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Deacon's Human Resources and Pensions Newsletter - January 2014

By: Cynthia Chung

Submitted by Firm:
Deacons
Firm Contacts:
Cynthia Chung
Article Type:
Legal Update
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Chinese New Year Greeting
by Cynthia Chung, Head of Human Resources & Pensions Practice Group(cynthia.chung@deacons.com.hk)

The Human Resources and Pensions team in Deacons wishes you a prosperous new year of the Horse.

The revamped trust law in Hong Kong and its impact on ORSO schemes
by Vickie Leung, Associate (vickie.leung@deacons.com.hk) and Victoria Cheung, Trainee (victoria.cheung@deacons.com.hk)

To modernize the trust law regime in Hong Kong, the Trustee Ordinance (Cap.29) and the Perpetuities and Accumulations Ordinance (Cap. 257) have been amended with effect from 1 December 2013. In this article, we would like to discuss the implications of these amendments on the trustees of an occupational retirement scheme ("ORSO Scheme").

Duty of trustees

The amended Trustee Ordinance introduces a statutory duty in relation to certain functions a trustee carries out, including investment, delegation, appointing nominees and custodians, taking out insurance and powers in relation to accepting property and valuations and audit, etc. Where the statutory duty applies, the trustee must exercise the care and skill that is reasonable in the circumstances, having regard to (i) any special knowledge or experience that the trustee has or holds out as having; and (ii) if the trustee is acting in that capacity in the course of a business or profession, any special knowledge or experience that is reasonably expected of a person in the course of that kind of business or profession. Therefore, the statutory duty may apply to non-professional and professional trustees. The statutory duty will exist (if it applies) alongside the other fundamental duties of trustees at common law, such as their duty to act in the best interest of beneficiaries.

As regards an ORSO Scheme whose trust instrument is silent on the standard of care of trustees, the new statutory duty will apply. However, for trust instruments that have already set out a duty and standard of care of trustees, the amended Trustee Ordinance provides that the statutory duty will not apply "if it appears from the trust instrument or an enactment that the duty is not meant to apply". In addition, persons creating the ORSO Scheme (which was created before 1 December 2013) may also consider executing a deed with a provision to the effect that the statutory duty does not apply.

Exemption of trustees' liabilities

At common law, a trustee can exclude his liabilities except for fraud. The amended Trustee Ordinance tightens control on exemption clauses in relation to professional trustees who are remunerated for their services. These trustees can no longer exclude or indemnify against their liabilities for fraud, wilful misconduct and gross negligence. However, in relation to trusts created before 1 December 2013, this new rule will only come into effect in December 2014.

In practice, this amendment may have no significant impact on trustees of ORSO Schemes. Firstly, it has no application on individual trustees of ORSO Schemes who do not qualify as professional trustees. Secondly, the Occupational Retirement Schemes Ordinance (Cap. 426) provides that trust assets cannot be used to indemnify an ORSO Scheme's trustee against any fraud, misfeasance or breach of trust. Breach of trust has a broad coverage including acts of gross negligence. As such, the position of ORSO Schemes' trustees may not be affected by the amendment in practice.

Powers of trustees

When the trust instrument is silent on trustees' powers, the Trustee Ordinance steps in and provides trustees with default powers. The amended Trustee Ordinance has enhanced the existing and introduced new default powers. However, the new or extended powers conferred on trustees are (i) in addition to the powers conferred by the trust instrument, (ii) are subject to the terms of the trust instrument and (iii) would only apply if there is no contrary intention in the trust instrument.

