Application of the Employment Ordinance to overseas contracts

by Duncan Abate, partner; Hong Tran, partner; and Gabriel Cheung, legal assistant, JSM

Article exclusively contributed by JSM

The recent High Court judgment in the case of HSBC v Stephen Wallace examined whether the Employment Ordinance (EO) would apply to an employee who works in Hong Kong, but who is employed under a contract governed by a law other than that of Hong Kong.

Mr Wallace was a senior investment banker who left HSBC for another investment bank. He was employed by a UK subsidiary of HSBC for four years and his contract was governed by the laws of England. He also had a secondment letter from HSBC which effectively stated that as soon as he began work, he would be seconded to Hong Kong.

In June 2007 Mr Wallace tendered his resignation to HSBC. His employment contract required him to give six months' notice. After he gave notice, HSBC immediately placed Mr Wallace on "garden leave" for the entire six months.

His employment contract contained certain post-termination restrictive rules prohibiting Mr Wallace from working for a competitor for a six-month post termination of employment period which would be offset by any garden leave.

Mr Wallace was keen to commence employment with his new employer and so during his garden leave he asked HSBC to release him early. HSBC refused. He determined that he had the right to "buy out" the remainder of his notice period by means of payment of wages in lieu of notice under section 7 of the Hong Kong EO. HSBC pointed out to Mr Wallace that the employment contract was governed by the laws of England and, therefore, the EO did not apply and he did not have the right to buy out his notice.

However, Mr Wallace asserted that section 7 of the EO states that any attempt in a contract of employment to extinguish or reduce any statutory right, benefit or entitlement of an employee under the EO is void. Mr Wallace presented HSBC with a cheque which, he alleged, was sufficient in order to "buy out" his notice period under section 7 and therefore terminate the employment contract immediately. HSBC returned the cheque to Mr Wallace and held their ground. HSBC continued to pay his salary and treat him as an employee.

Mr Wallace then began a new job with his new employer on 9 October 2007 (still within the six-month notice period). HSBC became aware of the situation and applied for an injunction to restrain Mr Wallace from working for the competitor on two grounds. First, Mr Wallace was still an employee of HSBC (due to the fact that his attempt to buy out his notice period under section 7 was wrong by law as section 7 did not apply to his contract); also, he was restricted from working for the competitor on the grounds that the relevant non-competition restrictive covenant was valid.

The Court ruling

Deputy Judge Gill agreed with HSBC on both counts. The Court held that the parties to a contract, including employment contracts, are entitled to choose the governing law unless the statutory law of the land, which was Hong Kong statutory law in this case, overrides it. The governing law could also be revoked if the parties do not have any connection with the chosen governing law.

Therefore, in relation to the first point above, the contract of employment was governed by English law which was chosen by both parties. The court held that the EO is not an overriding statute, HSBC does indeed have connections with England and that the invocation of English law was not a device artificially introduced to exclude Hong Kong EO protections.

As such Mr Wallace was held to still be an employee of HSBC. In addition, Deputy Judge Gill determined that the non-compete restriction was valid and therefore prohibited Mr Wallace from working for any competitor.

Since Mr Wallace had already worked for the competitor for a period of six or seven weeks prior to the time of the injunction hearing, the Court held that this period could not be considered "garden leave". As a result, the court determined that the non-compete restriction period should be extended by six to seven weeks.

Q & A on overseas contracts
Q1 When does the Employment Ordinance apply to a contract of employment?
A1 The Employment Ordinance applies if it is expressly stated in the contract that Hong Kong laws govern the contract, or if although the contract states that the laws of another jurisdiction apply, the contract is wholly performed by the employer in Hong Kong and none of the parties to the contract have any real connection with that other jurisdiction.

Q2 Under what circumstances can an employee "buy out" his notice period under the EO?
A2 Section 7 of the EO provides that either party to a contract of employment may make a payment of wages in lieu of the notice period.

Q3 Under what circumstances will a Court enforce post-termination restrictive covenants ("PTRs")?
A3 PTRs are void and unenforceable unless an employer can demonstrate that the PTRs protect a legitimate interest of the employer's business and are reasonable in all circumstances.

Taken from Career Times 25 April 2008

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor

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