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Deacon's Human Resources and Pensions Newsletter - May 2014

Submitted By Firm: Deacons

Contact(s): Cynthia Chung

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Date Published: 5/14/2014

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Paternity Leave for Working New Fathers, by Vickie Leung (vickie.leung@deacons.com.hk) and and Ann Liu (ann.liu@deacons.com.hk)

The Hong Kong Government published the Employment (Amendment) Bill 2014 (the "Bill") in the Gazette on 28 February 2014. The Bill was introduced into the Legislative Council on 26 March 2014. The Bill seeks to provide three days' paid paternity leave ("Paternity Leave") as a statutory benefit for working fathers under the Employment Ordinance.

The Bill facilitates working fathers to take care of the newborn and the mother around the time of childbirth. The Hong Kong Government took into account various factors including the interests of employees and affordability of the employers, together with the prevailing practice of the private sector in formulating the Bill. This is to ensure that a reasonable balance is struck between the interests of both employers and employees.

As both Paternity Leave and maternity leave emanate from the same cause, the relevant provisions of the Bill mirror the arrangements applicable to maternity leave under the Employment Ordinance.

The Bill proposes that a working father is entitled to Paternity Leave in respect of each confinement. Multiple births in one pregnancy are to be taken as one confinement. The Bill also proposes that father of children born overseas will also be entitled to Paternity Leave. Paternity Leave is also intended to be granted even if the child is born dead or dies after birth. However, the Bill does not extend Paternity Leave to miscarriage.

To be eligible for Paternity Leave, the Bill proposes that the father of a newborn or a father-to-be must be employed under a continuous contract and have given advance notice to his employer of his intention to take Paternity Leave. The notice can be given in two ways. The working father can notify the employer his intention to take Paternity Leave at least 3 months before the expected date of childbirth and the intended date of his Paternity Leave at least 2 days before taking the same. Alternatively, he can notify the employer of each of the intended date of Paternity Leave at least 5 days before taking the same.

Paternity Leave can be taken within the period which begins 4 weeks before the expected date of the delivery of the child and ends 10 weeks from and inclusive of the actual date of delivery of the child. The 3-day Paternity Leave can be taken consecutively or separately.

If the working father has been continuously employed for a minimum of 40 weeks and submitted the birth certificate of his child to his employer, it is intended that he will also be entitled to Paternity Leave pay. The daily rate of Paternity Leave pay is proposed to be four-fifths of the employee's average daily wages in the past 12 months. Worth noting is that the Bill proposes that if the employer pays a sum of money to the working father in respect of a day on which the working father takes Paternity Leave under the employment contract or any other agreement, such sum will be deductable from the Paternity Leave pay payable under the Employment Ordinance.

It is proposed that employers will commit a criminal offence if they fail to grant working fathers Paternity Leave and Paternity Leave pay.

 

How may the Contracts (Rights of Third Parties) Bill and the New Companies Ordinance be relevant in the human resources/employment context?, by Elsie Chan (elsie.chan@deacons.com.hk) and Gladys Ching (gladys.ching@deacons.com.hk)

A. Contracts (Rights of Third Parties) Bill

Introduction

The Contracts (Rights of Third Parties) Bill (the "Bill") was gazetted on 28 February 2014. The Government introduced the Bill into the Legislative Council for first reading on 26 March 2014.

Hong Kong's Current Law - the Doctrine of Privity of Contract

Under existing law, a third party cannot acquire and enforce a right under a contract to which he is not a party. The Bill seeks to reform this aspect of the doctrine of privity of contract in Hong Kong. The Bill is based on the United Kingdom's Contracts (Rights of Third Parties) Act 1999. If the Bill is passed (and thereby, becoming an Ordinance), it will enable a third party to enforce a contract to which he is not a party in some circumstances.

Key features of the Bill

  • Prospective effect: The Bill will only apply to contracts entered into on or after the Ordinance takes effect.
  • Definition of a "third party": The Bill defines a third party as a person who is not a party to the contract. To have rights under the Bill, the third party should be expressly identified by name, as a member of a class or as answering a particular description. Rights may also be conferred on a third party who is not in existence at the time when the contract is entered into.
  • Enforcement by a third party: A third party may enforce a term under a contract if (i) the contract expressly provides that the third party may do so; or (ii) the term purports to confer a benefit on such third party.
  • Remedies of a third party: The Bill provides that a third party who enforces a contract term under the Bill would have the same remedies in an action for breach of contract as if the third party had been a party to the contract.
  • Contracting out: Following the UK position, parties may by agreement opt out of the application of this new statutory scheme.

The Bill and employment contracts

One type of contract to which the Bill does not apply is an employment contract (as defined in the Employment Ordinance) but the exclusion is only limited to the enforcement of a term in the employment contract by a third party against an employee.