  • Power to insure: Trustees may derive their power to insure trust property from the trust instrument or the Trustee Ordinance. Pursuant to the amended Trustee Ordinance, trustees who exercise the statutory power to insure may now insure trust property against loss and damage due to any event, not just through fire and typhoon as was the case under the old regime.
  • Power to appoint agents, custodians and nominees: Pursuant to the amended Trustee Ordinance, a trustee may appoint (i) agents to perform most of their functions including the investment of trust assets; (ii) nominees in relation to any of the trust assets; (iii) custodians for the safe custody of trust assets or title documents. Upon appointment of the agent, nominee or custodian, the trustee should keep the arrangement under review, and if necessary, exercise his power of intervention (by giving directions and revoking the appointment) unless such application is inconsistent with the terms of the trust instrument.
  • Power to invest: In the absence of a contrary provision in the trust instrument, a trustee shall make investment decisions in accordance with the range of authorized investments in Schedule 2 to the Trustee Ordinance. This position has not changed. However, the choices of companies that trustees can invest in are widened by the relaxations of the conditions regarding investment in shares. Trustees exercising the default investment powers pursuant to the Trustee Ordinance can now invest in companies with a market capitalization of at least HK$5 billion and a track record of having paid cash or in-kind dividends over the preceding 3 years (instead of HK$10 billion and 5 years of cash-only dividends which was the previous position).< >the PS withdraws his approval of the principal…or the PS approves another teacher of the school as the principal..." a serious question to be tried; adequacy of damages as a remedy; balance of convenience or balance of the risk of doing an injustice.

Despite the foregoing, as the trust instruments of most ORSO Schemes would already have their own provisions concerning the above powers, the amendments above may not have a significant practical impact on ORSO Schemes' trustees.

Settlors' involvement in the trusts

At present, if the settlor of a trust reserves excessive powers to himself, the trust may be invalidated on the ground of the lack of certainty of intention to create a trust. Pursuant to the amended Trustee Ordinance, the settlor of an ORSO Scheme (i.e. an employer) may now reserve any or all powers of investment or asset management functions in a trust deed without running the risk of invalidating the trust. In practice, such powers of investment and asset management vest in the trustees and so this amendment may have little practical impact on ORSO Schemes.

Trustees' remuneration

Prior to the amendments, it is not possible for trustees to be paid unless the trust instrument contains an express provision to that effect. The amended Trustee Ordinance introduces a new statutory charging clause whereby trustees acting in a professional capacity may now receive reasonable remuneration in the absence of a contrary intention in the trust instrument. However, as the trust instruments of most ORSO Schemes would have already provided for trustees' entitlement to remuneration, this amendment should not affect trustees of most ORSO Schemes.

Beneficiaries' right to remove trustees

At present, beneficiaries of ORSO Schemes (i.e. members of pension schemes or their beneficiaries) may only remove a trustee without going to the court if (i) the trust instrument grants the beneficiaries a power to remove trustees or (ii) all the beneficiaries (being of full age and capacity and absolutely entitled to the trust property) consent to terminate the trust and re-settle the trust property. The amended Trustee Ordinance introduces an additional court-free process whereby the sole beneficiary or all the beneficiaries may remove a trustee without terminating the trust. This process is applicable if (i) the trust instrument has not provided for a contrary intention; (ii) the trust instrument has not nominated anyone for the purpose of appointing trustees; and (iii) if all the beneficiaries are of full age and capacity and are absolutely entitled to the trust property. This amendment will apply to a trust created before 1 December 2013 unless a deed is executed by the settlor with a provision to the effect that this amendment does not apply. Nevertheless, as most ORSO Schemes would have provided for the power to appoint trustees in the trust deed, it appears that this new process may have no relevance to ORSO Schemes.

Perpetuity period

The rule against perpetuity which requires trusts in Hong Kong to run no more than 80 years is now abolished in the amended Perpetuities and Accumulations Ordinance. However, this abolition only applies to trusts created on or after 1 December 2013. In other words, only a trust created on or after 1 December 2013 may last for an unlimited period and so it does not apply to an ORSO Scheme established before that date.

Employee successfully imposed an interlocutory injunction on the employer's summary dismissal decision, by Elsie Chan, Associate (elsie.chan@deacons.com.hk)

In Woo Kwok Ping v The Incorporated Management Committee of Tsuen Wan Trade Association Primary School [HCA1523/2013], the Plaintiff had been teaching at the Defendant School since 1986, and became the principal thereof in 2009. But for her termination of employment in July 2013, the Plaintiff would be due for retirement on 31 August 2014.

During the period from August 2012 to 27 July 2013, a number of reminders/warnings were given by the Defendant School to the Plaintiff. On 27 July 2013, after sending 3 warning letters to the Plaintiff, the Defendant School summarily dismissed her on the same day.

The Plaintiff sought an interlocutory injunction to enjoin the Defendant School from acting upon the dismissal before the Permanent Secretary for Education ("PS") has withdrawn her approval (or has approved another principal) in accordance with section 55 of the Education Ordinance, its related regulations and/or the Code of Aid for Aided Schools (the "Code").

