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Labor and employment law challenges in business transformations

Hong Kong

Workforce restructuring

The key practical issues in workforce restructuring include:

  • Legal justification
  • Works council and employee representatives’ process
  • Labor administration process
  • Costs and timing
  • Litigation risk

Applicable legislation

There are no specific legislations dealing with workforce restructuring. However, the Employment Ordinance (Cap. 57) sets out provisions that cover an employer’s obligation when dealing with layoffs and redundancies, namely, providing eligible employees with severance payments (Sec. 31B of the Employment Ordinance).

Required legal justification

There is no specific legal requirement for employers to provide specific reasons for termination if the employees are terminated lawfully with the required notice or payment in lieu of notice. However, if an employee has been employed under a continuous contract for more than 24 months, then the employer’s right to terminate the employee must be in accordance with the reasons specified under Sec. 32K of the Employment Ordinance as follows:

  • The conduct of the employee
  • The capability or qualifications of the employee for performing the work assigned by the employer
  • The redundancy of the employee or other genuine operational requirements of the business of the employer
  • The fact that the employee or the employer or both of them would, in relation to the employment, be in contravention of the law if the employee were to continue in the employment of the employer or were to so continue without that variation of the terms of his contract of employment
    Or
  • Any other reason of substance, which, in the opinion of the court or the Labor Tribunal, was sufficient cause to warrant the dismissal of the employee or the variation of the terms of that contract of employment

Works council/unions or other employee consultation requirements

Consultation requirements with works council/unions

There is no information and consultation requirement or obligation as there are no specific statutory provisions governing the workforce restructuring process. However, in rare case scenario, an employer must fulfill such requirements or obligations if there is an industrial agreement to that effect with the trade unions.

Though the laws of Hong Kong do provide its residents the right to participate in trade unions, participation rates are relatively low. Collective bargaining agreements are not recognized statutorily and are governed by general contractual principles.

Similarly, there are no statutory provisions or specific requirements to inform and consult with works council.

Consultation requirements with other employee representatives

There are no statutory requirements to consult with other employee representatives.

Consultation requirements with employees

There are no statutory requirements to consult with the employees directly; however, it is a leading practice to do so as it concerns the impacted employees. This is particularly the case if the employee’s current role will cease or if the employee will be transferred to a different position.

Approval/notification of the labor authorities or other government authorities

There are no statutory or specific requirements to notify or seek approval of the labor authorities or other government authorities for terminating employees.

Employee selection criteria

There are no legally prescribed employee selection criteria in a workforce restructuring. However, when deciding the selection criteria, to assess which employees would be made redundant (or transferred, etc.), the employer must take due care to confirm that the selection criteria are fair, objective and do not have any discriminatory impact.

For example, when selecting employees to be made redundant, employers should be mindful of the following categories of employees, whereby their termination is unlawful:

  • Pregnant employees
  • Employees taking statutory paid maternity leave or paternity leave
  • Employees taking statutory paid sick leave
    Or
  • Employees who have suffered a workplace injury and are being paid employment compensation

The leading practice is to identify the work areas in which workforce reductions are necessary and select the employees for termination based on an objective criteria relating to their performance, capacity and conduct.

Actions required to limit the negative impact and social plan

There is no statutory guidance on the actions an employer is required to take to limit the negative impact and/or to device a social plan when implementing workforce restructuring; however, employers are encouraged to do all that is possible to limit the negative impact.

In this regard, certain measures (for example, generous ex gratia payments, possible redeployment, issue of reference letters to impacted employees) are recommended by the Hong Kong Labour Department as a leading practice when dealing with terminations. However, these recommendations are encouraged as a matter of guidance only (and not of law) for a smooth transition and to limit the possible disruptions that may be caused to an organization.

Internal alternative employment/redeployment
There is no specific obligation to search for an alternative employment.

Other measures
Currently, there is no specific obligation to adopt a social plan or other such measures.

Estimated timeline

There is no prescribed time frame to fully implement a large-scale redundancy. However, employers should be mindful of the time for severance payments, which is to be paid within two months of the employee’s application for such payment.

Estimated costs

Mandatory costs

The key components of mandatory HR legal costs are as follows:

  • Any amount earned by the employee from the latest date of payment up until the termination date (i.e., salary, commissions, overtime, allowances or expenses)
  • Any accrued unutilized annual leave entitlements
  • Accrued end-of-year payments (or pro-rated, if any)
  • Any payments in lieu of notice if the employee is released from work during the notice period
  • Any payments due under contract
  • Severance payments or long-service payments (as applicable)
  • Accrued sickness allowances (if due)
  • Accrued maternity or paternity leave pay

Customary additional costs

Though not statutorily required, many companies opt to pay its employees an ex gratia payment as a matter of goodwill to assist these employees to limit the negative impact of the redundancies. The amount of this payment will vary depending on the size of the company and the means of the company and its group. There may also be costs associated with redeployment should the company decide to assist the employees in that regard.

Hiring restrictions post-redundancy

There are no statutory post-redundancy restrictions in terms of hiring new employees.

Litigation risk

Interested parties

The interested parties to bring lawsuits would be the impacted employees for reasons such as circumstances, which include unreasonable dismissal and unlawful discrimination (based on disability, sex, race and family status).

Damages and other remedies

Claims could lead to civil remedies (i.e., reinstatement, re-engagement or compensation), as well as criminal sanctions under certain circumstances. Remedies available for the aggrieved can be sourced from both common law and statute.

In dealing with remedies relating to terminations, depending on the type of dismissal, the damages awarded to employees will differ. For example:

  • Wrongful termination (i.e., employee terminated without serving the required notice or not being paid in lieu of notice): The employer’s liability to damages is generally limited to the sum of what the employee would have received during the period when he or she was wrongly terminated and the date on which the contract could have been lawfully terminated.
  • Unlawful termination (i.e., termination prohibited by statute): The employer may be liable to pay statutory compensation and possibly be prosecuted for the offence.
  • Unreasonable termination (i.e., the employee was terminated or the contract can be varied because the employer intends to extinguish or limit any right or benefit conferred by the Employment Ordinance; or the employee was terminated without a valid reason and/or in contravention of one of the prohibited circumstances under the Employment Ordinance): The court could either order for reinstatement or reengagement (i.e., the employee would be re-engaged on terms comparable to original terms or in other suitable terms) or for terminal payments.

Country-specific issues

Statutory redundancy pay (known as severance payments) are only payable if the employee is eligible and he or she applies for it within three months of termination. This severance payment must be paid within two months of the employee’s application. A failure to pay severance pay will attract prosecution of an offence.

Contact

Primary Contact for Hong Kong Labor and Employment Law

Harry HR Lin
Lin and Associates
+852 26293201

Global Labor and Employment Law Guide
Workforce restructuring
2016-07-01
Hong Kong
HK

Contacts