Hong Kong's District Court upheld an employee's claim for unpaid bonus and refund of wrongful deductions in Kan Kin Tong v. Man Leong Fire Services Ltd [2023] HKDC 513.

The Court held that the unpaid bonus, which the defendant employer claimed was discretionary, was contractual in nature and formed part of the plaintiff's remuneration or wages under the employment contract.

Facts

The plaintiff was employed by the defendant as engineer responsible for managing fire services installation projects. He was entitled to a basic monthly salary plus a percentage of the defendant's net profit.

His basic monthly salary only increased slightly from HK$10,000 in 2006 to HK$15,000 at the time of termination in 2017. But the percentage of net profit he was entitled to gradually increased from the initial 20% to 45-50% from 2016. The percentage he was entitled to would increase with the amount of net profit.

The defendant referred to this profit share as a "bonus" and the Court adopted this terminology. While employed, he was paid the bonus every half year, in January and July.

Initially, all terms of the plaintiff's employment were agreed verbally. In 2014 and 2016, the parties entered into two written agreements regarding bonuses (2014 Bonus Agreement and 2016 Bonus Agreement, collectively the Bonus Agreements). Under the Bonus Agreements, the plaintiff was entitled to receive a percentage of the net profit (Bonus). The Bonus Agreements provided that the half-yearly payment of the bonus is stated to be "for reference only and is subject to the final decision of [the defendant]".

The present dispute arose because the plaintiff left to set up his own competing business and the defendant refused to pay the plaintiff the outstanding share of profit and other payments due under the employment contract.

The plaintiff argued that the Bonus was a non-discretionary share of the net profit he was entitled to as part of his remuneration or wages under the employment contract. The defendant argued that the Bonus was a discretionary bonus, to which the plaintiff might or might not be entitled, subject to the discretion of the defendant.

The defendant also argued that it was an implied term of the Bonus Agreements that an employee whose employment is terminated by the employee (i.e. resigned) or by the employer on good cause will cease to be entitled to any further bonus under the 2016 Bonus Agreement.

Bonus Was Contractual in Nature

The Court's primary task was to construe the contract between the plaintiff and defendant. The guiding principle in construing a contract is to look at the document as a whole by taking into consideration the factual and legal background against which the contract was concluded, and the practical objects which it was intended to achieve.

The Court held it was clear that the Bonus, despite its label, was by nature a share of profit/commission based on work done, and a crucial part of the plaintiff's income when working for the defendant, accounting for over 90% of the plaintiff's income in the few years before he left the defendant's employment.

Despite the statement of the Bonus being subject to the "sole discretion/final decision" of the defendant, there was no provision in the 2016 Bonus Agreement as to conditions/scenarios under which the defendant could exercise its so-called "discretion" not to pay the Bonus, or to pay an amount different from the prescribed percentages.

The bonus payment mechanism was straightforward, essentially mathematical calculation based on a simple subtraction of "expenses" from "income" times the applicable percentage of 45% or 50%. The defendant had kept a transparent record of all income and expenses of projects handled by the plaintiff, as well as Bonus payments to the plaintiff every six months, demonstrating they were not arbitrary bonuses subject to the defendant's discretion.

The Court held that, despite the Bonus being labelled as discretionary, the bonus system was in fact a formulaic incentive payment scheme and contractual in nature. The Court further held that the Bonus was part of the contractual remuneration for work done and was "wages" under the Employment Ordinance.

Defendant Did Not Exercise Discretion Reasonably and Rationally Even If the Bonus Was Discretionary

The Court found that the alleged implied terms of the plaintiff having to remain in employment or being prohibited from working in competition with the defendant after resigning to be entitled to the Bonus, were neither reasonable nor equitable. The alleged implied terms also contradicted the express term of the Bonus Agreements; that employees should be rewarded for what they worked hard for.

The Court found that even if the Bonus was discretionary, the defendant's exercise of discretion not to pay the Bonus would have been unreasonable and irrational.

Lessons for Employers

Hong Kong employers should be aware that labelling a bonus as discretionary is not definitive of it being discretionary – especially if in substance the bonus is determined based on a detailed formula.

Employers should consider which aspect of the bonus is subject to discretion and what parameters, if any, the employer may consider in exercising that discretion.

For example, the employer may consider retaining discretion regarding: (a) entitlement to be considered for a bonus; (b) amount of any bonus award; (c) manner of delivery (e.g., by cash, shares or other benefit); and (d) timing, namely when to pay the bonus and if it may be subject to a deferral arrangement.

It is not uncommon to see bonus award expressed as subject to the employee's individual performance and employer's performance. However, if these are the only parameters specified, the employer may be confined to considering just those parameters but not others, such as outlook for business or change in strategy, employee's behaviour/conduct after appraisal period, and (like this case) whether the employee has resigned.

The judgment is available here.

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