In other words, there is a possibility that a third party may be able to rely on the provisions of the Bill to enforce a term of the employment contract against the employer. An example of this would be a term which provides that the employer will provide medical insurance to the employee and his spouse and children. The employee's spouse and children in such case are third parties within the meaning of the Bill who may be able to seek enforcement of the term against the employer under the Bill. If the employer does not wish to confer a right of enforcement on a third party under the Bill, an express opt-out provision should be incorporated into the employment contract to that effect.

The Bill and employment-related contracts

Other than the exemption relating to employment contracts mentioned above, other types of contracts to which the Bill does not apply are bills of exchange, promissory notes, contracts on negotiable instruments, deeds of mutual covenant, contracts for the carriage of goods by sea and by air, contracts on a letter of credit and company's articles.

However, as can be seen, many types of contracts commonly entered into in the human resources/employment context are not covered by the exemptions under the Bill.

Examples of such contracts include:

  • Independent contractor agreements;
  • Settlement agreements;
  • Standalone confidentiality agreements; and
  • Standalone restrictive covenant agreements.

This means that when the Ordinance takes effect, third parties to these contracts may conceivably have a right under the Ordinance to enforce a term of the contract against the contracting parties. To give an example, under a restrictive covenant agreement, a staff member agrees not to solicit customers from the company and its holding companies or subsidiaries within a certain period. As the contract expressly identifies those companies and the term confers a benefit on them, the Bill will allow them to enforce the restrictive covenant agreement directly against the staff member.

What should employers do with respect to the Bill?

i) For contracts entered into before the Ordinance takes effect

Since the Bill will not apply to contracts entered into before the commencement of the Ordinance, third parties to such contracts will not be entitled to any rights against the contracting parties under the Ordinance. Nothing needs to be done in respect of contracts executed before the Ordinance takes effect.

ii) For contracts to be entered into on or after the Ordinance takes effect

Companies should review their contracts/terms and conditions to see if there are any terms which purport to confer a benefit on third parties who might be able to enforce such terms against the companies under the Ordinance.

If so, companies should consider updating their contracts/terms and conditions to include an express clause providing that the Ordinance does not apply to the contract or those terms and conditions if they wish to opt out from the application of the legislation.

B. New Companies Ordinance

The New Companies Ordinance has become effective since 3 March 2014.

Section 4 of the Companies Disclosure of Company Name and Liability Status Regulation under the New Companies Ordinance (the "Regulation") provides that a company must state its registered name(s) in its (i) communication document; (ii) transaction instruments; and (iii) website.

The term "communication documents" under the Regulation means business letter, notice (e.g. termination notice), and official publications (e.g. employment handbook), and the term "transaction instrument" means contracts (e.g. employment contracts, independent contractor contract, settlement agreement, standalone confidentiality agreement, restrictive covenants) or deeds (e.g. settlement deed), bill of exchange, promissory note, cheques, invoice or receipts.

If a company has registered both English name and Chinese name, then both names should be stated.

Therefore, in preparing employment contracts, employment handbook, settlement agreement, independent contractor agreement, termination notice etc, it is important that the company shall expressly stipulate its English/Chinese name(s) registered in the Companies Registry. Otherwise, whilst it will not render the relevant contracts, handbook or notice void, it is in breach of the New Companies Ordinance, and the company, its responsible persons and persons authorised the breach committed an offence, and the fine is at level 3 (i.e. HK$10,000)

 

Yung Chi Keung v Protection of Wages on Insolvency Fund Board, by Elsie Chan (elsie.chan@deacons.com.hk)

This is a case with respect to the interpretation of the words "the applicant's entitlement to severance payment" in section 16(2)(f)(i) of the Protection of Wages on Insolvency Ordinance (the "PWIO").

Under the PWIO, the applicant may apply for an ex-gratia payment from the Protection of Wages on insolvency Fund (the "Fund") as his former employer entered into voluntary liquidation.

The relevant sections of the PWIO are set out below:-

"15(1) ......an applicant to whom:-

(c) the liability to be paid a severance payment has arisen and the severance payment is unpaid...;
may apply for an ex-gratia payment from the Fund in respect of...the severance payment..."

"16(1).....an employer has failed to pay…severance payment...to an applicant and that:-

(b) in case of an employer who is a company, a winding-up petition has been presented against the employer,

[the Commissioner] may make an ex-gratia payment to the applicant out of the Fund of the amount of the ....severance payment..."

