Can a benefits policy to pay employees ex gratia or voluntary payments acquire contractual status by custom and practice?
Introduction
Employer
companies may have benefits policies to help attract and retain talents. They
can come in many forms, such as year-end bonus or ex gratia payment, travel benefit, retirement benefit and so on.
These policies may be expressly stated in their employee handbook or
implemented without anything in writing. Whilst employer companies may consider
that some of their benefits policies (for example, ex gratia payment) do not form part of the employment contracts and
they intend to provide these benefits at their absolute discretion, can these
policies acquire contractual status by custom and practice?
When
will an employee benefits policy
acquire contractual status?
An
employee benefits policy may acquire contractual status by:
1.
incorporation by custom and
practice; and
2.
variation of contract.
In
addition, an employer may be estopped by convention (i.e. estoppel by convention) from not providing an employee ex gratia payment or other benefits if
there is a common assumption between the parties for the employer to do so.
Incorporation
by custom and practice
Albion Automotive Ltd v Walker
In Albion Automotive Ltd v Walker
[2002] EWCA Civ 946, the English Court of Appeal (“English CA”) explained when an employee benefit policy may be incorporated
into employment contracts by custom and practice.
Between
1990 and 1994, there were six redundancy exercises. The employer paid the
redundant employees enhanced redundancy payments, which were more than their statutory
entitlements. In 1999, 22 employees were made redundant but they did not
receive enhanced redundancy payments. They claimed that they were entitled to enhanced
redundancy payments on the grounds that the enhanced terms had been
incorporated into their employment contracts by custom and practice. The
employer maintained that the enhanced terms only applied to the six previous
redundancy exercises.
The
English CA ruled that a number of factors are important in assessing whether a
policy originally produced by management has acquired contractual status, including:
1.
whether the policy was drawn to the attention of employees;
2.
whether it was followed without exception for a substantial
period;
3.
the number of occasions on which it was followed;
4.
whether payments were made automatically;
5.
whether the nature of communication of the policy
supported the inference that the employers intended to be contractually bound;
6.
whether the policy was adopted by agreement;
7.
whether employees had a reasonable expectation that
the enhanced payment would be made;
8.
whether terms were incorporated in a written
agreement; and
9.
whether the terms were consistently applied.
The English CA held
that the employer was contractually bound after considering, among others, the
following factors:
1.
The policy was reduced in writing and was the outcome
of high profile negotiations with trade unions (although not expressly incorporated
in the contracts of employment) and introduced after a period of protracted
negotiations. However, in later exercises, the enhanced terms were simply
applied without reference to negotiations with trade unions.
2.
The policy was subsequently applied to further
redundancy exercises.
3.
Availability of the enhanced redundancy terms were
drawn by the employer to the attention of all employees in writing at the time
of each redundancy exercise and were well known among employees.
4.
The policy was followed for extensive period of
time.
5.
The policy was followed for six redundancy
exercises.
6.
All employees had a reasonable expectation that
enhanced redundancy payments would be made.
Chong Cheng Lin Courtney v Cathay Pacific Airways
Ltd (CFI)
Is
the English CA’s decision in Albion
Automotive applicable in Hong Kong? In Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd [2009]
HKEC 2073 (CFI); [2011] 1 HKLRD 10 (CA), the Hong Kong Court of First Instance
(“CFI”) considered Albion Automotive.
In
1979, Chong commenced employment with Cathay Pacific as a cabin attendant. In
1991, Cathay Pacific issued an employee handbook containing a retiree travel
benefit (“RTB”) policy. In 1993, Chong’s
employment was terminated but she was not given RTB. She claimed RTB on the
grounds that RTB had been incorporated by custom and practice. Cathay Pacific maintained
that the handbook was not part of the employment contract. In any event the
incorporation of the RTB policy was not supported by consideration.
The
CFI considered Albion Automotive and
concluded that the RTB terms had been incorporated by custom and practice since:
1.
an employee handbook generally contains terms intended to be
contractual;
2.
the RTB policy had been followed for a substantial period; and
3.
Chong was made aware of RTB shortly after she commenced employment.
The
CFI held that the incorporation of the RTB policy was supported by
consideration as RTB was a reason why Chong decided to remain as an employee.
Variation of contract
Chong Cheng Lin Courtney v Cathay Pacific Airways
Ltd (CA)
Cathay
Pacific appealed against the CFI decision and the case went to the Court of Appeal
(“CA”). The CA reached the same
decision (i.e. Cathay Pacific was required to provide Chong with RTB) but via a
different route.
