Issue: October 2012

Editor: Tim Darby | European Editor: Paul Callaghan | Latin America Editor: Juan Carlos Varela | Canada Editor: Gilles Touchette | Asia and Oceania Editor: Ute Krudewagen

Hong Kong

Court of Final Appeal Issues Important Judgment about Annual Leave

Jennifer van Dale and Rashi Narayan, Baker & McKenzie, Hong Kong

Certain allowances and commissions should be included in addition to basic salary when calculating statutory annual leave pay and statutory holiday pay, the Hong Kong Court of Final Appeal ("CFA") has held.¹ The CFA also held that any contractual annual leave granted by the employer which is beyond the statutory minimum ("Additional Annual Leave") is subject to the statutory annual leave provisions in the Employment Ordinance unless the contract stipulates otherwise. The Employment Ordinance governs the method for calculating payment of annual leave and regulates accrual, carry forward and payment in lieu entitlements. For example, under the Employment Ordinance, employees cannot take statutory annual leave during the first year of employment, and employers can determine when employees take annual leave. Criminal penalties apply to employers who do not grant annual leave in the timeframe required by the legislation.

Cathay Pacific Airways Ltd ("Cathay") had been in dispute with a number of its employees on its calculations relating to (i) statutory annual leave pay and statutory holiday pay and (ii) Additional Annual Leave. The dispute and the decision primarily concern leave pay as calculated under the Employment Ordinance as it stood prior to changes made in 2007. This is still relevant as there is a 6-year limitation period to recover a shortfall in statutory payments, therefore employees can still make a claim under the old rules until July 2013. The decision regarding Additional Annual Leave will be relevant going forward.

This decision also means that employers can continue with different rules for Additional Annual Leave and statutory minimum annual leave only if those rules are set out in writing within the employment contract or a contractual policy. If the rules are not so set out, the Additional Annual Leave will be subject to the same rules that apply to statutory annual leave under the Employment Ordinance (described above).

¹Cathay Pacific Airways Ltd –v- Kwan Siu Wa Becky and Others (26/09/2012, Facv5/2012).

Terminations Are to Be Reviewed by Courts Based on Totality of Circumstances Rather Than Just on Employer’s Dismissal Letter

Jennifer van Dale and Rashi Narayan, Baker & McKenzie, Hong Kong

When considering whether an employer has dismissed an employee in breach of contract, the overall picture leading to dismissal and events immediately after will be analyzed by the courts in addition to any letter of dismissal, the Hong Kong Court of Final Appeal ("CFA") has confirmed.¹

In this case, the plaintiffs were airline pilots employed by Cathay Pacific Airways Ltd and its subsidiaries ("Cathay"). The pilots had been in dispute with Cathay over rostering practices and benefits, and ultimately in July 2001, Cathay dismissed the pilots by letter, which terminated their employment by giving three months' pay in lieu of notice. The dismissal letters did not refer to any disciplinary issues. The pilots brought claims for wrongful termination (in addition to other claims) on the basis that the underlying cause for dismissal was in essence a disciplinary matter, which meant that Cathay was in breach of contract for failing to follow the disciplinary procedure appended to their contracts of employment.

Cathay sought to argue that because the dismissal letters did not refer to any disciplinary issues, the contractual disciplinary procedures were not triggered. The CFA held that the overall picture was relevant and that public statements about misconduct by the pilots made the day after the dismissals could not be seen as separate from the dismissals. The pilots were awarded one additional month of pay for wrongful termination due to Cathay's failure to follow the disciplinary procedure prior to dismissal.

In Hong Kong an employer can serve notice of dismissal on an employee without providing a reason for the dismissal. An employee with two years of service is protected from dismissal without a "valid reason" but there is no requirement to set out the reason in any dismissal letter. The reason for dismissal becomes relevant only if the employee brings claims against the employer such as for unreasonable termination or wrongful termination.

¹Blakeney-Williams and Cathay Pacific Airways Ltd [FACV No. 13 of 2011].