EMPLOYMENT (AMENDMENT) BILL 2006

The Employment (Amendment) Bill 2006 (the "Bill") was gazetted on 8 December 2006 and was read in the Legislation Council for the first time on 20 December 2006.  The Bill proposes that commission be expressly included in the calculation of certain statutory payments under the Employment Ordinance (“EO”).  In this article, we discuss the specific amendments proposed to be made, the reasons for the proposed changes and the relevant impacts of these changes on employers and employees.

Background
The Legislative Council Brief in relation to the Bill provides that the original intention behind the EO was to include contractual commission as part of "wages", however such commissions are designated or calculated.  This is to ensure that an employee take home the same amount of money whilst enjoying his/her statutory entitlements such as statutory holiday or annual leave.

Despite the original intention of the EO, at the end of February 2006, the Court of Final Appeal case of Lisbeth Enterprises Limited (trading as Philip Wain) v. Mandy Luk held that, apart (perhaps) from the contractual commission which accrued and calculated on a daily basis in amount varying from day to day, no commission is to be included in the calculation of holiday pay and annual leave pay.  This is because the EO uses the words "commission which would have earned" rather than "commission which might have earned", which, the Court of Appeal, indicated that there must be some form of certainty in the amount of the commission for it to be included as wages. 

Whilst respecting the decision of the court, the Government considers that the ruling of the Lisbeth case did not fully reflect its policy intention. The Government accordingly considers that it is necessary to amend the EO.

The Proposed Amendments
The Bill proposes changes with respect to the modes of calculating (i) payment in lieu of notice, (ii) damages for wrongful termination of contract, (iii) end of year payment, (iv) maternity leave pay, (v) damages for wrongful termination of an employee’s contract during her pregnancy, (vi) sickness allowance, (vii) damages for wrongful termination of an employee’s contract on a sickness day taken by him, (viii) holiday pay, and (ix) annual leave pay.

Under the Bill, it is proposed that the above entitlements will be calculated by reference to monthly average or daily average of the wages earned by the employee.  By doing so, it is hoped that the commission (which is currently defined as part of wages) would be counted as part of wages for the purpose of calculating various entitlements under the EO.

The monthly/daily average wages are calculated on the basis of a 12-month moving average earned by the employee (or such shorter period if the employee has been employed for less than 12 months) immediately before the specified date. 

For example, in determining contractual year-end payment, under the Bill, a full month’s wages shall be calculated as follows:

Provided that the year-end bonus shall become due to the employee on 31 December, the full month’s wages shall be HK$13,750 (HK$165,000/12).

In addition, in calculating the monthly/daily average wages, if the period covers any period which no full wages are given to the employee as a result of any leave taken under the EO or the Employees' Compensation Ordinance or with agreement or by reason of the employee not being provided by his employer with work on any normal working day, that period is to be disregarded for the purpose of calculating wages. 

If it is not practical to calculate the daily/monthly average of the wages earned by an employee, the amount may be calculated by reference to the wages earned by a person who was employed in the same trade or occupation and at the same work in the same district during the period of 12 months immediately before the specified date.

The monthly average of the wages earned by the employee is used in determining the employee’s entitlement under the following areas:

1. payment in lieu of notice and damages for wrongful termination where the notice period is expressed in months;

2. a full month’s wages with respect to year end payment.

The daily average of the wages earned by the employee is used in determining the employee’s entitlement under the following areas:

1. Maternity Leave Payment;

2. payment in lieu of notice and damages for wrongful termination where the notice period is expressed in days or weeks;

3. damages for wrongful termination of an employee’s contract on a sickness day taken by him;

4. sickness allowances;

5. rate of holiday pay;

6. rate of annual leave pay.

The Bill also seeks to clarify that where pursuant to the employment contract, a sum of money is paid to an employee in respect of a period of maternity leave, a sickness day, a holiday or a day of annual leave, the related maternity leave pay, sickness allowance, holiday pay or annual leave pay payable under the EO is to be reduced by the contract sum.

Impact on Employers and Employees
The Bill provides a mode of calculating payment of the statutory entitlements provided above on the basis of 12-month moving average.

For employees whose wages include a relatively large proportion of commission, the new method will benefit the employees as it ensures that the commissions received by them will also be included in calculating their statutory entitlements.  The period of 12 months is also considered as reasonable as it encompasses a full business cycle comprising both the peak and slack seasons. 

