Employee entitlements when a business changes ownership

Hong Tran, senior associate, Employment and Employee Benefits Group, Johnson Stokes & Master

Article exclusively contributed by Johnson Stokes & Master

The recent Court of Appeal decision in the case of Law Shu Fat v Ng Kwong Yiu clarified the position of employees when there are changes in the ownership of a business for which they work.

The key issue was whether there is a termination of employment when the business changes hands. The issue is important because, if termination does occur, employees are entitled to certain statutory rights and protection under the Employment Ordinance (EO). They will also be entitled to other rights and benefits granted under the contract of employment.

In this case, the Court of Appeal found that, if a business is transferred from owner A to owner B, there will be termination of employment by A and re-employment by B.

The Court reasoned that, where A's business is transferred to B, the work previously available to employees will also be transferred. Their positions will therefore be redundant, so A will have to terminate their contracts of employment. Normally, that would mean giving notice of termination or payment in lieu of notice.

If B, the new owner of the business, wants to keep those employees, it will need to hire them expressly by means of entering into new contracts of employment.

In deciding this, the Court of Appeal overturned previous Court of First Instance cases, which had concluded that a transfer of employment on a change of business ownership did not necessitate the termination and re-employment of staff.

The confusion arose because of the concept of "continuous employment" in the First Schedule of the EO. A common condition for receiving statutory benefits is the requirement that someone must have been in continuous employment for a specified minimum period. For example, two years' continuous employment is required to receive severance pay.

The First Schedule of the EO expressly says that where a trade, business or undertaking is transferred from one person to another, "the period of employment of an employee ... at the time of the transfer shall count as a period of employment with the transferee." Also, it states that the transfer shall not break the continuity of the period employment.

This means that, in determining whether an employee has satisfied the condition of continuous employment, the periods before and after the transfer are counted together.

However, elsewhere, the EO expressly says that certain statutory benefits are held back from employees where there is termination due to a transfer of business. This is quite separate from the continuous employment provision in the First Schedule.

When they considered this particular case, the Court of First Instance focused upon the question of continuous employment. They interpreted the First Schedule as not terminating employment when a transfer of business occurs.

However, if this was correct, there would be no need for the original employer to give notice of termination or payment in lieu, or to provide the employee with details of his or her new company.

The employee would not be able to claim any entitlements under the existing contract and there would be no question of receiving any statutory benefits when employment was transferred.

The Court of Appeal's decision now means that employees will be given more information and have greater clarity regarding their employment status. There will also be less uncertainty about the rights and benefits due to them under the EO and their employment contracts.

Q&A on entitlements when employment is transferred
Q1 What rights and benefits are employees entitled to on termination?
A1 These include statutory severance or long service pay, (subject to satisfying qualifying criteria and no exemptions applying), accrued and untaken statutory annual leave, and potential claims for unreasonable dismissal. Contractual benefits may include retirement scheme benefits, gratuities and share option grants.

Q2 Is an employer required to give notice of termination on a "transfer" of employment?
A2 Yes. The employer selling a business must give staff the required notice under the contract of employment. However, an employee who accepts an offer to transfer and work for the new owner may agree to waive such notice.

Q3 Is the original employer required to pay out for accrued but untaken statutory annual leave on termination of employment?
A3 Yes. However, as a matter of practice if the parties agree, the new owner may recognise the employee's outstanding annual leave rather than have the original employer pay for it.

Q4 What happens if an employee does not agree to the transfer of employment?
A4 The contract will be terminated and the original employer will be obliged to pay out all statutory and contractual entitlements. However, if the new owner has made an offer no less favourable than the existing contract at least seven days before the transfer date, then the employee may not be entitled to claim statutory severance pay.

Taken from Career Times 21 July 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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