Legal update: Making redundancies during turbulent times

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By Andrea Randall, partner, Gall Hong Kong

In light of the recent economic climate in Hong Kong, especially in relation to COVID-19, employers may consider making redundancies to trim down their workforce. This article examines the legal and practical considerations as well as payments made on termination.

Legal considerations when making someone redundant
An employee is made redundant when the employer either shuts down or intends to shut down their business, or reduces the size of their workforce.

There is no regulatory framework in Hong Kong that governs the fairness of the redundancy process nor are employers required to consult their employees prior to making him or her redundant. Generally speaking, employers are given a free rein on selecting which employees to terminate so long as the employee has not been selected due to discriminatory reasons (for example, due to his disability, gender, race or family status) or where it is unlawful to do so.

The Employment Ordinance (the “EO”) provides that it is unlawful to terminate an employee in the following circumstances:
• Where a female employee employed under a continuous contract of employment has served notice of her pregnancy to her employer (other than in circumstances justifying summary dismissal under section 9 of the EO).
• Where the employee is taking paid statutory sick leave (other than in circumstances justifying summary dismissal under section 9 of the EO).
• Where an employee gives evidence or has agreed to give evidence in enforcement proceedings under the EO or the Factories and Industrial Undertaking Ordinance Cap 59).
• Where an employee has suffered a work-related injury entitling him to compensation under the Employees’ Compensation Ordinance.
• Where an employee is involved in trade union activity.
• Where an employee has a spent conviction or fails to disclose a spent conviction.
• Where an employee is performing or due to perform jury service.

It’s usually ideal to communicate to the employee in an in-person meeting that he or she is being made redundant. At this time, the employee should also be provided with a termination letter and/or a separation agreement.

Practical considerations when making someone redundant
While there is no mandated selection process in Hong Kong, as a matter of best practice, employers should have a process to determine the employees to be made redundant:
• Determine the employer’s business and operational requirements.
• Identify the employees that may be made redundant.
• Have a fair and objective criteria to assess these employees against, for example, work performance and disciplinary record.
• Provide the employee with a termination letter and/or a separation agreement setting out the terms of termination.

Depending on whether the terms of separation can be agreed, this may include a release and waiver clause.It is usually ideal to communicate to the employee in an in-person meeting that he or she is being made redundant. Depending on the circumstances, a member of the HR team and the employee’s line manager may be present at the meeting, or it might be more appropriate to simply have a member of the HR team (particularly if the employer wants to avoid any protracted debate as to the circumstances of the termination). At this time, the employee should also be provided with a termination letter and/or a separation agreement.

It’s difficult to predict how an employee will react so it’s sensible to stay calm, avoid arguments and to deliver the message clearly.

It is difficult to predict how an employee will react so it would be sensible to stay calm, avoid arguments and to deliver the message clearly. It would also be helpful to anticipate what queries the employee may have and to prepare answers in advance of the meeting. Redundancies often affect staff morale, and therefore, employees should be provided an opportunity to discuss any concerns with their manager, and employees should be informed once the redundancy process is over.

Payments made on termination
An employee who has been employed under a continuous contract (defined as an employee working for 18 hours a week for at least four weeks) for at least 24 months is entitled to a statutory severance payment calculated as the lower of two-thirds of the last full month’s salary or two-thirds of HK$22,500, multiplied by the number of years’ of service. The cap on the statutory severance payment is HK$390,000. An employee is not entitled to the statutory long service payment where the statutory severance payment is made to him or her.

It is currently an option for the employer to offset the statutory severance payment with the accrued benefits derived from the employer’s contributions to the mandatory provident fund. The amount offset should not be more than the amount of the statutory severance paid to the employee. Employers should be aware that the government in Hong Kong is looking at changing this offset mechanism in the future so should keep abreast of any developments and seek legal advice where necessary.

Other termination payments could include:
• Contractual payments (such as a discretionary bonus and 13th month payment).
• Statutory payments, including outstanding wages, payment in lieu of notice (if any), pro-rated end of year payment, accrued untaken annual leave, pro rata unaccrued annual leave pay, severance payment, statutory holiday pay, sickness allowance, and maternity leave pay.

The employer should make payment of termination payments (save for the statutory severance payment) within seven days of termination, failing which the employer may face both civil and criminal liability .