Deduction from Payments and the Defence of Set-Off Struck Down by Hong Kong Court

Summary of Facts

The point of contention in this case involved a HK$7,800,000 guaranteed bonus (“Guaranteed Bonus”) that the former employee, Xu Yi Jun ("Employee"), claimed that she was entitled to as against her former employer, GF Capital ("Company").

The Guaranteed Bonus clause in the employment contract was as follows: 

“The 2016 Guaranteed Bonus will be vested in the following calendar year and payable in full on payment date of your monthly basic salary in March 2017 (the “Due Date”). If your employment with the Company is terminated voluntarily by you without cause or you have been found guilty of any gross misconduct, in either case before the Due Date, any outstanding payments of the 2016 Guaranteed Bonus will be forfeited.”

At the time of the Due Date, the Company was conducting an investigation into the Employee's alleged gross misconduct and as such withheld payment of the Guaranteed Bonus. The Employee was subsequently found guilty of gross misconduct and tendered her resignation.

The Employee brought proceedings in the Labour Tribunal claiming the sum of the Guaranteed Bonus with interest. The Company argued that the Guaranteed Bonus was forfeited as a result of the Employee's misconduct, and that the loss and damage caused by the misconduct also gave the Company a defence of equitable set-off.

Decision

The two main issues in this case were: (i) what was the proper interpretation of the Guaranteed Bonus clause, and (ii) whether the set-off was lawful under section 32 of the EO.

(i) Proper interpretation of the Guaranteed Bonus clause

The clause stated that the Guaranteed Bonus would be forfeited if the Employee was "found guilty of any gross misconduct…before the Due Date". There was no dispute that the investigation was on-going and the Employee had not been found guilty of any gross misconduct prior to the Due Date. 

The Employee argued that the plain and natural meaning of the clause meant that the Guaranteed Bonus could only be forfeited when there was a finding of gross misconduct before the Due Date. The Company objected and argued that the occurrence of gross misconduct prior to the Due Date was sufficient.

The Court held that the language of the clause was very clear that a finding of gross misconduct before the Due Date was necessary to trigger the forfeiture and that the occurrence of misconduct alone was not sufficient.

(ii) Defence of Set-off and Section 32 of the EO

As the Court decided that the Guaranteed Bonus was payable pursuant to the contractual clause, the Company sought to argue that it could exercise an equitable set-off against its liability to pay the Guaranteed Bonus based on the Employee’s misconduct.

In response, the Employee relied on section 32 of the EO and claimed that the set-off would be unlawful under this provision:

“No deductions shall be made by an employer from the wages of his employee or from any other sum due to the employee otherwise than in accordance with this Ordinance.”

The Company argued that an equitable set-off does not fall within "deductions" under section 32, as such set-off does not extinguish or reduce any claim by an employee for wages, but merely precludes the employee's right to claim for wages where it is manifestly unjust to do so (e.g. employee had conducted bad or negligent work which the employer might be able to claim damages for). It is also submitted that a distinction should be drawn between an equitable set-off in the context of legal proceedings (which should not be precluded by section 32) and an equitable set-off deployed by the employer outside legal proceedings (which should fall within section 32).

The Court agreed with the Employee and rejected the Company's arguments:

• The legislature could not have intended for a "carefully circumscribed meaning" to the word "deduction", nor to remove the protection against set-off and permit the employer to temporarily deprive the employee of the right to payment until the final resolution of the employer's claim for unliquidated damages against the employee for bad or negligent work.
  
  
• Although the practice of set-off by judgment is permissible (i.e. where cross-liabilities were netted off and extinguished to the extent of the other pursuant to a judgment), this alone does not support the Company's contention that section 32 permits an employer to exercise an equitable set-off in an action by raising a claim for unliquidated damages.

Therefore, the Court held that the equitable set-off of the Employee's claim for the Guaranteed Bonus against the Company's counterclaim is unlawful under section 32 of the EO.

Key Takeaways

• Employers should review their employment contracts and ensure that there is clear drafting on when payment obligation crystallises and that it reflects their intention, and to introduce flexibility on payment obligations where reasonable and appropriate (e.g. discretionary bonuses).
  
  
• Before making any deductions from payments, employers should carefully consider the circumstances and the relevant contractual provision to determine whether the sums have already been vested, in which case the deduction is prohibited under section 32.
  
  
• As set-offs against sums are generally unlawful under section 32 (unless any of the permitted exceptions under section 32 are applicable), it is prudent for the employer to first pay the sum to the employee and to then bring a claim against the employee for damages.