This case concerns a dispute between a company and its former employee on whether the employee resigned of his own volition or whether the employment was terminated by the company, thereby affecting the former employee’s entitlement under the employment agreement following the termination.

Facts

The Plaintiff, Mr. Dafni, has many years of experience in the shipping industry. The Defendant, CMA CGM, is an international shipping company. The Defendant became interested in engaging the Plaintiff to work for a Taiwanese shipping company (“CNC”) which the Defendant was planning to acquire at the time. On 21 November 2006, the parties entered into a Heads of Agreement (“HOA”) which provided for the Defendant to procure the employment of the Plaintiff by CNC as its Managing Director for three years at a specific salary and sharing of 2.5% net profit tax with CNC (capped at US$1 million per year). It is also stated that if the Plaintiff’s employment were terminated by the Defendant or CNC after the six-month trial period, the Defendant would have to pay the Plaintiff’s salaries for the remainder of his three-year contract period (the “Cancellation Indemnity Clause”).

After the Defendant acquired CNC, the Plaintiff started his employment with CNC on 12 April 2007 and an employment contract was signed on the same day. However, the Plaintiff’s former employer, Z, then commenced proceedings in Singapore against the Plaintiff for breach of fiduciary duties (the “Z Litigation”) around December 2007.

In light of the adverse publicity generated by the Z Litigation, the Defendant decided to terminate the employment of the Plaintiff. Hence, around mid-March 2008, the Plaintiff was informed at a meeting with the Chairman of the Defendant that his employment with CNC would have to be terminated. The Defendant also suggested having the termination “dressed-up” as a voluntary resignation by the Plaintiff for the benefit of both parties and was assured that even though the termination was being dressed-up as a resignation, the Plaintiff would still be paid according to the HOA.

In reliance of the Defendant’s representation, the Plaintiff signed the resignation letter prepared by CNC, which purported to state that the Plaintiff was resigning for “personal reasons”, and that the Plaintiff had “no claim against the Company in respect of remuneration, fees or otherwise, compensation for loss of office or any accounts whatsoever”. Later when the Defendant refused to pay the Plaintiff’s entitlement under the HOA, the Plaintiff claimed against the Defendant for breach of terms of the HOA, in particular the Cancellation Indemnity Clause. The Defendant in its defence argued that the Plaintiff had truly resigned out of his own volition or alternatively, the termination was for reasons of wilful misconduct of the Plaintiff.

Decision

The determination of whether there was in fact a resignation on the Plaintiff’s own volition or a termination by the Defendant depends largely on as well as the contemporaneous documents submitted by the parties. The Court was of the view that evidence was overwhelming in support of the Plaintiff’s case that he did not resign, but was forced to “resign” upon the assurance by the Defendant that he would be paid in full of his entitlements under the HOA. The resignation was not a genuine resignation, but was being dressed up as a “resignation”. Further, the Court found no “wilful misconduct” proved against the Plaintiff. Accordingly, the Court held that the Defendant should pay according to the terms of the HOA on the basis that the employment was in truth terminated by the Defendant.

Take-away points for HR professionals

Termination “dressed up” as a resignation is sometimes known as “resignation in lieu of discharge”. Even though there is no legal definition under the current employment law in Hong Kong on what constitutes “resignation in lieu of discharge”, it appears that such practice is not uncommon in Hong Kong. In fact, there is a practical need for such practice when it comes to discharging employees at managerial or executive level tend to prefer an amicable settlement and the employer does not wish to affect the employee’s future employment possibilities with other employers by having on record a discharge rather than a resignation. Therefore, one cannot simply avoid “resignation in lieu of discharge” altogether. Some important points for HR to note:

• Employers must be aware of the potential legal consequences arising from such a “resignation”. Even though it appears on record to be a resignation, in fact, the employer was the initiating party in the separation and the employee did not choose to leave the work of their own free will. Therefore, if the employer is open to the option of “resignation in lieu of discharge”, it needs to be cautious when negotiating on the “resigned” employee’s separation entitlement basis pursuant to the “resignation” to avoid any future dispute.
• Employer should take note of the employee’s statutory entitlement upon the termination, and also the contractual benefits and payments provided under the employment agreement. Employers cannot simply avoid or minimise the contractual and statutory payments by having recourse to a sham or a forced “resignation”. It is also advisable for both parties to discuss and record the separation terms and, if necessary, sign a separation agreement to conclude the employment relationship on good terms. Contemporaneous documents and records, such as meeting minutes and emails, which record discussions between the parties should also be documented properly. This will avoid any future dispute or if there is any change in the HR personnel of the employer, the new HR personnel will know about the termination arrangement and not mistake it for a voluntary resignation.
• Employers who would like to adopt a “resignation in lieu of discharge” should seek legal advice to ascertain the legal effect and risks of the terms to avoid any misunderstanding or dispute in the future.

(This article, written by our Partner Mr Dominic Wai and our Trainee Solicitor Ms Jenny Ng, is also published in the May 2017 issue of Human Resources, the Official Journal of the Hong Kong Institute of Human Resource Management.)