Listed Parent Company Held to be Liable as Joint Employer of its Subsidiary’s Employee Sonia Wong, Special Counsel, Baker & McKenzie ; Venus Man Associate, Baker & McKenzie ; Emma Pugh, Knowledge Lawyer, Baker & McKenzie

Facts

A recent High Court decision in Yung Wai Tak Abraham William v Natural Dairy (NZ) Holdings Ltd (in Provisional Liquidation) (17/08/2020, HCLA26/2018) [2020] HKCFI 2067 (Decision) held that a Hong Kong listed company and its wholly owned subsidiary were joint employers of the appellant whose main job was to serve the listed company as its company secretary. The parent company Natural Dairy (NZ) Holdings Ltd (Natural Dairy), was held liable for, inter alia, unpaid wages, statutory severance payment, payment in lieu of notice, and salary adjustment owed to the appellant by the subsidiary, Nation Resources Limited (Nation Resources).

In coming to its conclusion, the court applied the “overall impression” test set down by the Court of Final Appeal in Poon Chau Nam v Yim Siu Cheung, Poon Chau Nam v Yim Siu Cheung [2007] 10 HKCFAR 156, taking into account all relevant features of the parties’ relationship, including the proper interpretation of the written employment contract, the recruitment process, the services provided by the employee to the companies involved, the employer’s confession, and other contemporaneous documentary evidence.

Background

The case originates from a Labour Tribunal claim. The first defendant, Natural Dairy, is a company established in the Cayman Islands and listed on the Hong Kong Stock Exchange, whose trading has been suspended since 7 September 2010. On 22 December 2016, a Cayman Islands court appointed provisional liquidators (Provisional Liquidator) for Natural Dairy. The second defendant, Nation Resources, is a wholly owned Hong Kong incorporated subsidiary of Natural Dairy, with an issued share capital of only HK$100 and liabilities of hundreds of millions of Hong Kong dollars.

The first claimant, Yung Wai Tak Abraham William, was employed as a company secretary pursuant to a written employment contract entered into between Yung and Nation Resources (the Contract). Yung claimed, inter alia, arrears of salary, payment in lieu of notice, statutory severance payment, and salary adjustment, against Natural Dairy and Nation Resources as joint employers. The second claimant was also contracted with Nation Resources and had similar claims. The Tribunal ruled that Nation Resources was the only employer of Yung and dismissed Yung’s claim against Natural Dairy.

Legal principles

Yung appealed to the High Court on the following grounds: 

1. The Deputy Presiding Officer had not considered that under the Listing Rules the company secretary should be an employee of the listed issuer.

2. The Deputy Presiding Officer had not considered the evidence in statement given by former senior executives of Natural Dairy (“Employer’s Statements”).

3. The Deputy Presiding Officer should not have only considered the appellant’s tax demand notes, MPF records, cheques, and pay slips, but should have also objectively considered all the evidence. In particular, the Deputy Presiding Officer should have considered the background and the funding situation of Natural Dairy and Nation Resources, as the arrangement between the two companies was a sham that aimed to avoid Natural Dairy’s liabilities.

4. The document supporting the adjustment of salary was signed by the Chairman of Natural Dairy and stamped with Natural Dairy’s company chop.

Leave to appeal was granted on 14 June 2019, based on grounds 1, 3 and 4.

In handing down the decision of 17 August 2020, the court held that the Deputy Presiding Officer had made legal errors in her fact-finding process. The court did not interfere with the Deputy Presiding Officer’s finding that Nation Resources was an employer of Yung. However, having regarded all the evidence, the court found that Natural Dairy was a joint employer of Yung and granted Yung relief.

In reaching the conclusion, the court considered the following factors: 

1. Based on the auditor’s reports of Nation Resources and the statement given by the Provisional Liquidator, there was no doubt that Nation Resources had undertaken the liabilities of Natural Dairy and was the “treasury centre of the whole group”. While accepting that such an arrangement was a sham, the court opined that the sham arrangement did not benefit the appellant as it was for the appellant to prove that an employment contract existed between him and Natural Dairy.

