Care needed when employers express intent

By Hong Tran, Registered foreign lawyer, Employment and Employee Benefits Group, Johnson Stokes & Ma

Article exclusively contributed by Johnson Stokes & Master

Employers should be aware that, in certain cases, merely expressing an intention to vary a contract of employment unilaterally may amount to a repudiation of that contract. This can apply even if the variation has not yet been implemented, and the point is illustrated by the 2003 case of Globe Silver Limited v Wong Chun Pong.

In that case, Globe Silver Limited ("GSL") employed Dr Wong as a medical practitioner. Among other things, the employment agreement provided for a salary of HK$56,000 per month and that "any variation or amendment of [the] agreement shall be in writing signed by or on behalf of both parties". The agreement also stated that the contract might be terminated by GSL or Dr Wong, giving "not less than 3 months' written notice to the other or one and a half months' basic consultants fee in the [sic] lieu of notice or such shorter notice or lesser sum as may be mutually agreed upon".

Shortly after Dr Wong started the job, GSL told him that his salary would be reduced from $56,000 to $50,000 per month with immediate effect. It was GSL's argument at trial that this was presented only as a proposal. The following day, Dr Wong told GSL that he did not agree to such a reduction in salary and wished to terminate the contract of employment at the end of the month.

GSL commenced proceedings against him claiming damages for his failure to work out the notice period or give payment in lieu.

The central issue the court had to determine was whether the "proposal" by GSL about the reduction in salary was in fact something which would only take effect if it was agreed to in writing by Dr Wong, or whether GSL's conduct amounted to a breach of the employment agreement, entitling him to terminate it immediately.

The court said that the common law describes an employee in Dr Wong's position as having being "constructively dismissed". This description will apply to an employee if "the employer is guilty of conduct which is a significant breach going to the root of the contract of employment, or which shows that the employer no longer intends to be bound by one or more of the central terms of the contract".

Did GSL's declaration constitute "a significant breach" under this definition? The court referred to an earlier decision which said "it is common ground that the unilateral imposition by an employer of a reduction in the agreed remuneration of an employee constitutes a fundamental and repudiatory breach of the contract of employment which, if accepted by the employee, would terminate the contract forthwith".

The court said that it was notable following Dr Wong's notification of his intent to resign that GSL did not reassure him by making plain, for example, that it was only a proposal and that the figures could always be discussed. Nor did the company tell Dr Wong that if he did not agree to the reduction, they would not enforce it.

The court therefore found that GSL's declaration of intent to reduce the salary constituted a fundamental and repudiatory breach of the contract of employment. As such, Dr Wong was not required to pay them any damages for breach of contract.

Q & A on altering the terms in a contract of employment
Q1 What should employers do to reduce the risk of a claim for constructive dismissal when they seek to vary an employee's contract of employment?
A1 If the contract does not contain an express power for the employer to make variations unilaterally, then great care should be taken in presenting any "proposal" to do so. Then, it should be made clear that it is only a proposal and that the employee's consent is being sought. If the employee does not agree to the proposal then the employer should not seek to implement it.

Q2 Can the employer vary the contract of employment in any way he chooses, if it contains an express power for the employer to vary terms unilaterally?
A2 No. Employers are under a duty (which is implied in every contract of employment) to exercise their discretion in good faith and in a reasonable manner. For example, the implied duty means that an employer cannot unilaterally cut salaries for the purpose of increasing profits. This would be regarded as a capricious exercise of discretion.

Taken from Career Times 22 April 2005

(Last review date: 23 August 2013)

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