Introduction

It is not unusual for an employer to second its employee to work for another company within the same corporate group. Can the company to which the employee is seconded also become an “employer” and be liable for the employee’s employment entitlements? In the recent case of Yung Wai Tak Abraham William v Natural Dairy (NZ) Holdings Ltd [2020] HKCFI 2067, the Court of First Instance (“CFI”) held that, in appropriate circumstances, the court will hold a company to be the employer of the seconded employee even though there is no written employment contract between them.  

Background

The appellant, Yung Wai Tak (“Yung”), was employed as a company secretary by Nation Resources Ltd (“Subsidiary”), a wholly-owned subsidiary of Natural Dairy (NZ) Holdings Ltd (“Parent Company”), which is a company listed on the Hong Kong Stock Exchange. During the recruitment process, Yung responded to the Parent Company’s job advertisement and was interviewed by the Subsidiary. An employment contract was entered into between the Subsidiary and Yung (“Employment Contract”). The Subsidiary was named as the employer in Yung’s pay slips, MPF records and tax demand notes.

During his employment, Yung actually worked for the Parent Company as its company secretary. In his email correspondence with his colleagues, Yung referred to himself as the Parent Company’s employee. Yung was the Parent Company’s authorised representative and was also a member of the Parent Company’s Hong Kong Management Committee. Yung’s business card was printed with the Parent Company’s logo and company name together with the job title being the Parent Company’s company secretary.

In 2017, Yung was dismissed by the Subsidiary. He claimed against both the Subsidiary and the Parent Company for outstanding wages, payment in lieu of notice, severance payment and salary adjustment amounting to approximately HK$1 million. As both the Subsidiary and the Parent Company were in liquidation, they were represented by the liquidators. In the Labour Tribunal, the presiding officer ruled that the Parent Company was not Yung’s employer. Yung appealed against the decision.

The Parent Company’s argument

The CFI allowed Yung to appeal to the CFI. At the appeal, the Parent Company argued that the Employment Contract was signed between the Subsidiary and Yung. The Subsidiary was responsible for all of Yung’s salaries and MPF payments, and it was named as the employer in his tax demand notes as well. Yung was only seconded to work for the Parent Company pursuant to the terms in the Employment Contract.

Key issues in appeal and the CFI’s decision

Issue 1: Interpretation of the contract

The crux of the case lies in the interpretation of the Employment Contract. It was not disputed that the Subsidiary was named as the employer in the Employment Contract. However, the CFI applied the principle of construing documents as laid down and affirmed by Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 4 HKC 707, and held that the document should be viewed as a whole together with its factual and legal background rather than having regard merely to the individual words used. On a proper construction of the Employment Contract, the CFI ruled that Yung was employed as the Subsidiary’s company secretary. Yung was required to report to and take instructions from the board of directors of the Subsidiary. The relevant clauses in the Employment Contract could not be extended to mean taking instructions from or working for any persons from another company, including the Parent Company. Hence, under the Employment Contract, Yung had no obligation to work for the Parent Company and by doing so, he was in effect performing services pursuant to a separate employment contract.

Issue 2: The parties’ conduct and relevant contemporaneous evidence

In its judgment, the CFI discussed at length the recruitment process, parties’ subsequent conduct and the contemporaneous evidence. The CFI took the view that the Employment Contract could not reflect the true intentions of the parties. On the facts of the case, the main duties of Yung were to act as the company secretary of the Parent Company as well as dealing with its logistics. The Subsidiary was a private company with HK$100 share capital. It is evident that Yung mainly had to deal with the work of the Parent Company. Thus, the CFI found that Yung’s major duty was to provide services to the Parent Company notwithstanding the fact that the Employment Contract was entered with the Subsidiary.

The argument that Yung was merely seconded to the Parent Company was found to be farfetched and implausible. Yung had no knowledge of such arrangement and the Parent Company failed to put forward any objective evidence to support such argument. There were no meeting minutes, board resolutions or secondment agreements, etc. to support the existence of any secondment arrangement. In contrast, the CFI found ample evidence showing that Yung was an employee of the Parent Company. Thus, even if the Employment Contract was only signed between the Subsidiary and Yung, there exists a separate employment relationship between the Parent Company and Yung.

Issue 3: The Listing Rule

Paragraph F.1.1 of Appendix 14 Corporate Governance Code and Corporate Governance Report of the Main Board Listing Rules provides that the company secretary should be an employee of a listed company. Any failure to comply with such requirement should be disclosed in its annual report, Corporate Governance Report and interim reports to explain to the public of its incompliance and the reason behind. The Parent Company has never disclosed or reported its incompliance with the said rule. Accordingly, the CFI found a reasonable presumption that the company secretary, i.e. Yung, was an employee of the Parent Company, of which the Parent Company had failed to discharge its evidential burden to rebut to the contrary. 

The CFI allowed Yung’s appeal and ruled that the Parent Company was liable to paying the employee compensation to Yung as the employer.

Key takeaways

Corporate groups are reminded to review their work arrangement, in particular when employees are expected to be seconded to another company to provide services. Employers should take note that the employment contract may not be conclusive evidence of the existence or non-existence of an employment relationship and that the court will always examine the facts and look beyond the contract to properly construe the relationship between the parties. It is open for the Court to find an employee as being employed by more than one employer at the same time, especially when the employee worked in associated companies with common directors and/or management.  Hence, if a company does not want to become an “employer” of the secondees and become liable for their employment entitlements, care should be taken to ensure that the secondment arrangement and underlying employment documents reflect the intended legal relationship.