"16.2 The Commissioner shall not make any payment under subsection (1):-

(f) in respect of a severance payment:-

(i) of an amount exceeding the aggregate of $50,000 and half of that part of the applicant's entitlement to severance payment in excess of HK$50,000;"

The applicant's stance is that the phrase "the applicant's entitlement to severance payment" means the net amount of severance payment payable to him calculated in accordance with section 31(G)(1) of the Employment Ordinance ("EO") and deducting therefrom all gratuities, retirement scheme benefit or mandatory provident fund scheme benefit as required by section 31I of the EO (the "section 31I benefit"). This net amount is then used to calculate the maximum amount of ex-gratia as provided in section 16(2)(f)(i).

The Commissioner however thinks that the phrase "the applicant's entitlement to severance payment" should mean the amount calculated according to section 31G(1) EO without deducting the section 31I benefit. The deduction of the section 31I benefit is to be made from the maximum amount of ex-gratia payment calculated according to section 16(2)(f)(i).

For the current case, the Commissioner calculated that the applicant's severance payment under section 31G EO is HK$131,696.54, and the section 31I EO benefit is HK$106,319.04. According to the Commissioner's calculation, the maximum amount of ex-gratia payment payable to him under the PWIO should be:-

HK$50,000 + (HK$131,696.54 - HK$50,000) ÷ 2 = HK$90,848.27

The section 31I benefit of HK$106,319.04 should be deducted from the maximum ex-gratia payment. The net maximum sum of ex-gratia payment payable to the applicant is HK$90,848.27- HK$106,319.04 = -HK$15,470.77. Hence no ex-gratia payment is payable to the applicant.

Under the applicant's calculation, the maximum amount of ex-gratia payment should be:-

HK$50,000+ (HK$131,696.54 - HK$106,319.04 - HK$50,000) ÷ 2 =HK$37,688.76

The total sum including the section 31I benefit is HK$37,688.75+HK$106,319.04 =HK$144,007.79.

The total sum of HK$144,007.79 exceeds the severance payment under section 31G at HK$131,696.54. He should therefore be paid an ex-gratia payment of HK$25,377.50 only. This sum plus the section 31I benefit of HK$106,319.04 equals to the section 31G amount of HK$131,696.54.

The applicant's argument

The applicant submitted that the unpaid severance payment mentioned in section 15(1) of the PWIO must mean the part of the severance payment that is outstanding after the deduction of the section 31I benefit because if the section 31I benefit should wholly offset the severance payment, then there would be no unpaid severance payment. The applicant also submitted that the unpaid severance payment referred in section 16(1) of the PWIO must be the amount outstanding after the deduction of the section 31I benefit, and the amount of ex-gratia payment must be in respect of the unpaid or outstanding portion of the severance payment.

The Commissioner's interpretation

The Commissioner submits that section 16(2)(f)(i) of the PWIO does not talk about the unpaid or outstanding portion of the severance payment but the severance payment entitlement. Hence, it is talking about the amount of severance payment before deduction of the section 31I benefit.

The Commissioner also refers to section 16(2B)(a) of the PWIO which provides that:-

"16(2B)(a) Where it appears to the Commissioner that:-

(i) an applicant's wages have been reduced...; and

(ii) before the wage reduction took effect, the employer of the applicant had given an undertaking to the applicant...that if the applicant was dismissed .....after the wage reduction, the severance payment payable to him would be calculated in a manner more favourable to him than that provided for in section 31G EO,

then, for the purposes of subsection (2)(f)(i), the applicant's entitlement to severance payment may.....be calculated:-

(A) ....in accordance with section 31G of the EO; or

(B) in the manner specified in the undertaking,
whichever results in a lesser amount."

The Commissioner submits that section 31G EO is expressly adopted as one option for calculating "the applicant's entitlement to severance payment" in the scenario under section 16(2B). For consistency, "the applicant's entitlement to severance payment" in section 16(2)(f)(i) should also mean the entitlement calculated according to section 31G EO without any deduction of the section 31I benefit.

The Decision

The court considers that in order to understand the meaning of "the applicant's entitlement to severance payment" in section 16(2)(f)(i) of the PWIO, it is necessary to see how "the employee's entitlement to severance payment" is defined under the EO.

Having analysed section 31G and 31I of the EO, it is clear that the first step to ascertain the amount of severance payment payable to an employee is to calculate the same according to the formula under section 31G. But the actual amount to be paid has to be reduced by the section 31I benefit. The section 31I benefit takes effect as a part-payment of the severance payment entitlement but the original entitlement is the amount calculated under section 31G, not the net sum after deducting the section 31I benefit.

The court considers that since both sections 16(2)(f)(i) and (2B) are to provide for the calculation of the ex-gratia payment, the same words should bear the same meaning. "The applicant's entitlement to severance payment" in section 16(2)(f)(i) of the PWIO should mean the sum calculated according to section 31G EO without any deduction of the section 31I benefit. If the entitlement in section 16(2)(f)(i) should be the net severance payment after deduction of the section 31I benefit, then section 16(2)(f)(i) should have so provided.