It was undisputed that the terms set out in the Plaintiff's employment contract could not contravene the Education Ordinance, its related regulations, the Code or the instructions given by the Secretary for Education/PS.

One of the main disputes between the parties was whether the summary dismissal was justifiable or wrongful. In addition, the Plaintiff also contended that the Defendant School had not acted in accordance with section 55 of the Education Ordinance which provides that:-

"The principal of a school shall hold office until-

  1. the PS withdraws his approval of the principal…or
  2. the PS approves another teacher of the school as the principal..."

In order to consider the Plaintiff's application, the court had to consider the following issues:-

  1. a serious question to be tried;
  2. adequacy of damages as a remedy;
  3. balance of convenience or balance of the risk of doing an injustice.

(a) a serious question to be tried

The court considered that the present case was clearly not a frivolous or vexatious claim and involved a serious question to be tried. This was particularly the case as the Defendant School did not dispute the applicable provisions of the Education Ordinance formed part of the Plaintiff's employment contract, and the need for the PS to act in accordance with section 55 of the Education Ordinance before the Plaintiff's office as principal could be brought to an end lawfully but the PS had not so acted.

(b) adequacy of damages as a remedy/ balance of convenience

The Plaintiff relied on two cases, Robb v London Borough of Hammersmith & Fulham [1991] IRLR 72 and Gryf-Lowczowski v Hinchingbrooke Healthcare NHS Trust [2006] IRLR 100, which have been summed up in Chitty on Contracts (2012) 31st Ed:-

"…An injunction to restrain dismissal can also be issued in respect of a period during which no services are to be rendered under the contract. Thus where an employee had been suspended on full pay while disciplinary proceedings against him were in progress, it was held that the employers could be restrained from dismissing him before the disciplinary proceedings had run their full course; and they could be so restrained if they had purported to dismiss the employee without any recourse to the disciplinary procedure which governed the employment relationship."

The above two cases involve dismissals where the contract provided for a relative elaborate disciplinary procedure, or an investigating panel. One of the reasons for granting the injunction was to ensure the employee's entitlement to such procedure. In the Robb case, the court considered that "….damages would not be an adequate remedy for the manner of his unlawful dismissal and his deprivation of the disciplinary procedure."

In the present case, although no formal disciplinary procedure had been laid down in the employment contract, the court considered that in view of section 55 of the Education Ordinance, it was appropriate to grant an injunction because damages would not be an adequate remedy for the deprivation of the security of tenure apparently afforded by that provision.

In reaching its decision, the court had also taken into account the following:-

  1. the Plaintiff expressly accepted she was not seeking reinstatement of her post (and the injunction is not intended to have that effect);
  2. the Defendant School has not informed the PS of the Plaintiff's summary dismissal;
  3. the Defendant School has not given an undertaking not to act upon the summary dismissal before the PS has acted in accordance with section 55 of the Education Ordinance.
  4. If an injunction order in the terms sought by the Plaintiff is granted, it is unlikely substantial difficulties would be caused to the Defendant School regarding its daily administration and affairs.

In light of the above, the court granted an injunction order in the following terms:-

"An injunction until:

  1. judgement in the action;
  2. the PS has acted in accordance with the Education Ordinance;
  3. further order,

(whichever is the earlier) to restrain the Defendant School, their servants or agents or otherwise from acting upon the purported dismissal of 27 July 2013 of the Plaintiff from the post of Principal before the PS has withdrawn her approval (or has approved another Principal) in accordance with the Education Ordinance."

Highlights of the Guangdong Provincial Regulation on Collective Bargaining and Collective Contracts (Draft)
广东省企业集体协商和集体合同条例(修订草案征求意见稿)

by Iris Cheng, Partner (iris.cheng@deacons.com.hk)

The Standing Committee of the People's Congress of Guangdong province has issued a Draft Regulation on Collective Bargaining and Collective Contracts 《广东省企业集体协商和集体合同条例(修订草案征求意见稿)》(hereinafter the "Draft Regulation") on 11th October, 2013 to seek opinions from the public. It is intended to set down a mechanism for employers and employees to negotiate and reach agreement on some sensitive issues mainly on employee protection as well as welfare and benefits.