However, for employees who receive fixed monthly wages without commission payment, the amendments may lead to their statutory entitlements being less than the amounts they would have otherwise received if the EO is not amended.  This may happen if they receive a pay rise shortly before their taking of maternity leave, sick leave or other leave, as the come may be.

Take maternity leave pay for an example, in the EO, the current maternity leave pay is calculated at four-fifths of the prevailing monthly rate of pay of the employee.  If the employee receives a pay rise before the maternity leave, the maternity leave pay will be at four-fifths of the increased monthly salary.  However, under the Bill the maternity leave pay is calculated on the basis of 12-month average, which is based partly on the monthly salary before the pay-rise.

In addition, it is not clear in calculating the daily average of the wages, whether rest days or only working days should be used as a basis. 

There is also a provision in the Bill that in case it is impracticable to calculate the monthly/daily average wages, the amount may be calculated by reference to the wages earned by a person who was employed in the same trade or occupation and at the same work in the same district during the period of 12 months immediately before the due day.  Yet, it is not sure how effective this provision is and whether this provides useful guidelines in calculating the average wages or adds more confusion.

One thing for sure, employers will need to review and, where appropriate, reconsider the remuneration packages offered to their employees having regard to the financial and administrative burden imposed by the proposed amendments.

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EMPLOYEE OR INDEPENDENT CONTRACTOR?

The Court of Final Appeal recently made a ruling in Poon Chau Nam v. Yim Siu Cheung t/a Yat Cheung Air-conditioning & Electric Co. casting light on determining whether a worker should be treated as an employee or an independent contractor under the Employees Compensation Ordinance ("ECO").

This is an appeal case from the District Court and the Court of Appeal.  The appellant worker suffered personal injury in a work-related accident at a building.  He was welding a part in an air-conditioner when the welding rod suddenly shattered and a fragment struck his left eye.  In consequence, he had suffered a 30% loss of vision in that eye and a 45% loss of earning capacity.  The issue was whether the appellant worker was an employee of the respondent company at the time of the accident.  The District Court and the Court of Appeal both held that there was no employer and employee relationship between the parties.

Considerations of the District Court and the Court of Appeal 
The District Court and the Court of Appeal had considered a number of facts and applied the relevant tests in determining whether there was an employment relationship.  However, they considered two factors to be crucial, effectively ruling out the existence of any employment contract. 

These were:

1. the absence of any mutual obligation to provide and take up work; and 

2. the appellant’s decision to make his own MPF arrangement as a self-employed person (to which the District Court Judge added the fact that the worker had done jobs for different enterprises). 

The Court of Final Appeal
Whether an employment relationship exists is a question of fact and therefore it can only be interfered with on appeal if it can be shown that the court below misdirected itself in law or came to a decision which no court, properly directly itself on the relevant facts, could reasonably have reached.

The CFA considered that the courts below misdirected themselves in law by regarding the absence of a mutual obligation to provide and accept work as inconsistent with the existence of a contract of employment. 

Provisions under the ECO
It was an undisputed fact that the worker had been engaged "on a casual as required basis".  Therefore, the CFA considered necessary to consider the provisions in the ECO dealing with persons casually employed.

Section 2(1) of the ECO defines an "employee" as a person who works under a contract of service.  It continues with a proviso which materially states that:

"Provided that the following persons are excepted from the definition of "employee" …(b) any person whose employment is of a casual nature, and who is employed otherwise than for the purposes of the employer's trade or business……"

The effect of the proviso above is to include within the definition of "employee" for ECO purposes, a person working under a contract of service even if his employment is of a casual nature, provided that such casual employment is for the purposes of the employer’s trade or business. 

In addition, section 11(2) of the ECO provides a mechanism for calculating compensation where an injury is suffered in the course of casual employment.

Section 11(7) further recognises that a casual employee may find work with more than one employer and addresses the calculation of compensation in such cases.

In view of the above provisions and by considering various cases, the CFA was of the view that there was nothing in the ECO to suggest that a mutual obligation to supply and take up work had to exist before a worker could be qualified as an employee.  On the contrary, the CFA considered that the ECO recognised casual work was by its nature irregular, with gaps concurring between stints when there was work, and provided a mechanism for determining compensation based on notional monthly earnings using external evidence of comparable remuneration.  It also recognised that such workers might find stints of work with more than one employer.

The CFA considered that the provisions cited above were clearly provisions designed to operate where the parties were not mutually obliged to offer and take up work.  They weighed heavily against the suggestion that absence of a mutual obligation to supply and accept work removed the worker from the ECO’s ambit.