Therefore, the court accepted the Commissioner's approach and rejected the applicant's application.

 

New Regulations on Labour Dispatch, by Iris Cheng (iris.cheng@deacons.com.hk) and Jenny Jin (jenny.jin@deacons.com.cn)

In order to further regulate labour dispatch arrangements, the Ministry of Human Resources and Social Security promulgated the Tentative Provisions on Labour Dispatch ("Provision") came into effect on 1 March 2014.

The Provision clarifies and elaborates certain ambiguous or incomplete points relating to labour dispatch arrangements in the PRC Labour Contract Law in furtherance of the implementation thereof, though some questions and doubts still remain. Below is a summary of the salient points of the Provision which may give you a general idea of what has been laid down in the Provision:

Scope of Targeted Employers

  • The Provision mainly targets at employers which are legally entitled to employ staff directly in their own capacity, including PRC domestic enterprises and foreign invested enterprises. While the Provision has made it clear that partnership organizations such as accounting firms and law firms, foundations and private non-enterprise organizations shall like ordinary enterprises, comply with the Provision in using the dispatched staff, it leaves governmental bodies, institutions and social organizations which may employ staff according to the PRC Labour Contract Law out of its jurisdiction.

Restrictions on Positions and Percentage for Use of Dispatched Staff

  • The Provision reinstates that an employer may use the dispatched staff only for temporary, ancillary or substitutable positions as defined under the PRC Labour Contract Law. It, however, requires the ancillary positions to be discussed at the employees' congress or with all the employees, determined through negotiation between the employer and the trade union or the employees' representatives on an equal basis, and then announced internally within the employer's organization.
  • The Provision has made it clear that an employer shall control the number of dispatched staff to be within 10% of its "total workforce". It has further defined the "total workforce" as the sum of the number of the employees having a labour contract with the employer and the number of the dispatched staff used by the employer.
  • Those employers with dispatched staff accounting for more than 10% of their total workforce before the Provision takes effect shall develop an employment adjustment scheme for reducing the proportion to the statutory limit within 2 years from the effective date of the Provision (i.e. before 1 March 2016). However, this requirement should not affect those labour contracts and labour dispatch agreements concluded prior to the release of the amendment to the PRC Labour Contract Law concerning labour dispatch (i.e. before 28 December 2012) with a term expiring after 2 years of the effective date of the Provision, which may continue to be performed till their expiry dates. The adjustment scheme above is required to be filed to the local labour authority for record. An employer is not allowed to use any new dispatched staff until it has brought down the proportion of its dispatched staff to the statutory limit.
  • The Provision expressly exempts the use of the dispatched staff by a representative office of a foreign enterprise or financial institution in China and the use of international ocean sailors by a seaman employing unit from the above restrictions on the applicable positions and the 10% threshold.

Probation Period

  • The Provision stipulates that a labour dispatch unit may agree on a probation period with a dispatched staff member for only once. This means that if a labour dispatch unit dispatches the same dispatched staff member to a second employer, the second employer would not be given the chance to make use of probation period to test the staff member's ability.

Return of Dispatched Staff

  • The Provision has elaborated the circumstances under which an employer may or may not return a dispatched staff member to a labour dispatch unit, which coupled with the situations prescribed by the PRC Labour Contract Law, mirror those under which an employer may or may not terminate the labour contract of an employee according to the PRC Labour Contract Law and thus give equal treatment to the directly hired employees and the dispatched staff.

Dispatch in Disguise

  • The Provision stipulates that the use of employees by an employer in the form of labour dispatch disguised as contracting, outsourcing etc. shall be regarded as labour dispatch and dealt with according to the Provision. This may to some extent curb the abuse of outsourcing to get around the statutory restrictions on the labour dispatch.

Sanctions for Violations of Labour Dispatch Provisions

  • The Provision generally applies the penalties prescribed under the PRC Labour Contract Law to the various violations of the Provision, and additionally imposes order for rectification, warning and compensation for loss suffered by the dispatched staff, if any, on violation of the procedures for determining ancillary positions.

While the Provision is expected to facilitate the implementation of the legal framework for labour dispatch under the PRC Labour Contract Law with more clarity and details, certain issues remain unclear or untouched upon. For example, it is not clear as to when an employer with excessive dispatched staff shall file an employment adjustment scheme, what if the employer does not file it or fails to meet the statutory limit within the prescribed period and whether renewal of the use of dispatched staff will be regarded as the use of new dispatched staff. Therefore, it is advisable to pay close attention to the further developments and implementation of the Provision and implement and/or adjust the employment arrangements as necessary and appropriate.

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