Money Matter

Contract is key when it comes to year-end bonus

by Joyce Leung, senior associate, Allen & Overy

Article exclusively contributed by Allen & Overy

In October 2005, successful merchandiser Mr Chan decided to go it alone and open his own small sourcing company. When recruiting people for his new venture, Mr Chan felt obliged to offer his staff a "year-end bonus" and therefore promised them this, including it in the company's employment contract.

However, business did not go well. At the end of 2006, Mr Chan reluctantly told his employees that there would be no "year-end bonus".

Mr Chan's employees were upset and their loyalty shaken. Some even threatened to leave the company. Mr Lam, who had worked for Mr Chan for 11 months, said that he might take Mr Chan to court if he did not receive his well-deserved "13th-month salary". Having been with the company for 13 months, Mrs Lee seconded that motion, even though she only worked from Monday to Thursday for four hours a day.

Observing the rules

Employers who are about to set up a Hong Kong office often wonder if it is mandatory to make an end-of-year payment to employees. The answer is "no". The law does not mandate an end-of-year payment under an employment contract. An employer is free to decide whether to offer it to an employee or not.

However, if the employer agrees that an end-of-year payment will be made and the employee is employed under a contract of continuous employment, the employer must observe the rules under the Employment Ordinance (EO) in making that payment.

Mr Chan is therefore required by law to distribute the "year-end bonus" to his staff, though not to Mrs Lee. In general, an employee is in continuous employment if he or she works not less than 18 hours per week for at least four consecutive weeks. Mrs Lee works only 16 hours a week and her employment is thus not considered "continuous".

A question of definition

Feeling pressured, Mr Chan argued that a "year-end bonus" is not the same as an "end-of-year payment", as it is called under the EO. Indeed, the label of such payments actually relates to the definition of the payment. Employers in Hong Kong do not normally call the payment an "end-of-year payment" under their employment contracts. Commonly, they refer to an "annual bonus", "13th-month payment", "14th-month payment" or "double pay".

Whatever it is called, if it is an annual payment of a contractual nature and not of a gratuitous or discretionary nature, it is arguably governed by the rules set out in the "end-of-year payment" provisions under the EO.

Amount of payment

The law permits an employer to freely come to an agreement with an employee as to what the amount of an end-of-year payment will be. The amount, once specified in the employment contract, is payable, according to the EO. If the employment contract does not specify the amount payable, a sum equal to the employee's full month's wages will be payable as an end-of-year payment. "Wages" is defined under the EO, and employers should be aware that provisions in the Employment (Amendment) Ordinance, which took effect on 13 July 2007, have some bearing on the calculation of the amount of end-of-year payment.

An employee will be entitled to the full amount of the end-of-year payment as described above if he or she has worked a full bonus year.

Q&A on eligibility for end-of-year payment
Q1 Is a discretionary bonus mandatory under the EO?
A1 No. An end-of-year payment that is of a gratuitous nature or payable at the discretion of the employer is not mandatory under the EO. However, if an end-of-year payment is contractually agreed on the provisions of the EO described above will apply.

Q2 Is there flexibility in the distribution of an end-of-year payment?
A2 If an employer intends that an end-of-year payment should fall outside the regulatory ambit of the EO, it should expressly state in the employment contract that the payment is entirely gratuitous or discretionary in nature. There is a presumption under the EO that an end-of-year payment is not of a gratuitous nature or payable at the discretion of the employer unless there is a written employment term to the contrary. (This presumption does not apply to any employment contract made before 27 June 1997.)

Taken from Career Times 03 August 2007

(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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