Specific engagements / Umbrella contracts
The CFA also considered that the courts below had failed to distinguish between "specific engagements" and "Umbrella contracts" which might arise in the context of casual employment.

As and when a particular casual job is offered and accepted, the parties enter into a contract in relation to that engagement.  Plainly, such a contract does not involve any general obligation to provide or accept work.  It comes into existence in relation only to the specific engagement and normally terminates by performance when the engagement is completed.  Such contract may be an employment contract and it has nothing to do with the mutual obligation. 

On the other hand, it is possible for the parties to enter into an overall contract whereby they undertake mutual obligations to provide and accept work.  Such a contract is called an "umbrella" or "global" contract.  The existence of an umbrella contract does not necessarily mean that there is an employment contract.  Similarly, the fact that there is no umbrella contract does not prevent the court from finding that the parties have entered into a contract of employment each time a specific engagement occurs. 

The CFA considered that the absence of a mutual obligation to supply and to take up work, while fatal to the existence of an umbrella contract, was irrelevant to the existence of a contract of employment arising out of a specific engagement.  The courts below fell into error in holding that the absence of the relevant mutual obligations was inconsistent with an employment relationship without differentiating between these two types of contract. 

The appellant worker was injured while contractually engaged by the respondent to work on the air-conditioner in question.  The material question was whether the contract was a contract of employment. 

A contract of employment?
There is no single test that will conclusively point to the distinction between an employee and an independent contractor in all cases.  In earlier case law, whether the master controlled the manner of doing the work was regarded as the single test for identifying a master and servant relationship.  It became clear later that the control test was too narrow and other indicia had been developed (e.g. master’s power of selection of his servant; payment of wages or other remuneration; ownership of the tools; chance of profit; risk of loss etc).  The modern approach is to examine all the features of their relationship against the background of the indicia developed with a view to deciding whether, as a matter of overall impression, the relationship is one of employment.

The CFA found these facts: 

1. The air-conditioning business belonged to the respondent company.

2. The worker’s venture into an air-conditioning business on his own account had failed some years previously. 

3. The company decided which jobs should be assigned to the worker and paid him to do them at the daily rate of HK$550, plus any overtime. 

4. All the profits and losses of the business were for the company’s account. 

5. The worker bore no financial risks and reaped no financial rewards beyond his daily-rated remuneration. 

6. The respondent managed the business and hired several other workers, some of whom would sometimes work alongside the worker on a job. 

7. The worker personally did the work assigned to him. 

8. He did not hire anyone to help. 

9. Travel expenses incurred in the course of the work were borne by the company. 

10. The relevant equipment was owned by the company. 

11. Whenever items had to be purchased by the worker, he was reimbursed by the company. 

12. The worker was a skilled air-conditioning worker and did not require supervision or control over the manner of carrying out the work.

The CFA considered that the control test was in this case, of little relevance as the appellant was an experienced worker. In addition, the other indicia all pointed clearly to an employer-employee relationship entered into for each specific engagement. 

The MPF arrangement
The courts below considered that the worker’s arrangement for an MPF scheme as a self-employed person was a strong indication that there was no employer-employee relationship.  In addition, failure to give effect to the parties’ express intention that the worker should be treated as self-employed would unjustly result in the company being saddled with unexpected criminal liability for non-compliance with ECO obligations which are owed to employees but not to self-employed persons.

The CFA was of the view that the aforesaid came close to suggesting that the parties should be accorded freedom to contract out of the ECO, contrary to section 31(a) of the ECO.

Further, CFA considered that where the relationship was highly ambiguous and it was not at all clear that a worker was an employee, the parties’ express agreement as to the status of that person might be important.  In the present case, the CFA was of the view that objective facts strongly supported the conclusion that the appellant worker was an employee at the time of the accident and the fact that he labelled himself a self-employed person for MPF purposes would not change the picture concerning the company’s liability under the ECO.  Yet, the CFA made clear that its decision in this case was not intended to affect the position of casual employees under the Mandatory Provident Fund Schemes Ordinance which had its own provisions for dealing with such employees and their position did not arise for consideration in the appeal before the CFA.

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MPF UPDATES

1. First conviction on offence to make false or misleading statement to claim MPF benefits
According to section 43E of the Mandatory Provident Fund Schemes Ordinance ("MPFSO"), a person who, in any document given to the MPFA, an approved trustee or an auditor of an approved trustee or of a registered scheme in connection with the MPFSO, makes a statement that the person knows to be false or misleading in a material respect, or recklessly makes a statement which is false or misleading in a material respect, commits an offence.

