Cross-border employment between Hong Kong and Mainland China

With the close economic and trade ties between Mainland and Hong Kong, cross-border employment arrangements are common for Hong Kong employees. These employees will often spend a considerable amount of time in Mainland and they may incur expenses that are subject to reimbursements by the employer.

The Alcohol Countermeasure Systems case

In Alcohol Countermeasure Systems (HK) Limited & Anor v Li Chi Kong, Peter [2023] HKCFI 227, the Court of First Instance (“CFI”) heard a claim by two former employers for repayment of reimbursements already made to a former employee for his expenses incurred when he worked in Mainland.

The 1^st plaintiff employer (“HK Employer”) summarily dismissed the defendant employee (“Employee”) because the Employee did not respond to its request to provide certain information in relation to various expenses incurred by the Employee that had been reimbursed by the 2^nd plaintiff (“Mainland Employer”). The HK Employer and the Mainland Employer (collectively, “Employers”) are companies within the same group of companies.

The HK Employer claimed against the Employee for breach of express and implied terms of the employment contract between them. The Mainland Employer claimed against the Employee for fraudulent misrepresentation relating to certain expenses including living allowances, rental deposit, travel and entertainment expenses, F&B receipts, cash withdrawal and two payments to suppliers made for and on behalf of the Mainland Employer in the total sums of approximately RMB1,280,000 and HK$45,000 (“Expenses”), which the Employee had already been reimbursed (“Reimbursements”). The Mainland Employer claimed repayment of the Reimbursements.

Summary dismissal in Hong Kong

Section 9 of Employment Ordinance (Cap. 57) provides that an employer may terminate a contract of employment without notice or payment in lieu:

(a)    if an employee, in relation to his employment –

(i)         wilfully disobeys a lawful and reasonable order;

(ii)        misconducts himself, such conduct being inconsistent with the due and faithful discharge of his duties;

(iii)      is guilty of fraud or dishonesty; or

(iv)      is habitually neglectful in his duties; or

(b)    on any other ground on which he would be entitled to terminate the contract without notice at common law.

Background

The Employers are in the business of designing and supplying alcohol sensing equipment (commonly known as “breathalyzers”). The HK Employer was incorporated in Hong Kong in 2006. One of main purposes of its establishment was to employ management personnel to oversee the factory to be set up in the Mainland.

The Mainland Employer was incorporated in the Mainland in December 2010. The Mainland Employer was set up to operate and manage a factory in Dongguan (“Factory”).

The Employee is a permanent Hong Kong resident. The Employee and the HK Employer entered into an employment contract in January 2011 (“HK Employment Contract”). Subsequently, two employment contracts were entered into between the Employee and the Mainland Employer (collectively, “Mainland Employment Contracts”) in June 2011. The Employee’s last position was Factory General Manager of the Factory when he was summarily dismissed in August 2014.

The Employee was originally dismissed by the HK Employer by one-month notice effected by a letter dated 21 August 2014. By that letter, the Employee was required to provide certain information in relation to various expenses within 3 days. The Employee did not respond. The HK Employer made various further attempts to contact the Employee (including by emails and letters) after the 3-day deadline but the Employee still did not respond. The HK Employer summarily dismissed the Employee on 31 August 2014. The Employers then commenced legal proceedings against the Employee.

The main issues

The main issues were as follow:

1.       whether the Employee was employed solely by the HK Employer or both of the Employers;

2.       whether the Employee was entitled to the Reimbursements; and

3.       whether the Employee’s summary dismissal by the HK Employer was wrongful, and if so, the remedy that the Employee is entitled to be awarded.

The CFI’s decision

The 1^st Issue

There were disputes as to who was the “employer”. The Employers’ pleaded case was the Employee was employed by the HK Employer (and not the Mainland Employer) and the HK Employment Contract contained the full terms of employment between the HK Employer and the Employee.

The CFI considered the contents of the HK Employment Contract and the PRC Employment Contracts and found that the terms of the employment were contained in all three contracts. There was no term dealing with the Employee’s benefits in the HK Employment Contract. On the other hand, under the Mainland Employment Contracts, the Employee was entitled to reimburse, subject to provision of proof, the expenses incurred from performing his duties, including but not limited to travelling, meal and transportation expenses. The Mainland Employment Contracts also set a specific standard and method in relation to the Employee’s monthly meal allowance. It was more probable that the terms of the Employee’s employment were contained in the HK Employment Contract as well as the Mainland Employment Contracts, and the Employee was employed by the Employers (not the HK Employer only).

The 2^nd Issue

The CFI found the Employers had failed to prove the Employee had either submitted fraudulent/false receipts or pocketed part of the money to be paid to the suppliers of the Mainland Employer. The Employee was entitled to the Reimbursements and the Employers’ claim was dismissed accordingly.

The 3^rd Issue

The Employee counterclaimed against the HK Employer for wrongful dismissal. The CFI considered the HK Employer had used divers means to contact the Employee. The Employee’s case was he did not receive any of the emails and letters from the HK Employer or its lawyers. No credible reason had been provided by the Employee as to why he did not receive any of the emails and letters. The CFI found the Employee was aware of the HK Employer’s requests to him for explanations and provision of information regarding the Expenses, and he ignored them. The Employee had wilful disobey the HK Employer’s lawful and reasonable orders and the summary dismissal was justified.

Takeaways

There are several lessons to take home from the Alcohol Countermeasure Systems case.

Whenever there is cross-border employment between Hong Kong and the Mainland, in most (if not all) cases, employees will inevitably incur expenses such as living allowances, rental deposit, travel and entertainment expenses, meal allowances, etc. that are subject to reimbursements by the employer. The terms of the employment contract should properly deal with expenses and reimbursements. Employers should also put in place proper system (and, if appropriate, in their employee handbook) to deal with the details and procedures for claiming such expenses, the standard of proof required, etc. to avoid or minimise any subsequent disagreement or dispute. In the Alcohol Countermeasure Systems case, the amount claimed by the Employers for repayment of the Reimbursements was over HK$1.5 million.

Whilst the standard of proof for fraud in employment claims is the same as for all other civil claims (that is, the parties must prove their case on a balance of probabilities), cogent evidence that is sufficient and proportionate to the gravity of the allegations is required. The Employers in Alcohol Countermeasure Systems failed to provide such evidence.

The trial in the Alcohol Countermeasure Systems case lasted for 8 days. Whilst the CFI dismissed the Employers’ claim and the Employee was only successful in one limb of his counterclaim, it was however the Employers’ claim that took up the bulk of time and costs. The CFI ordered the Employers should bear 95% of the Employee’s costs in the entire action. This result could have perhaps been avoided with carefully drafted employment contract and proper expenses and reimbursements system being put in place in the first place.

Lastly, employees are reminded to obey any lawful and reasonable orders by the employers. Failure to do so, including not responding to employer’s requests for information relating to expenses receipts, may justify summary dismissal under section 9 of the Employment Ordinance.

 

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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 © 2023