Termination Without Notice: The Legal Implications of Payment in Lieu of Notice in Employment Contracts
Key Takeaways:
- Employers should carefully draft employment contracts and understand the implications of different termination methods on employee entitlements. If it is intended that a payment in lieu of notice will effect an employee’s rights under various schemes and benefits this should be clearly spelt out in the contact or the policy regarding such benefits.
- A payment in lieu of notice is a termination of the employment without notice. However, it is not a summary dismissal and employment documentation should not conflate the concepts.
- To ensure employees understand the different concepts and the effect of a payment in lieu of notice employers can give examples to its employees of the different concepts which will help avoid legal proceedings.
Introduction
In the recent case of Lo Wai Keung v Hannover Ruck SE, the Hong Kong Court of First Instance clarified important principles concerning the termination of employment contracts by payment in lieu of notice. The dispute centred on whether such a termination amounted to a termination without notice, which was decisive for determining an employee’s entitlement to share awards. The court’s judgment examined the language of the relevant statutory provisions, the parties’ contractual arrangements, and the guiding case law from both Hong Kong and England.
Background
Mr Lo was employed by Hannover Ruck SE (“Hannover”) and his employment was terminated by a letter dated 10 December 2020. Although the letter indicated that his employment would end on 31 December 2020, Hannover opted not to require Mr Lo to work his six-month notice period. Instead, it made a payment in lieu of notice, citing performance and conduct issues. Mr Lo challenged his termination, arguing that the employer’s approach had wrongly deprived him of share award entitlements granted under the company’s scheme.
The Share Award Scheme
Under the terms of the share award scheme, an employee retained the right to payment of the value of allocated share awards following the expiry of a vesting period, unless the termination was based on “extraordinary cancellation without notice” arising from an employee’s conduct. Hannover asserted that Mr Lo’s dismissal fell within that provision, thereby disentitling him to the value of the shares.
The Labour Tribunal found that Mr Lo was dismissed for issues related to his conduct, and that because he did not work out his notice period, he was not entitled to the share awards. On appeal, Mr Lo argued that a dismissal effected by a payment in lieu of notice ought not to be equated with a dismissal without notice.
The Court’s Analysis
In determining whether Mr Lo’s employment termination should indeed be viewed as “without notice,” the court examined sections 6, 7, and 9 of the Employment Ordinance. These sections distinguish between terminating an employment contract by giving notice, making a payment in lieu of notice, and summarily dismissing an employee without notice. Crucially, the court also noted that section 7 provides a statutory basis for making a payment in lieu of notice under Hong Kong law.
The court drew guidance from the principles set out in the cases of Gothard v Mirror Group Newspapers Ltd and Delaney v Staples, both English court decisions. In Gothard, the payment in lieu was deemed damages for breach of contract, rather than wages, thereby indicating that if an employee is dismissed without being asked to serve the notice period, the payment is not for work performed but rather compensates the employee for the notice that was not given.
Similarly, in Delaney v Staples, Lord Browne-Wilkinson explained that a payment in lieu of notice is not considered wages, as it is not remuneration for work done under the contract of employment. Instead, it is a payment to extinguish any claim for damages for wrongful dismissal. In both cases, the courts distinguished between wages for services rendered and payment for the employer’s decision to dispense with notice altogether.
Applying these principles, the Hong Kong court reasoned that if termination by payment in lieu was to be treated as “with proper notice,” there would be no contractual breach and thus no need for compensatory payment. The presence of such a payment, however, signalled that proper notice was not served, and the payment was instead a substitute for the notice period. As a result, this arrangement was best characterised as a dismissal without notice, placing Mr Lo’s termination within the clause of the share scheme that disentitled him to the awards.
Implications of the Decision
The outcome underscores the significance of careful drafting in employment contracts. Employers must anticipate that choosing to make a payment in lieu rather than requiring an employee to serve the notice period may affect entitlements such as share awards or other benefits, especially if the scheme’s language links certain employee rights to the reason for termination and the manner in which it is effected. Employees, for their part, should remain alert as to how clauses governing share entitlements might be interpreted, particularly if the employer prefers to terminate the relationship immediately.
In summary, the court’s judgment reinforces that a payment in lieu of notice, although permissible under Hong Kong law, effectively results in an immediate termination “without notice.” This can have a material effect on an employee’s contractual rights, as demonstrated by the denial of the value of Mr Lo’s share awards.