A Summary of the Draft Regulation

The Draft Regulation consists of 6 chapters and 63 articles. Salient features of the Draft Regulation are highlighted below:

What is Collective Bargaining?
Collective bargaining refers to the process of fair negotiations between employees and employers in relation to employment matters such as remuneration, working hours, rest and vocation, welfare benefits, training, social security, occupational health and safety etc. Collective bargaining can take place at the level of a particular enterprise, a particular industry sector or a particular region respectively. The agreement reached is then reduced to written form, which is termed the collective contract.

Collective Wage Bargaining
Wage negotiation is the fundamental aspect of collective bargaining and shall generally occur once every year. Both parties can negotiate on matters including the wage allocation system, wage standard, wage payment methods and allocation of allowances and bonuses. During wage negotiations, factors such as labour productivity, economic performance of the enterprise, local minimum wage, average wage of the industry and the Consumer Price Index etc. shall be taken into account.

Collective Bargaining Representatives
Each party shall have 3 to 9 representatives one of whom shall be the chief representative. The chief representative of an enterprise shall be the legal representative or a representative authorised by the legal representative in writing and the remaining representatives shall be determined by the legal representative. For enterprises with an existing trade union, the chief representative for the employees shall be the chairperson of the trade union or a representative authorised by him/her in writing and the remaining representatives can either be selected by the trade union or democratically elected in the workers' conference. Both parties are allowed to appoint outside professionals as their representatives but the number shall not exceed 1/3 of the representatives on its side.

Protection of the Employee Representatives
The Draft Regulation offers protection to employee representatives during the collective bargaining process. For instance, without the consent of the employee representatives, the enterprise must not adjust, demote or remove them from their existing positions, or deduct their wages during the period when they are performing their duties. In particular, the enterprise must not terminate the employee representatives' employment contract while they are performing their negotiation duties, except under the circumstances for summary dismissal specified in Article 39 of the Labour Contract Law of the People's Republic of China.

Collective Bargaining Procedures
Both employees and the enterprise have the right to request for collective bargaining. If this is requested by more than 1/3 of the workers, the trade union shall issue an offer of negotiations to the enterprise. When a written request is issued, the receiving party must address the issues raised one by one by providing a written response within 20 days. If the enterprise violates this article, which consequently results in employee strikes or slow-downs, the enterprise cannot terminate the employee's labour contract by reason of employees' serious violation of the enterprise's rules and regulations.

Confidential Information
Each party is entitled to request the other side to provide information relating to the subject of the negotiations, e.g. registration information, articles of association, financial statements, wage payment status, payment status of tax and social security etc. except information involving State secrets and technical secrets of an enterprise. Any commercial secrets obtained during the collective bargaining process shall be kept confidential by the representatives.

Regulation of Conduct during the Collective Bargaining Process

Enterprise

The enterprises are restricted from certain acts during the collective bargaining process. Examples include unreasonably delaying the collective bargaining process and restricting or interfering with the selection of employee representatives etc.

Employees

During the collective bargaining process, the employees are restricted from engaging in conducts including without limitation refusing to participate in collective bargaining by way of work strikes or slow-downs, destroying the enterprise's equipment or tools or violently interfering with the ordinary course of operation.
If the enterprise or the employees violate the above restrictions, they may be held liable under the criminal law or under the public security management regulations.

How to Resolve Collective Bargaining and Collective Contract Disputes?

If disputes occur during the process of collective bargaining, both parties can, among others, agree to apply for mediation or conciliation by submitting a written application to the local Human Resource and Social Security authorities.

Comments

This Draft Regulation is relatively controversial and has raised some concerns from the employers' perspective. Whilst it has attempted to set down a relatively comprehensive mechanism for collective bargaining and emphasized certain restrictions during the process of collective bargaining e.g. strikes, slow-downs, destruction of employers' properties etc. in order to ensure that collective bargaining will be conducted in a peaceful manner, certain requirements appear to be quite sensitive and employers may have hesitation to comply with them from a commercial perspective, e.g. the provision of confidential information relating to its business operation. Although the public consultation period has expired and it is uncertain when the Draft Regulation will be formally promulgated, it is important to pay attention to the legislative development and get prepared for the collective bargaining mechanism to be implemented.