2. Under the proper interpretation of the Contract, Yung was employed as company secretary of Nation Resources (not Natural Dairy) and had no obligation to provide services as company secretary to Natural Dairy under the Contract. The fact that Yung was providing such services implied that he was performing the obligations under another employment contract.

3. The provision within the Contract stating that Yung had no other agreements with the group (including Natural Dairy), did not preclude nor prohibit Yung from having a separate employment contract with Natural Dairy.

4. Based on the recruitment process and contemporaneous evidence, the court accepted that the Contract did not accurately reflect all intents of the appellant, Natural Dairy and Nation Resources, and that the appellant was employed as Natural Dairy’s company secretary. This included the fact that: (i) the job advertisement was published in the name of Natural Dairy; (ii) Natural Dairy and Nation Resources shared the same office address and webpage; (iii) Yung was interviewed by the vice president of Natural Dairy (namely the second claimant) who had the authority to negotiate his employment contract on behalf of Natural Dairy; (iv) contemporaneous email correspondence showed that Yung and the senior executives mutually understood that Yung joined as Natural Dairy’s company secretary; (v) Yung’s title as company secretary of Natural Dairy was on his business card; and (vi) Yung’s main duty was to provide services to Natural Dairy. As a member of Natural Dairy’s Hong Kong Management Committee, he handled a substantial amount of work related to Natural Dairy’s resumption of trading, company secretarial affairs, logistics and shipping. 

5. The Provisional Liquidator submitted that Yung was assigned or outsourced to Natural Dairy without providing any proof. The evidence relied on by the Provisional Liquidator, such as Yung’s tax demand notes, MPF records, cheques, and pay slips, only proved that Yung was an employee of Nation Resources. It could not, however, rebut the strong evidence that Yung was mainly providing services to Natural Dairy in the capacity as an employee of the later.

6. The notice regarding the adjustment of salary was signed by three directors of the board of Natural Dairy with Natural Dairy’s company chop. The recipients of the notice included Yung, the second claimant and an employee of Natural Dairy, which reflected that Natural Dairy deemed Yung and the second claimant as its own employees.

7. The then chairman of Natural Dairy once replied to Yung that Natural Dairy was the employer, and the Contract was signed in the name of Nation Resources only for administrative convenience.

8. The Employer’s Statements were taken into account as hearsay evidence in assessing Ground 3. In the Employer’s Statements, various former senior executives admitted that Natural Dairy was an employer of Yung.

9. Appendix 14 of the Corporate Governance Code and Corporate Governance Report of the Listing Rules stipulates that the company secretary should be an employee of the listed issuer. There was a rebuttable presumption that if the reports were silent on any deviation from the code provision, the company secretary would be an employee of Natural Dairy. The Provisional Liquidator was unable to provide any evidence to rebut this presumption. 

Takeaway points for employers and HR practitioners

1. Group companies that share resources for administrative convenience should be mindful of the use of services of employees of an associated entity within the same group, and be careful in regulating the employment relationship within the group. The entity that mainly or substantially uses the services of an employee within the same group may be held jointly liable as a joint employer of that employee.

2. It is important for employers and HR practitioners to ensure that employment documentation reflects the true relationship of the parties. For instance, if it is intended that an employee will be seconded or assigned to provide services to other group entities, this should be clearly specified.

3. An employment contract can be entered into orally, in writing or by conduct. As illustrated in the decision, the court can infer an employment relationship from the background and the conduct of the parties even in the absence of a written employment contract. A joint employer can be held liable for wages and other employee benefits.

4. Failure to classify an individual as an employee correctly can lead to compliance issues including, for example, non-compliance with applicable employment legislation and failure to enrol the employee in and contribute to a mandatory provident fund scheme.

5. Where the employer is a listed issuer and intends not to have an employee of its own to be the company secretary, it should state such deviation and explain it in its interim and annual reports. This serves as a rebuttal of the presumption that the company secretary is an employee of the listed issuer as provided under Appendix 14 of the Listing Rules.