“Employers have to give reason for termination of employment” – Myth or Fact?
Introduction
Are employers obliged to give reason to employees for terminating their employment? In its recent judgment in Suen Hung Shan 孫鴻山 v Wong & Ouyang (HK) Limited [2023] HKCFI 3006, the Court of First Instance (“CFI”) reaffirmed that employers are not obliged to do so.
Background
The plaintiff employee (“Employee”) was originally employed by the defendant company (“Employer”) as Senior Resident Architect. The Employer terminated the Employee’s employment during his probation period. The Employee commenced a claim against the Employer at the Labour Tribunal, which was later settled.
The settlement agreement between the parties provided that the Employer would appoint the Employee as Technical Manager. Under the settlement, the parties entered into a second employment agreement (“Second Employment Agreement”). The Second Employment Agreement provides, among other things, that:
“1. Contract Period
The period of this contract shall be deemed to have commenced on 19 April, 2019 and shall continue to 27 July, 2020. The employment period may be extended if mutually agreed.
7. Termination
Employment can be terminated with 30 working days’ notice from either party.”
(emphasis added)
By a letter dated 2 June 2020 (“Termination Notice”), the Employer informed the Employee that his employment would be terminated on 27 July 2020.
The Employee started another claim against the Employer at the Labour Tribunal, which was later transferred to the CFI. The Employee claimed that there was an implied term in the Second Employment Agreement that the Employer should give reason for termination of his employment. By terminating the Second Employment Agreement, the Employer had breached the implied term and the mutual trust between the parties.
The Employee also claimed that it was stipulated in the Second Employment Agreement that the Employer would renew his contract if it was satisfied with his performance. In the Termination Notice, the management of the Employer thanked him for his contribution to the Employer. The Employer’s payment of an “end-of-contract gratuity” to him also demonstrated that the Employer was satisfied with his performance. Under these circumstances, it was unreasonable for the Employer to dismiss him. The Employee sought, among other things, an order that he be re-employed by the Employer.
The CFI’s decision
The CFI held that the Second Employment Agreement was clearly a fixed term contract that expressly provided an “end date”, namely, 27 July 2020. As it was a fixed term contract, the Employer was plainly entitled to let the contract expire by effluxion of time. The Termination Notice did not seek to terminate the Second Employment Agreement earlier than 27 July 2020. The Second Employment Agreement indeed expired on 27 July 2020.
The CFI was of the view that even if the Termination Notice did terminate the Second Employment Agreement earlier than scheduled, the Employer was not obliged to provide reason as to why the Employer had chosen to terminate the agreement earlier.
The CFI applied the principle set out in Lam Siu Wai v Equal Opportunities Commission [2021] 5 HKLRD 30 in deciding whether terminating an employment without providing reason of termination constitutes a breach of the implied duty of mutual trust and confidence between the employer and employee.
Lam Siu Wai v Equal Opportunities Commission
In Lam Siu Wai, the CFI noted that under common law, the duty of mutual trust and confidence is implied in every employment contracts. This 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. The fundamental purpose of the implied duty of trust and confidence is to maintain the relationship between employer and employee. It is hence inappropriate to apply such implied duty to the termination of an employment.
The CFI also held that it was reasonably well-established that a contractual right to terminate an employment (on the part of either employer or employee) could be exercised unreasonably or capriciously, so long as the right was exercised in accordance with the contract, and the court was not concerned with the rightness or wrongness of a dismissal.
In Suen Hung Shan, the CFI (at §61 of its judgment) cited the following passages in Lam Siu Wai:
“In this regard, I respectfully agree with Anthony Chan J who held in Lam Siu Wai v Equal Opportunities Commission [2021] 5 HKLRD 30 that:
“27. As the law stands (and stood at the time of the Decision), the [common law implied duty of mutual trust and confidence] cannot be applied to water down an employer’s right to terminate the employment of a worker without cause by invoking the notice provisions (contractual and/or statutory).
30. […] it is reasonably well-established that a contractual right to terminate an employment (on the part of either employer or employee) can be exercised unreasonably or capriciously so long as the right is exercised in accordance with the contract, and the court is not concerned with the rightness or wrongness of a dismissal: Malloch v Aberdeen Corp [1971] 1 WLR 1578 at 1581G; Johnson v Unisys Ltd [2003] 1 AC 518 at §§38-41; Cheung Chi Keung v Hospital Authority [2006] 2 HKLRD 46 at §19.”’
For more details of and our discussion in Lam Siu Wai v Equal Opportunities Commission, please click here.
Takeaway
The CFI’s decision in Lam Siu Wai had 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) or 7 (Termination of contract by payment in lieu of notice) of the Employment Ordinance (Cap. 57) (“EO”) without giving any reasons of termination. In Suen Hung Shan, the CFI reiterated this legal principle in Lam Siu Wai. The common conception or notion that “Employers have to give reason for termination” is a myth.
The duty of mutual trust and confidence is implied in all employment contracts and applies to both employer and employee, where under this duty, an employer (or an employee) 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. However, in both Lam Siu Wai and Suen Hung Shan, the CFI has made it clear that the implied duty of mutual trust and confidence does not apply to termination of an employment.
That said, employers should be mindful with provisions relating to unreasonable dismissal and unlawful dismissal under the EO. For example, an employee employed under a continuous contract for a period of not less than 24 months may make a claim for remedies against an employer for unreasonable dismissal if he is dismissed other than for a valid reason as specified in the EO. If an employee makes a claim for unreasonable dismissal, the employer has the burden to prove it had a statutory valid reason to dismiss the employee.
Under the EO, it is unlawful for an employer to dismiss an employee under certain circumstances. For example, dismissal of a female employee who has been confirmed pregnant and has served a notice of pregnancy to her employer, dismissal whilst the employee is on paid sick leave, or dismissal of an injured employee before having entered into an agreement with the employee for employee’s compensation or before the issue of a certificate of assessment, etc.
Termination of employment is not always straightforward and can be tricky. This may be more so when it involves employees who may be eligible to end of year bonuses or payments, pregnant employees, employees who have recently given birth, employees with disabilities or sicknesses, etc. It is always wise for employers to seek legal advice instead of rushing into a decision to dismiss an employee. Likewise, employees should seek legal advice when their employers are acting unreasonably and may have breached their implied duty of trust and confidence.
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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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Published by ONC Lawyers © 2023 |
