Employer argues 'sole discretion' regarding bonuses, but HK court rules otherwise
Hong Kong's District Court recently ruled on a case involving a bonus payment in an employment agreement.
The decision sheds light on the distinction between discretionary and non-discretionary bonuses and the factors that the Court considers when determining the true nature of such payments.
The worker, Kan Kin Tong, was a fire services installation technician who had been employed by Man Leong Fire Services Ltd, a fire services installation contractor, for 11 years.
He tendered his one-month notice of resignation with termination of employment effective on 3 August 2017. After that, he commenced business with his own company, Wang Fai Engineering Ltd, also as a fire services installation contractor.
According to records, the employer saw him as its direct competitor, and so “their relationship turned sour.” The company “refused to pay what the latter claimed to be his share of profit and other payments due under the employment contract.”
Worker’s earnings and bonus
The worker was employed as an engineer, and his main duty was to handle and manage different fire service installation projects. He was responsible for sourcing projects, compiling quotations for tendering purposes, material procurement, project running, management of his team, liaison with the suppliers and sub-contractors, negotiating with customers on prices, payments, etc.
Essentially, he had to manage the projects from inception to completion. He was paid a monthly basic salary of $10,000 plus 20% of the net profits from the projects sourced by him, plus $1,000 monthly stationery and transportation allowance.
After more than a decade of employment up to his termination in 2017, his earnings comprised (i) a monthly basic salary plus (ii) a percentage of the net profits.
The monthly basic salary had increased only slightly from $10,000 in 2006 to $13,000 in 2014, and up to $15,000 at the time of termination in 2017.
The “percentage net profit” part calculated and paid half-yearly (i.e. in January and July every year) was gradually increased from the initial 20% by later agreements (in writing) to a progressive increasing scale of 20-40% in 2014, and up to 45-50% as from 2016 (and up to the time of termination). The percentage would increase with the amount of net profit.
The employer argued that the percentage net profit payable to him as a “bonus” was discretionary in nature, adding that such payment was subject to its “sole discretion.”
On the other hand, the worker argued that this is “a non-discretionary share of the net profit to which he was entitled as part of his remuneration/wages under the employment, and refers to it as share profit .”
Employer’s bonus system
The District Court examined the substance of the bonus system and found that despite being labelled as a "discretionary bonus," the payment scheme was, in fact, a formulaic incentive based on the amount of work done and income received.
The court noted that the "discretionary" label was inconsistent with the employer's own stated objective of sharing the fruits of hard work equally between the employer and employee.
Furthermore, the court considered the absence of a non-compete clause in the employment agreement, which would have prevented the worker from immediately starting a competing business upon leaving the employer.
Thus, the court reminded Hong Kong employers that simply labelling a bonus as "discretionary" does not guarantee absolute discretion over the payment. It will scrutinize the facts, past dealings, and the overall context of the bonus scheme to determine its true nature.
