The Situation

There is a certain buzz and sense of anticipation in many offices now that bonus season is upon us. But expectations may of course not be met – in these uncertain times, more employers may choose not to pay annual bonuses, or perhaps pay smaller ones. What then for disappointed employees?

While there is no requirement under Hong Kong law for employers to pay employees an annual bonus, for those in administrative and supporting roles, end-of-year payments are common and even expected.

These bonuses are often referred to as “13th month pay” or “double pay” as they are usually equal to one month’s basic salary. They are typically paid before Chinese New Year as extra cash for employees to spend over the holidays.

The term “end-of-year payment”, however, merits some analysis. It can be used to refer to any sort of annual payment or annual bonus which is contractual and is payable only at the discretion of the employer.

The Argument

The question of whether a bonus is an end-of-year payment is an important one because there are certain quirks under Hong Kong law which apply in respect of end-of-year payments.

For example, an employee is entitled to a pro rata portion of their end-of-year payment if they have been employed under a continuous contract for not less than three months during the bonus year. The only exceptions to this are where the employee resigns of his own accord or is lawfully dismissed without notice or payment in lieu of notice.

Contractual annual bonus clauses are increasingly drafted to state that the employee must still be employed on the payment date to be entitled to the bonus – and therefore if you are not employed on that date, the whole of the bonus (not just a portion) is forfeited. This sort of requirement is, however, unlikely to be enforceable if the bonus happens to be an end-of-year payment because of the pro rata payment rule.

Essentially, the question of whether a payment is an end-of-year payment comes down to whether it is contractual or discretionary in nature.

In deciding this, the Hong Kong courts will usually consider several factors. As a starting point, the courts may look at the language used in the employment contract or employment document where the bonus payment is set out.

There is a general presumption under the Employment Ordinance that an end-of-year payment is a contractual payment, unless the employment contract makes it very clear that this is not the case.

However, even if the bonus payment is clearly labelled as being discretionary, the courts will generally also want to look at what happens in practice and will take a “substance over form” approach. For example, if the bonus payment clause sets out specific targets or parameters which, if achieved, would entitle the employee to the payment (and particularly if those targets have been met), then the courts are likely to consider such a bonus as being contractual.

The courts will also look above and beyond the employment contract and consider the employer’s actual practice of paying the bonus. For example, if a bonus is expressed as being discretionary under the employment contract, but the same (or broadly the same) amount has been paid by the employer to the employee at around the same time over a number of years, then an employee may be able to argue that the customary practice has turned the bonus into a contractual entitlement.

The Conclusion

Employers should therefore ensure that the language around any bonus payment is very clear, and that the structure and payment of any bonus is consistent with what is set out in the terms and conditions of the employment contract.

There is no hard-and-fast rule as to how bonuses should be structured or paid, but if done right they can be very effective tools for incentivising employees.

However if not reviewed regularly, bonus arrangements may trip up employers who decide not to pay a bonus or to vary past practice, which may not be the most auspicious of starts to the new year...

This article appeared in the Classified Post print edition as Avoid ambiguity on bonuses in contracts.