Transfer of business and liabilities

by Bucky Chan, Partner, Litigation Department, Woo Kwan Lee & Lo

Article exclusively contributed by Woo Kwan Lee & Lo

When a business is transferred from one proprietor to another, is the new employer obliged to pay accrued benefits to the former boss's employees? The Court of First Instance's decision in Leung Kin Chi vs Chan Pui Man trading as Chan Wan Kee (HCLA 1/2006) highlights this issue.

Mr Leung started working for Mr Chan senior as a delivery worker in his metal-delivery business in 1994. On 21 March 2000, Mr Chan senior passed away. Two days later, his son, Mr Chan junior - the defendant in this case, took over his father's business and commenced trading as a sole proprietor under the trade name Chan Wan Kee.

About three weeks after Mr Chan senior died, Mr Leung confirmed in writing that, by reason of the death of Mr Chan senior, his employment with Mr Chan senior had been terminated. He further stated that there were no outstanding claims for holiday pay, long-service payments, bonuses or other emoluments arising from his employment with Mr Chan senior.

Mr Leung worked for the son until around 31 May 2005. Four months later, in spite of his earlier confirmation relating to outstanding claims, he commenced legal proceedings against Mr Chan junior, claiming, among other benefits, statutory holiday pay, annual-leave pay and severance payment in relation to the period that he was employed by Mr Chan senior.

Is Mr Leung entitled to his accrued benefits?

The question to be determined by the Court was whether the transfer of business from Mr Chan senior to Mr Chan junior amounted to a termination of employment. In addition, the question was whether Mr Leung was therefore entitled to employment benefits such as statutory holiday pay, annual-leave pay and severance payment accrued while employed by Mr Chan senior.

Usually, a transferor employer can terminate an employee's employment upon transfer of business by giving him termination notice. He is then liable to pay the employee his accrued benefits. However, in this case, the transferor employer (Mr Chan senior) did not terminate the employment and, after the transfer, the employee simply carried on being employed in the business by the transferee. So, was employment terminated? The Court held the view that the answer was yes and that the transfer of the business necessarily involved a change in the identity of the employer, even though the employee continued the same work in the business.

Upon the transfer of the business, the employee's contract with the transferor employer should have been terminated. He would then have been able to enter into a fresh employment contract with his new employer. Once employment was terminated, the transferor employer would have been liable to pay the employee's accrued benefits on that basis.

What if the transferor employer disappears?

A difficult situation may arise when an employee does not immediately claim his accrued benefits from the transferor employer at the time of the transfer and when he later decides to do so, his former employer can no longer be located. In one such case, the Court resolved the situation by extending the coverage of Paragraph 5 of the First Schedule to the Employment Ordinance. By its wording alone, Paragraph 5 does not impose liability for employment benefits, but simply counts the period of employment (and not the benefits of employment) of an employee with a transferor towards his subsequent employment (if any) by the new (transferee) employer.

Paragraph 5 provides, "If a trade, business or undertaking is transferred from one person to another, the period of employment of an employee in the trade, business or undertaking at the time of the transfer shall count as a period of employment with the transferee, and the transfer shall not break the continuity of the period of employment."

The Court found that although Paragraph 5 alone does not impose liability for employment benefits, it comes into play when the employment with the transferee employer is terminated later. When calculating the period of employment in determining the quantum of such benefits, Paragraph 5 has the practical effect of continuing the employment upon transfer, and the period of employment with the former employer is counted together with the period of employment with the new employer. Thus the new employer's liability also covers the period of employment with the former (transferor) employer.

This case serves as a warning to transferee employers to be very careful if they wish to continue the employment of the workers of the transferor of the business. They may find that they have to pay more than they bargained for when employment is eventually terminated.

Q & A about a transferee employer's liabilities
Q1 What should the transferee employer do in relation to an employee's accrued benefits if the employee continues working for the transferee employer following the transfer of business?
A1 The transferee employer should ensure that the transferor employer terminate his/her employment with the employee and settle all accrued benefits, before signing a new employment contract with the same employee.

Q2 Is a written confirmation by the employee that there are no outstanding benefits payable to him sufficient to discharge the transferee employer of his liability in relation to the benefits that the employee accrued while employed by the transferor employer?
A2 No. It is insufficient for the employer to simply ask the employee to sign a confirmation letter in order to avoid his liability arising from the employment by the previous employer following a transfer of business. There must be a genuine legal agreement between the employee and the employer that the new employer is not liable for previous benefits due to the employee.

Taken from Career Times 22 June 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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