Conditions for buying out a contract of employment

by Hong Tran, Solicitor Employment and Employee Benefits Group, Johnson Stokes & Master

Article exclusively contributed by Johnson Stokes & Master

In the case of Kao, Lee & Yip v Lau Wing & Tsui Wai Yu, the Court of First Instance considered whether someone could unilaterally "buy out" his or her contract of employment, if so desired, or whether it was necessary to get the employer's agreement in order to do so. The main point was whether both parties to a contract of employment had to agree for the contract to be terminated by payment of wages in lieu of notice.

The facts of the case were relatively straightforward. Ms Lau and Ms Tsui were employed as solicitors by the law firm Kao, Lee & Yip. As employees, they were required to give three months' notice if they wanted to terminate their contracts.

In August 2005, they purported to do this by working one month and making a payment of wages in lieu for the remaining two months' notice. Their letters of resignation explained this intention and included cheques for the equivalent of two months' wages. In taking this action, they relied on section 7 of the Employment Ordinance (EO). This says that either party to a contract of employment may at any time terminate it without notice "by agreeing to pay to the other party a sum equal to the amount of wages which would have accrued to the employee" during the required period of notice.

However, the law firm was not convinced that section 7 entitled the employees to terminate their contracts unilaterally in this way. In particular, the firm drew attention to the words "by agreeing to pay" and stressed that agreement was needed to validly terminate a contract of employment by payment of wages in lieu of notice.

A number of cases had previously dealt with the same issue. A 1974 Full Court case (being the highest court in Hong Kong at the time) considered that mutual agreement was necessary. However, in contrast, more recent decisions of lower courts have found the opposite.

In this instance, Justice Burrell sought to distinguish the 1974 Full Court case and found that mutual agreement was unnecessary to terminate by payment of wages in lieu of notice under section 7 of the EO. The judge said that the key phrase is "by agreeing to pay to the other party" and not "by agreeing with the other party to pay". In the end, he found that the employees had validly terminated their contracts of employment.

While recent case law supports the view that mutual agreement is unnecessary, the issue can be easily avoided. It would not arise if the contract of employment expressly provided that either party may terminate by payment of wages in lieu at any time.

Q & A on terminating a contract of employment
Q1 How much do I have to pay to buy out my contract of employment?
A1 The amount required to "buy out" the notice period is equivalent to the wages which would have accrued to the employee during the required notice period. "Wages" is defined very broadly under the Employment Ordinance (EO) to include most cash allowances, but does not include any payment which is gratuitous or which is payable only at the discretion of the employer. The EO indicates the minimum amount which must be paid. If the contract of employment provides for a more generous payment then it is necessary to comply with the terms of the contract.

Q2 If I make a payment of wages in lieu of my notice period, when is my last day of employment?
A2 If you do this, your employment will terminate immediately. You will not remain employed until the end of the required notice period.

Q3 Can I make a part payment of my notice period?
A3 Yes. Under the EO you can buy out a part of the required notice period, as was done by the employees in the Kao, Lee & Yip case.

Q4 What if I get the calculation of the buyout amount wrong?
A4 It will be wrongful termination. The EO provides that the damages the other party is entitled to would be the amount of wages that should have been paid.

Taken from Career Times 26 May 2006

(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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