent. While this type of clause may be a useful starting point, strictly speaking it should not be used to implement substantive or material changes to an employee’s working conditions, but should be limited to making minor or administrative changes. If employers seek to rely on this clause when implementing pay cuts or reduced working hours, there would be a high risk of successful challenge by employees and it is advisable to implement such changes by consent.


Using Paid Annual Leave

Employers can potentially ask employees to use their accrued but untaken annual leave. Although this does not generate an immediate cost saving, it does avoid the issue of all employees taking their annual leave at the end of the year when businesses are (hopefully) closer to being back to business and/or having large accrual balances to pay out on any termination of employment.

In Hong Kong, employers are generally free to determine the dates on which employees must use their statutory paid accrued annual leave provided they have consulted with them in advance and given them not less than 14 days' written notice. There is no definition of what amounts to sufficient “consultation” — provided the employer has entered into some form of dialogue with the employee and allowed them some time to consider their views, this should be sufficient. For any contractual accrued annual leave (i.e. anything over and above the statutory minimum), the treatment would depend on the terms of the employment contract and the employer’s annual leave policy.



In worst case scenarios, employers may be left with no choice but to consider redundancies and downsizings. While this is seldom the outcome that employers want, the reality is that it may be the only alternative in the current climate.

There are no specific statutory requirements in Hong Kong regarding the process for implementing a redundancy e.g. collective consultation obligations. Redundancies are treated as a termination of employment in the ordinary course for most intents and purposes.

Employees with at least two years’ continuous service are eligible to receive a statutory severance payment. For monthly rated employees, the amount is generally 2/3 of the employee’s last full month’s wages or HK$15,000, whichever is less, per year of service – subject to a maximum of HK$390,000. The calculation may be different for employees who are paid on a daily or other basis. 

The amount can be offset by the value of the contributions the employer has made to the employee’s Mandatory Provident Fund or other occupational retirement scheme over the relevant years of service. Although in the past some employers would choose to exercise their discretion not to apply the offset in order to treat employees more generously (and because the government has announced that it plans to abolish the mechanism), we anticipate that more employers will use this ability as a cost saving measure going forwards.

As opposed to unilateral redundancies, employers may also consider offering voluntary redundancies on the basis of an enhanced redundancy package. This can be an attractive option for certain staff, particularly those who have been long-serving, and can help to mitigate some of the risks (reputational and otherwise) associated with unilateral redundancies.


Government Relief Programmes

Many governments around the world have introduced wage subsidies and employment relief schemes.

On 8 April 2020, the Hong Kong government announced a HK$137.5 billion package of relief measures to tackle the COVID-19 outbreak. This includes an HK$80 billion Employment Support Scheme to encourage employers to retain staff through the provision of a wage subsidy which is expected to benefit around 1.5 million employees.

According to the preliminary proposal announced by the government, all private sector employers who have been making Mandatory Provident Fund contributions for employees are eligible to apply for wage subsidy. Eligible employers may claim up to 50% of the employee’s monthly salary (capped at HK$9,000 per month) for a period of 6 months. However, the subsidy is conditional upon the employers undertaking that they will not implement any redundancies.

There will also be one-off grants for the hardest hit sectors including tourism, aviation, catering/F&B, construction, education and businesses which have been forced to close temporarily as a result of the government’s measures to safeguard public health (e.g. fitness centres, beauty parlours, sports and recreational facilities).

At the time of writing, the government’s proposal is preliminary in nature and there are still a number of questions e.g. how long is the undertaking not to implement redundancies expected to last, can employers opt only to apply for part of the workforce, does this restrict employers from making other cost-cutting measures that fall short of redundancy? Further details will be announced in the coming days.

In the meantime, employers with a presence in Hong Kong should review the terms of the Scheme and other support measures to determine whether they are eligible to claim relief. They should also assess whether this would impact their ability to claim (or continue to claim) other relief measures that have already been applied for (or have been received), not only in Hong Kong but on a regional basis.

Helen Colquhoun and David Smail

Helen Colquhoun, Partner and Head of Employment Hong Kong, DLA Piper

David Smail, Senior Associate Hong Kong, DLA Piper

Cost Cutting furlough unpaid leave redundancy relief programme