Case reveals how employer's actions completely undermined its own policy claims
A Hong Kong court recently dealt with a significant employment law case involving disputed end-of-year payments for four workers who left their employment in 2023.
The case centred on whether these payments were contractual entitlements or discretionary bonuses that the employer could unilaterally modify through policy changes.
The workers argued that their end-of-year payments were contractual rights based on their employment agreements and the company's historical practice of making these payments automatically.
They contended that despite policy changes in 2003 and 2020 that attempted to characterise the payments as discretionary, their original contracts established these as guaranteed entitlements.
The workers maintained that the employer lacked the power to unilaterally strip away these contractual benefits through policy amendments.
The dispute involved four workers with different employment histories within the same company. The first worker started her employment in August 1993, making her the longest-serving employee with over 30 years of service.
Her original employment contract stated she was "entitled to have one month's end of year payment on completion of a full payment period (from January 1 to December 31). Pro-rata payment will be given for an incomplete year of services, if only that you have worked till the last date of the payment period."
This first worker's contract included a management rights clause providing that "[The company] reserves to have the right to cancel, modify, or amend the aforesaid rules and regulations, policies, and benefits. When changes are made and announced, the old ones should cease to be in force and automatically be superseded by the new measures." The court noted that this clause did not use explicit language about unilateral changes, observing that "no such word as 'unilateral' or 'unilaterally' was used."
The other three workers began their employment in 2004, 2013, and 2018 respectively. Their contracts contained similar end-of-year payment provisions but with additional restrictions, specifying that if workers resigned "within the payment period, you will not be entitled to have end of year payment."
Their contracts also included a broader disclaimer stating that "All payments, except basic salary as stated under Item 1 of this Employment Letter as well as reimbursements, are purely gratuitous and are paid by [the company] at its absolute discretion."
The employer made two significant policy changes attempting to characterise these payments as discretionary. In May 2003, the company revised its Staff Handbook declaring that "End of year payment is gratuitous and paid by [the company] at its absolute discretion."
In December 2019, the employer issued another policy effective in 2020, stating that "The discretionary end of year payment is gratuitous in nature. [The board of directors of the company] has the sole discretion to decide whether to distribute the End of Year Payment, depending on [the company's] performance or other factors which [the Board] consider reasonable."
The Labour Tribunal examined whether these payments were contractual or discretionary by looking beyond written terms to actual workplace practices.
For the first worker, whose contract predated the policy changes, the tribunal found the contractual nature was clear. The tribunal noted that even if her contract's variation clause had been valid, the 2003 policy change "did not purport to amend any contract unilaterally."
For the three other workers, despite their contracts labelling certain payments as "gratuitous," the tribunal applied established legal principles that contractual labels are not always decisive.
The Deputy Presiding Officer explained that "the label of 'contractual' or 'discretionary' was not determinative" and examined the actual implementation of these payments over the years.
The tribunal heard crucial evidence from the employer's former directors, who had resigned in 2023. These former directors provided testimony about the company's actual practices before the 2020 policy change.
Their evidence proved decisive, as they admitted that before 2020, the employer "did not exercise any discretion in granting the end-of-year payments and even did not differentiate between contractual and discretionary end-of-year payments in the employees' contract."
Based on this evidence about actual workplace practices, the Deputy Presiding Officer found that "as a matter of fact, the end-of-year payments were contractual" for all four workers.
The central legal question became whether the employer possessed the power to unilaterally change these contractual terms through policy amendments. The tribunal examined the variation clauses in both sets of employment contracts to determine if they granted such broad powers to the employer.
The Deputy Presiding Officer applied the legal test from Wandsworth London Borough Council v D'Silva, a Court of Appeal decision that established clear principles for contractual variations in employment.
She quoted the key principle: "The general position is that contracts of employment can only be varied by agreement. However, in the employment field an employer or for that matter an employee can reserve the ability to change a particular aspect of the contract unilaterally by notifying the other party as a part of the contract that this is the situation. However, clear language is required to reserve to one party an unusual power of this sort."
The tribunal found that neither contract clause met this "clear language" standard. The Deputy Presiding Officer concluded that "any variation had to be made by mutual agreement or lawful means, and cannot be effected unilaterally by inserting variations into the contract or handbooks, because for [the Defendant] to have power to do so, the words must be clear and precise."
The employer argued that the workers had accepted the contractual variation through continued employment and failure to object to communications describing payments as discretionary. Between 2020 and 2022, the employer sent emails and issued payslips describing the payments as discretionary.
However, the tribunal rejected this argument, with the Deputy Presiding Officer reasoning that "continuing to work in such circumstances did not mean acceptance of the variation" because the payments continued to be made during this period.
The employer challenged the Labour Tribunal's decision through an application for leave to appeal to the High Court. The company argued that the tribunal had failed to consider relevant statutory provisions including sections 11A and 11AA, and case law such as Bruce Gordon Hut v Special Assets Ltd. The employer also complained that the tribunal should have conducted further investigations.
The Deputy High Court Judge dismissed these complaints, stating that "the Labour Tribunal (as any other Court) does not have to deal with each and every point raised" and that "absence of mention of certain points did not mean that she had not considered those points."
The judge found that even if the tribunal had specifically mentioned these authorities, the outcome would have remained the same because the fundamental legal analysis was sound.
The judge also rejected arguments about insufficient investigation, reasoning that additional questioning would not have changed the outcome. He stated: "What [the Defendant] actually considered was a matter of fact which would not be changed by any handbook it wrote."
The High Court confirmed the tribunal's contractual interpretation, noting that regardless of whether the variation clauses were considered too wide, the legal principle from Wandsworth London Borough Council v D'Silva remained applicable.
The High Court rejected the employer's appeal application entirely. The Deputy High Court Judge concluded: "In the premises, I am not satisfied that the intended appeal is arguable. I dismiss [the Defendant's] application for leave to appeal against the Award, with no order as to costs."
This decision confirmed that all four workers were entitled to their end-of-year payments for 2023, despite having left their employment during that year.
The court's reasoning established that employers cannot easily convert contractual benefits into discretionary ones through unilateral policy declarations.
The judge noted that the tribunal's factual findings about both the contractual nature of the payments and the lack of effective variation "remain unscathed."
