Introduction

In the sophisticated landscape of Hong Kong’s financial services sector, remuneration structures often deviate from traditional fixed-salary models, favouring performance-linked incentives. A recurring and potentially contentious issue within this framework is the legal characterization of commission-only contracts under Hong Kong labour law. When the employment relationship between financial institute and its key personnel deteriorates, the question of what constitutes “wages” can become a pivotal legal determination that governs claims for constructive dismissal and payment in lieu of notice.

The recent judgment of the Court of First Instance (“CFI”) in Caidao Capital Ltd v Harmen Christiaan Overdijk and Others [2026] HKCFI 1326 provides clarity on these matters. The CFI was required to determine whether employees who receive no fixed salary, but instead receive monthly advances against future commission entitlements, are afforded the same statutory protections as traditional salaried employees. This decision offers guidance on how payment in lieu of notice is calculated in purely performance-based roles and serves as a significant warning to employers who seek to withhold earned commissions pending the “satisfactory” completion of audits.

Factual background

The dispute involved two investment managers, Mr Overdijk (“D1”) and Mr Lamaison (“D2”) (collectively “Employees”), who joined Caidao Capital Limited (“Employer”) in September 2014 to establish a wealth management division known as “Caidao Wealth”. Under the term of their employment agreements (collectively “Employment Agreements”), the Employees were “wholly responsible for the financial costs” of the new business unit and their remuneration was “solely commission based and not fixed”.

This remuneration was governed by a Transaction and Fee Revenue Share (“TFRS”) formula. Under the initial “90/10 split” set out in an addendum to their Employment Agreements, 90% of the revenue generated by the clients they serviced was credited to their business unit. After deducting associated costs, the remaining net income was to be shared equally between the two Employees. To provide regular cash flow during their employment, the Employer agreed in April 2015 to pay each of the Employee a monthly advance of HK$100,000, which was intended to be set off against their final TFRS entitlements.

By 2016, the relationship between the parties became strained as the Employees prepared to establish their own venture. In early 2016, the Employer’s CEO proposed a variation of the revenue split from 90/10 to 80/20, citing concerns over regulatory compliance and corporate governance. While the Employees initially resisted, the CFI ultimately found that the 80/20 split was validly agreed during a management meeting on 21 April 2016.

Tensions escalated in late 2016 when the Employer informed the Employees that final TFRS payments would only be released upon the “satisfactory completion of independent audits”. Simultaneously, the Employer stopped paying the monthly HK$100,000 advances. On 2 February 2017, asserting that the suspension of these payments constituted a fundamental breach of contract, D1 claimed constructive dismissal and terminated his employment. D2 also sought to terminate his contract by offering payment in lieu of notice, requesting that this amount be set off against the TFRS he believed CCL owed him. The Employer contested their terminations, claiming that without a fixed salary, the Employees earned no “wages” and, thus, lacked the statutory rights associated with wage-earners.

The statutory definition of “wages”

A threshold issue before the CFI was whether commission-based earnings and monthly advances qualify as “wages” under the Employment Ordinance (Cap. 57) (“EO”). The Employer’s primary argument was that as the Employee’ remuneration was entirely contingent on TFRS and the monthly HK$100,000 payments were designated as “advances”, it did not constitute “wages” under the meaning of the EO.

The CFI rejected this narrow interpretation, where section 2 “wages” is broadly defined as:

“...all remuneration, earnings ... commission ... however designated or calculated, capable of being expressed in terms of money, payable to an employee in respect of work done...”.

The CFI emphasized that the law prioritizes substance over designation. As the TFRS was the primary remuneration for the work performed by the Employees, it fell squarely within the statutory definition of wages. Furthermore, the monthly HK$100,000 payments, regardless of their label as “advances”, were paid consistently for over 20 months in exchange for ongoing employment services.

The CFI found the Employer’s legal position to be internally inconsistent, noting that the Employer had contemporaneously demanded “wages in lieu of notice” from the Employees via its solicitors. It is logically unsustainable for an employer to claim that an employee earns no wages whilst at the same time seeks a remedy based on the “rate of wages” for a notice period.

The right to claim constructive dismissal

Under common law, an employee may terminate without notice where the employer’s conduct amounts to a repudiatory breach going to the root of the employment contract.

Under section 10A (Deemed termination of contract under section 7) of the EO, an employee is entitled to terminate his employment contract without notice or payment in lieu of notice if wages remain unpaid within one month from the day on which they become due to him under section 23.