The CA considered that “custom and practice” was
not in issue as the RTB “custom” did not exist in 1979 when Chong commenced
employment with Cathay Pacific.
For
the same reasons that the CFI found the RTB terms had been incorporated by
custom and practice, and given that the handbook spelt out the eligibility
requirement of RTB, the CA considered the employment contract had been
varied to include the RTB terms. If there were other circumstances under which
RTB should be withheld or if RTB was intended to be discretionary, Cathay
Pacific could have easily specified this in the handbook but Cathay Pacific did
not do so. The CA also considered that the consideration
requirement was satisfied by Chong as she remained as an employee.
Estoppel
by convention
Chong Cheng Lin Courtney v Cathay Pacific Airways
Ltd (CFI and CA)
Estoppel
by convention was relied on by Chong as an alternative basis to claim RTB.
However, since both the CFI and CA ruled in her favour, it was unnecessary for
the court to consider this issue.
Tung Woon Hing Candice v Cathay Pacific Airways Ltd
[2022] HKCU 1430
In
this recent Hong Kong CFI decision, estoppel by convention was relied on as the
sole ground for claiming ex gratia
payment.
Cathay
Pacific had a long practice of paying employees an extra sum at year end (referred
to as “year-end bonus” or “ex gratia
payment”) over the past 30 years except 2001. This extra sum was also paid to
employees retiring after June in that year. The claimants retired as cabin crew
in late 2017. Cathay Pacific then announced that an ex gratia payment of one-month’s salary would be paid only to
employees who were on the payroll on 31 December 2017. The claimants were
therefore not entitled to the 2017 ex gratia
payment. The claimants argued that because of the long established practice
of paying an extra sum even to employees retiring after June but before year
end, Cathay Pacific was required to pay the 2017 ex gratia payment to them.
The
Labour Tribunal took the view that the key element of estoppel by convention is
a common assumption between the parties and ruled that there was no common
assumption that Cathay Pacific would pay the 2017 ex gratia payment to the claimants because:
1.
from the Internal Guideline for the 2017 ex gratia payment, the requirements of being in service as at 31
December 2017 was a criterion for receiving the ex gratia payment;
2.
the rationale was to incentivise serving employees to stay with the
company;
3.
Cathay Pacific did not make any assurance that retired employees would
be entitled to the 2017 ex gratia
payment; and
4.
the Internal Guidelines for the 2008 and 2009 ex gratia payments stated that the payment was made at Cathay
Pacific’s absolute discretion (Cathay Pacific paid the usual “year-end bonus” of one month’s salary in all other years except 2001, 2008 and 2009 in the 30-year period).
The
claimants appealed to the CFI.
The
CFI stated that the requirements of estoppel by convention are as follows:
1.
the parties must enter into some legal relationship on the basis of a
shared assumption of fact or law;
2.
the content of the common assumption must be sufficiently certain to
enable the court to give effect to it;
3.
the assumption must have been communicated between the parties and acted
upon;
4.
there must be an attempt by one party to depart from the common
assumption which departure would be unjust; and
5.
the other party would suffer detriment arising out of his having entered
into the relevant transaction on the basis of the common assumption.
The
CFI held that the Labour Tribunal was entitled to conclude that there was no
common assumption as it did and dismissed the appeal accordingly.
Takeaway
From
an employer’s perspective, if the employer wants to provide employee benefits
at his absolute discretion and without being contractually bound to do so, then
the employer should clearly state in writing that the benefits are to be made
at his absolute discretion, where the employer reserves the right to withhold
such benefits should he want to do so. The court may find an employee benefit policy
had been incorporated into an employment contract by custom and practice if the
policy was clearly communicated to the employees in writing and it has been followed
for a substantial period: Albion Automotive.
Alternatively, the court may find an employee benefit policy had been
incorporated into an employment contract by variation of contract: Chong Cheng Lin Courtney.
Employers should review their discretionary
employee benefits policies from time to time to ensure that they still maintain
their control and discretion over them, and such policies have not unwittingly
acquired contractual status. Employers are advised to seek proper legal advice
and assistance when reviewing them.
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Important: The law and
procedure on this subject are very specialised and complicated. This article
is just a very general outline for reference and cannot be relied upon as
legal advice in any individual case. If any advice or assistance is needed,
please contact our solicitors. |
Published by ONC Lawyers
© 2022 |