No continuity of employment with successive fixed term contracts

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

Article exclusively contributed by Johnson Stokes & Master

Between October 1996 and 15 March 2001, Ms Chan was employed as a waitress by Fu On Seafood Restaurant under three separate written contracts of employment. The third of these was terminated by notice in a letter dated 14 February 2001. The reason given by the restaurant was that the premises had to be redecorated and the business would be scaled down when it reopened.

Unhappy about this, Ms Chan began proceedings via the Labour Tribunal. Her claim was for statutory severance payment for the total period she had worked for the restaurant - from the start of the first contract in October 1996 to the termination of the third one.

Under the Employment Ordinance (EO), an employee is entitled to statutory severance payment if, among other things, he or she has been employed under a "continuous contract" for at least 24 months. Schedule 1 of the EO says that an employee is considered to be under a continuous contract by working at least 18 hours per week for four consecutive weeks.

The restaurant, as defendant, argued there was a break of two weeks between the second and third contracts of employment. Ms Chan alleged that she had worked during that period. However, the Presiding Officer found it unnecessary to resolve this factual dispute.

He found in favour of Ms Chan since, under Schedule 1, he considered a break of four weeks was required before the continuity of employment was broken. On appeal, though, the Court of First Instance held that a period of working less than 18 hours within one week is sufficient to break the continuity of employment for the purposes of Schedule 1. The matter was then remitted to the Labour Tribunal to consider whether there had indeed been a break of two weeks between the second and third contracts, each of which individually fell short of 24 months.

However, the Court did say there had been continuous employment for not less than 24 months because there was effectively a "global contract". This is an overriding arrangement governing the whole relationship between employer and employee, regardless of the number of separate written contracts.

The defendant decided to take the case to the Court of Appeal. After due consideration, it held that, for a global contract, there must be "the irreducible minimum of mutual obligation", otherwise there would be no contractual link between the individual engagements.

The Court of Appeal cited a number of UK decisions. These said that, for a contract of employment to exist, there must be an obligation on the employee to accept and perform some minimum or reasonable amount of work for the employer. The court noted that even if the employee considers that "re-employment" is virtually certain after the break, this is not sufficient to create a global contract if there is no minimum of mutual obligation.

(Update: Significant cases include Carmichael v National Power plc (1999) and Nethermere (St Neots) Ltd v Gardiner (1984).)

On the facts, the Court of Appeal disagreed with the finding that there was a global contract. However, it did find from the evidence that the defendant had adopted a practice of entering into employment contracts for 18 months only to avoid liability, for example, for statutory severance payment.

Ms Chan sought to argue that the defendant's failure to make a statutory severance payment at the end of her second contract was evidence of continuity between contracts. However, the Court of Appeal found that non-payment was not evident that her employment was regarded as continuing.

In relation to the defendant's apparent scheme of having successive contracts to avoid liabilities for severance or long service payment, the Court of Appeal said there was nothing unreal about the break. "It was designed to break the continuity of employment. An employer is entitled to arrange its affairs to take advantage of the provisions of Schedule 1."

This case demonstrates that it is possible for employers to use successive contracts to break the continuity of employment for the purposes of determining entitlements under the EO.

Q & A on whether employers can avoid liability for certain payments
Q1 Is the position the same for severance and long service payment?
A1 Yes. Schedule 1 of the EO applies equally in respect of statutory long service payment.

Q2 Can an employer enter into employment arrangements to defeat the obligation to make statutory severance payment?
A2 According to the Court of Appeal ruling in Ms Chan's case, it is possible to deliberately hire employees on a series of fixed term contracts of periods shorter than 24 months.

Q3 What is the qualifying period for statutory severance payment and statutory long service payment?
A3 In order to qualify for statutory severance payment, an employee must have been employed under a continuous contract for a period of not less than 24 months ending on the date on which the employee is dismissed or laid off. The qualifying period for statutory long service payment is five years.

Taken from Career Times 22 September 2006

(Last review date: 23 August 2013)

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