In D1’s case, the CFI ruled that by February 2017, the Employer had failed to pay the January advance and had withheld outstanding TFRS without valid justification. The Employer attempted to justify this withholding by relying on the “Complyport Report”, which allegedly identified certain compliance shortcomings. However, the CFI ruled that:

1.      The parties had not established a clear agreement that passing an audit was a condition precedent to earning the TFRS; the relevant communications primarily addressed the timing of payment.

 

2.      Even if such a condition had existed, the Complyport Report did not constitute an “independent audit” as the Employer’s management had actively influenced its focus and findings to bolster its litigation position.

 

Since the monthly advances constituted wages and the Employer had no right to withhold them, the cessation of payment was a clear breach of an essential term of the Employment Agreement. Consequently, D1 was legally justified in treating himself as constructively dismissed.

Termination by payment in lieu for commission-based roles

The CFI also addressed D2’s attempt to terminate his employment by making payment in lieu of notice. The Employer contended that this statutory mechanism was unavailable to him as, in the absence of a fixed salary, there was no “rate of wages” to facilitate the calculation.

The CFI dismissed this argument, affirming that the right to terminate via payment in lieu is a statutory right that cannot be extinguished by the complexity of an employee’s remuneration structure. For purely commission-based roles, the “wages” for the calculation must be derived from the contractual commission formula.

The CFI clarified several important principles regarding this mechanism:

·           Calculability: The TFRS provided a specific, non-discretionary method for calculating earnings based on documented revenue and costs.

 

·           Employer discretion: While the contract allowed the Employer to determine the “timing” of payments in a dispute, it did not grant the Employer the discretion to simply refuse to make a determination as a means of avoiding its notice obligations.

 

·           The set-off principle: An employee is entitled to have the amount owed for the notice period set off against any outstanding commission balances owed by the employer.

The failure of the Employer’s “independent audit” defence

A critical aspect of the judgment was the CFI’s treatment of the Complyport Report. The Employer argued that the Employees’ right to their final TFRS was contingent on a “satisfactory” audit. The CFI’s rejection of this defence turned on the definition of “independence”.

The CFI found that an independent audit must be conducted by an external third party impartially, where the entity being audited does not control the narrative or influence the findings. The evidence revealed that the Employer’s CEO had:

·           provided “proactive suggestions” regarding which deficiencies should be included in the report.

 

·           explicitly requested that the word “independent” be added to the draft description of the audit; and

 

·           coordinated with the auditor to ensure the report was ready for use as evidence in the Labour Tribunal.

 

The CFI held that as the Employer had “blinkered” the auditor’s focus toward negative results to enhance its litigation prospects, the report lacked the necessary independence. Therefore, the Employer could not rely on the audit’s findings to deny the managers their earned commissions.

Takeaways

The CFI’s decision in Caidao Capital Ltd reinforces the principle that commission-only structures do not exempt an employer from the statutory requirements under the EO. Whether an employee receives a modest fixed salary or a significant fluctuating monthly advance, their right to be paid promptly and their right to terminate the contract in accordance with the law remain protected. For firms, the lesson is clear: transparency in commission calculations and integrity in the audit process are not merely best practices, but strict legal requirements.

The Caidao Capital Ltd case serves as a vital touchstone for the financial sector, emphasizing that statutory employment rights are non-negotiable, regardless of the specialized nature of a role or the complexity of the pay structure.

1.      Commission and advances are wages: Any regular remuneration for work performed – even if structured as a draw against future earnings – will likely be classified as “wages” under the EO. Withholding such payments for more than one month from the day on which they become due to him under section 23, EO gives the employee a statutory right to claim constructive dismissal.

 

2.      Clarity in documenting variations: Any variation to a commission structure or the imposition of post-employment conditions (such as audits) should be clearly documented with unequivocal and express language.

 

3.      Notice obligations are reciprocal: Employees on commission-only contracts retain the right to terminate their contracts by payment in lieu of notice.

 

4.      The integrity of the audit process: If a commission payout is genuinely conditional on a “satisfactory audit”, the employer must allow the auditor to function without interference. Attempting to influence an audit to avoid contractual obligations is likely to be viewed by the Court as an opportunistic attempt to evade liability.

 

As always, if it doubt, it is advisable to seek legal advice.

 

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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.

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