Introduction

“Employers have to give reason for termination” – Myth or Fact? In the recent decision of Lam Siu Wai v Equal Opportunities Commission [2021] HKCU 4949, the Court of First Instance (“CFI”) made it clear that it is unnecessary for an employer to give any reason for termination and the long-established implied duty of mutual trust and confidence does not cover termination of an employment.

Background

The Employment

Lam has been working for the Equal Opportunities Commission (“EOC”) for over 22 years since 1996. The last renewal of her employment with EOC was for 3 years from 1 March 2016. Prior to her dismissal, Lam was a Chief Equal Opportunities Officer. Lam’s employment contract provided that EOC may terminate her employment by giving three months’ notice or by paying three months’ salary in lieu of notice.

The Termination

On 15 May 2018, the EOC gave notice and informed Lam that her employment had been terminated with immediate effect. The letter of termination stated that:

“… We come to this decision after full consideration given to your job requirements, including personal attributes needed of your Chief Equal Opportunities Officer post.  Our conclusion is that your recent attitude and behaviour do not closely match with the requirements of this senior position and hence it is regrettable that we have to terminate your employment contract with the Commission.” [emphasis added]

(“Reason of Termination”)

Upon her dismissal, the EOC paid Lam three months’ wages in lieu of notice and all benefits due to her.

The claim and appeal

Lam commenced proceedings in the Labour Tribunal. Lam alleged that her employment was wrongfully terminated in bad faith, and in doing so the EOC had breached its implied duty of mutual trust and confidence of the employment contract. Lam claimed loss and damages, including loss of her income, loss of the EOC’s MPF contributions and loss of remaining gratuity for her remaining period of her employment.

The Tribunal decided that the implied duty of mutual trust and confidence applies to termination of an employment. The Tribunal held that the EOC borne the burden to prove that the Reason of Termination was a good and valid reason to terminate. By failing to discharge such burden, the EOC breached the implied duty of mutual trust and confidence.

The EOC appealed against the Tribunal’s Decision on the grounds that (1) it was entitled to terminate Lam’s employment without cause (by payment in lieu of notice) upon exercise of its contractual right, and (2) the implied duty of mutual trust and confidence does not apply to the termination of employment.

The law

The CFI noted that the implied duty of mutual trust and confidence applies to both employer and employee. In respect of the employer, the implied duty requires an employer not to, without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between the employer and employee.

Upon considering case authorities, the CFI took the view that the fundamental purpose of the implied duty of mutual trust and confidence was to maintain the relationship between employer and employee and it was inappropriate to apply this implied duty to termination of an employment. The Labour Tribunal was wrong in law in applying the implied duty of mutual trust and confidence to the termination of Lam’s employment. The CFI made the following important clarifications:

Clarification on the contractual right to terminate

It has been well-established a contractual right to terminate an employment can be exercised unreasonably or capriciously as long as it is in accordance with the employment contract and, therefore, the court is not concerned with the “rightness or wrongness of a dismissal”. If the EOC was entitled to dismiss Lam without cause in accordance with the employment contract, it would also be unnecessary for the EOC to give any reason of termination at all from the beginning.

Clarification on the case authority

The CFI considered and distinguished Tadjudin Sunny v Bank of America, National Association [2016] HKCU 1193. In Tadjudin Sunny, the Court of Appeal (“CA”) upheld an implied term in the employment contract that required the bank not to exercise its right to terminate by giving one month’s notice or by paying one month’s salary in lieu of notice, where the CA found that such termination was intended to avoid the employee from being eligible for a performance incentive programme.

The CFI considered that Tadjudin Sunny was not an authority for the general proposition that the right to terminate without cause was qualified by an implied duty to exercise such right in good faith. Instead, Tadjudin Sunny, at the highest, was only an authority opening “the door for further development in the common law in this regard was left ajar by the CA”. The CFI commented that implying a duty of good faith in termination of employment without cause would cause too far reaching effect since the reason(s) for termination may then be subject to the scrutiny by the Labour Tribunal and the judiciary, which will in turn complicate the matter with more time and costs. Such change of law, if needed, should be performed by the legislature. The CFI allowed the appeal.

Takeaway

The CFI’s decision in Lam Siu Wai has made it clear that an employer is entitled to terminate an employment by giving notice or payment in lieu of notice in accordance with the employment contract and sections 6 (Termination of contract by notice) and 7 (Termination of contract by payment in lieu of notice) of the Employment Ordinance (Cap. 57) without the need of giving any reasons of termination. The common conception that “Employers have to give reason for termination” is a myth.

Implied duty of mutual trust and confidence applies to both employer and employee.  Under this duty, an employer may not behave in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between the employer and employee. An employer will be in breach if it unreasonably and unnecessarily suspends an employee from work, bullies an employee, or behaves in any abusive manner, etc. Be that as it may, in Lam Siu Wai, the CFI has made it clear that the implied duty of mutual trust and confidence does not apply to termination of an employment.

Termination of employment can be tricky. In case of doubt, please do not hesitate to contact us.