In February 2007, an MPF scheme member was convicted for breaching section 43E by making false and misleading statement in a document submitted to the approved MPF trustee.  The defendant was fined HK$8,000.  This has been the first case that a scheme member was found guilty of an offence under this section.

In this case, the defendant applied to the trustee for early withdrawal of his MPF accrued benefits on the ground of permanent departure and submitted to the trustee a statutory declaration that he would depart from Hong Kong permanently.  However, the MPFA had conducted subsequent investigations in close collaboration with relevant government departments and found that the defendant did not leave Hong Kong.  Therefore, it was found that the statutory declaration submitted to the trustee was false or misleading in a material aspect and he was convicted.

The scheme members should be reminded that it is a serious offence to use false and misleading statement to apply for early withdrawal of MPF benefits and on conviction, the defendant is liable to a fine of HK$100,000 and imprisonment for 12 months on first occasion and for each subsequent occasion, the defendant is subject to a fine of HK$200,000 and imprisonment for 24 months.

2. First conviction on offence for failing to comply with lawful requirement made by the MPFA
According to section 43D(1)(b) of the MPFSO, any person who without reasonable excuse, fails to comply with a lawful requirement made by the MPFA in the course of exercising or performing its function, commits an offence.

In November 2006, the MPFA for the first time successfully prosecuted an employer for failing to comply with section 43D(1)(b) and the defendant was fined HK$3,000.

In this case, the MPFA inspectors had repeatedly requested the defendant by means of telephone and in writing to provide relevant income records in the course of investigating a default contribution case.  The requests were ignored by the defendant.  The MPFA subsequently carried out several on-site inspections on the defendant’s business premises and issued to the defendant Notices to Require Provision of Information and despite these notices, the defendant had still failed to provide the required information. 

The MPFA decided to bring this case to the court and the defendant pleaded guilty and was convicted. 

The employers should therefore be reminded to comply with the lawful requirement of the MPFA and in case of conviction, an employer could be liable to a fine of HK$100,000 and to imprisonment for 12 months on the first occasion and to a fine of HK$200,000 and to imprisonment for two years on each subsequent occasion.

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THE PRC LABOUR CONTRACT LAW (DRAFT)

The draft PRC Labour Contract Law had undergone a second review by the Standing Committee of the National People’s Congress in December 2006, and may be expected to be promulgated in the near future.  This law is not intended to replace the PRC Labour Law but does impose more obligations on the employers for the protection of the employees' interests and rights, apart from clarifying several unclear issues under the PRC Labour Law.

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PRC EMPLOYMENT - PRC LABOUR REGULATIONS AFFECTING FOREIGN INVESTED COMPANIES AS EMPLOYERS IN CHINA

The Labour Law of the People's Republic of China ("PRC") came into effect on 1 January 1995.  The PRC Labour Law sets out the basic legal framework for the administration of employment/labour relationships and is applicable to all labour/employment contracts entered into between a PRC entity (including any foreign invested company) as employer and an individual as employee rendering services in the PRC.

Most local governments do formulate their own local regulations and rules and notices in light of the national PRC Labour Law, to facilitate their administration and management of local employment/labour relationships.  It is therefore important to refer to the applicable local labour regulations as well if such regulations have been promulgated by the local government.  By way of examples, the following are the major local labour regulations applicable in Beijing, Shanghai, Guangzhou and Shenzhen respectively:

Under the existing PRC Labour Law, PRC employers are required to make social security contributions of different types, including medical insurance, pension scheme, unemployment insurance, work-related injury insurance and maternity insurance, as well as housing provident fund contributions, for their employees on a monthly basis.  Penalty payments may be imposed for the employer’s failure to do so.  However, housing provident fund is generally not applicable to expatriates (i.e. non-PRC nationals) working in China, and employers are thus not required to contribute housing provident fund in respect of their employees who are not PRC nationals.

Social security contributions are payable by both the employer and employee at different applicable rates based on the basic monthly salary of the employee.  The rates at which social contributions are determined are generally much higher for the employer than for the employees.  The employer is expected to deduct the employee’s share of contributions from the employee’s salary for onward payment of the employee’s share of contributions together with the employer’s contributions to the relevant authorities.  The rates of contributions vary from city to city and the local governments may revise the rates from time to time.  Below are the rates currently applicable in Beijing, Shanghai, Guangzhou and Shenzhen: