Introduction
As widely reported in the newspaper, ATV’s winding-up incident is top of the news in town. As an employee, what can be done to protect themselves if wages are unpaid by the insolvent employer? Shall they petition to wind up / bankrupt the employer? Or shall they apply for the Protection of Wages Insolvency Fund (the “Fund”)? Or shall they just walk out from the company instead?

Winding up / bankrupting the employer?
A straight forward way of protection is to file a winding up or bankruptcy petition against the insolvent employers and to wait for payments from the sale of assets by the liquidators / trustee in bankruptcy after a winding-up or bankruptcy order is made. However, it is a time-consuming process. Further, even though unpaid wages to employees are preferential payments under section 265 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), proceeds from the sale of assets will first go to secured creditors (e.g. creditors with fixed charge) and remuneration for liquidators and official receivers.  Therefore, other ways of protection, including those discussed below, may be considered.

Applying for payment under the Fund?

Introduction
Another way of protection is to apply for ex gratia payment (that is, payment without recognising any liability or legal obligation) under the Fund. This Fund is governed by the Protection of Wages Insolvency Ordinance (Cap 380) and helps employees when (1) a winding-up / bankruptcy petition has been presented against the employer and (2) the wages / benefits of the employees are unpaid. However, there are 2 groups of people whose applications will generally be refused: (1) a director of the company and (2) employees of a family business who is a family member of the bankrupt employer and lives with the employer.

What are payable under the Fund?
The ex gratia payment will cover (1) arrears of wages, (2) wages in lieu of notice, (3) severance payment, and (4) pay for untaken statutory holidays and untaken annual leaves. However, employees shall note that not all unpaid wages / benefits are recoverable as there is a cap on the ex gratia payment under each category. Further, employees have to pay attention to the deadlines for payments under each of the categories as delay in applications may affect his / her entitlement.

Walking out from the insolvent company?
As mentioned above, the Fund can only be used when a winding-up / bankruptcy petition is presented already. Given the legal costs involved in such a petition may be substantial to an employee, one may want to wait for the creditors or shareholders to petition or for the company to carry out voluntary winding up. Otherwise, one may consider just quitting the job and finding alternative employment as soon as possible before further wages are accrued. In these cases, section 10A of the Employment Ordinance (Cap 57) assists an employee to terminate their employment.

Pursuant to section 10A, if wages are not paid within one month from the expiry of the last day of the wage period, an employment contract is deemed to be terminated by the employer. Under such circumstances, the employee does not need to give notice of termination or payment in lieu of notice while the employer needs to pay for the full length of notice required to terminate the contract. Therefore, if wages are to be paid on a monthly basis on the last day of each month and the wages for January was not paid, the employment contract is deemed to be terminated on the first day of March and the employer still has to pay for the total number of months for the agreed notice period stated in the employment contract.

Conclusion
In short, insolvency of employers is definitely an unfortunate event, yet the above tools are there to assist employees in such a case. Employees are reminded to take all necessary steps as soon as possible when the employer is insolvent, including consulting the Labour Department and seeking legal advice, in order to maximize the protection that may be available to them.