Which law should govern employment contracts for work performed in Hong Kong?

This article was written by Peter Bullock.

There are many circumstances in which employees working in Hong Kong enter into employment contracts with foreign governing laws:

• there may be a secondment arrangement where an existing employee of an overseas office is sent to Hong Kong office for a stated (or initial) length of time, and the pre-existing governing law is stated to apply to the secondment agreement. This may be extended for convenience of the parties, sometimes for decades;
• staff relocating from an overseas headquarters may be offered a contract on the headquarters' terms (including choice of law), owing to the familiarity of the headquarters' Human Resources team;
• valued employees venturing overseas perhaps for the first time may request their "home" law as a security blanket; or
• more didactically, particularly in a large group, the deemed employer entity may be incorporated overseas, and the chosen law follows its place of incorporation.

Whatever the reason, unless the employee's terms are "localised" (generally a euphemism for made less generous), often with only grudging employee consent, the foreign choice of law will likely complicate the issue of separation at the end of the employment.

Employment laws, as between different jurisdictions, are amongst the most divergent of any areas of law. Some jurisdictions have decidedly pro-employee laws (notably, France and some other western European states), whilst others (notably the US) offer little or no security of tenure (whilst bringing in regulatory complexity in many aspects). Hong Kong's employment laws are pro-business, which generally favours the employer, but may also enable flexibility which can be used by employees.

Hong Kong is probably unique in permitting (by section 7(1A) Employment Ordinance) both employer and employee to terminate the employment by making a Payment in Lieu of Notice ("PILON"), irrespective of contrary provisions in the employment contract. For employees wishing to take up a more lucrative offer elsewhere (and often with a PILON funded by the new employer), this is attractive.

There are two diametrically opposed authorities as to whether an employee based in Hong Kong but with an employment contract governed by overseas law, may take advantage of section 7(1A) to make a PILON. In HSBC -v- Wallace [2008] a senior employee had been recruited by HSBC in England for immediate secondment to Hong Kong. His employment had its closest and most real connection to Hong Kong. His contract was governed by English law, which has no equivalent of section 7(1A). After three years in Hong Kong the employee resigned and tendered a PILON, moving to a competitor. HSBC sued, obtaining an injunction to prevent Wallace from working for the competitor on the basis that he was not permitted by English law to make a PILON. Wallace argued that section 4 of the Employment Ordinance (which states the Ordinance applies to every employee engaged [in Hong Kong] under a contract of employment), imported the section 7 PILON process into his contract. Deputy Judge Gill held that there was a presumption that English and not Hong Kong law was to be applied in establishing the parties' rights and this was not overridden by section 70 of the Employment Ordinance, which states:

The other case is Cantor Fitzgerald Europe -v- Boyer [2012]. Boyer's circumstances were almost identical to Wallace's: hired in London; English law contract (with no employee right to make PILON); seconded to Hong Kong; years later employee submits PILON. The only different feature was that Boyer's secondment letter stated that any "mandatory employment law of Hong Kong" would apply. Reyes J, having considered HSBC -v- Wallace, considered himself not to be bound by the judgment of the Deputy Judge in the earlier case and held that an express governing law clause was not capable of overriding the protections given to employees under the Employment Ordinance by virtue of section 70.

Although Reyes J heard arguments that employees might take the opportunity of a short secondment to Hong Kong to take undue advantage of section 7 Employment Ordinance, the legislative intent of the Employment Ordinance is clear, and most of the Employment Ordinance is to be regarded of mandatory application to employment performed in Hong Kong. In the absence of any clarificatory ruling or appellate decision since the case against Boyer, there remains uncertainty in this area.

It is normal for employers and employees to seek to avoid post termination disputes using a separation agreement. Where two or more governing laws are brought into play, this inevitably complicates matters. It may be that there is one contract, with a non-Hong Kong governing law. Alternatively, the itinerant employee may have had a number of successive contracts within the same group, with more than one governing law between them. It is a brave lawyer indeed who will draft a separation agreement on the assumption that the laws of a single jurisdiction will govern the entire series of relationships. What happens in practice is that the employee is required to waive claims in each of the relevant jurisdictions. This will likely entail schedules of discrimination waivers and long service benefits for each jurisdiction. The costs of paying out or compromising all these claims can also amount up.

Where there is an employer which is an overseas group company, careful consideration needs to be given as to whether the employee's restrictive covenants will be fully actionable. If an outgoing employee covenants not to solicit or provide services to the customers of the employer, the employer will not benefit if the employee's habitual customers are contracted to the Hong Kong operating company rather than the employer entity. If faced with this problem the employer might have an uphill struggle in demonstrating loss suffered by the employer. The employer can contract as agent for other group members, but this increases the possibility of the Court finding fault with post termination restrictions as reaching further than the minimum required by the employer.

There are often other attendant complexities along with diversity of the chosen governing law.

Pension schemes

An itinerant employee may wish to keep up a pension scheme entered into in his/her "home" jurisdiction. Assuming the scheme is qualifying, and sufficient payments continue to be made into such scheme, the employee may avoid having to join a Mandatory Provident Fund Scheme covering the employment in Hong Kong.

Continuity of employment

When calculating the reasonable period for long service benefits, consideration must be given as to the earliest date of the employment. Where a new employment with a new employer is undertaken, which does not expressly provide continuity of employment, the chain of employments may be broken. However, where successive employments are undertaken within the same group of companies, continuity may be preserved. Again, this may be a cause of complexity when drafting a separation agreement.

Repatriation right (and expenses)

One of the most contentious matters arising out of intra-group cross border employments is the "right of return". Whilst not dependent upon choice of law, the arguments often go hand in hand with the other complexities to be dealt with on a separation agreement.

In a secondment arrangement, the expiry of a secondment will likely not constitute termination of the underlying employment. The employer, however, may not have a role for the employee in the seconding jurisdiction. Arguments may be compounded if, for example, a secondee (single at the time of the original secondment), has acquired a spouse and children, pets and two 40 foot containers of possessions (to say nothing of the family car) – all wanting to be transported home business class. And then there are the quarantines.

Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".