It is not unusual for employees within a group of companies to be employed by one company within the group to perform work at or for other group companies. But, as the case of Yung Wai Tak Abraham William (???) v. Natural Dairy (NZ) Holdings Limited (in Provisional Liquidation) [2020] HKCFI 2067 illustrates, care should be taken to ensure that the company to whom the employee is seconded or does work for is not also held to be an employer of the employee and liable for the employee's employment entitlements. In this case, the Court of First Instance (the CFI) held that, although the employee's written contract was made with Nation Resources Ltd, a Subsidiary of Natural Dairy (NZ) Holdings Ltd (the Parent), the Parent was also a joint employer of the employee. The Parent was held jointly liable for the employee's claims for outstanding wages and various terminal payments.

Background

The Parent was listed on the Hong Kong Stock Exchange and had at the relevant time joint provisional liquidators appointed to it.

The Subsidiary was incorporated in Hong Kong and wholly owned by the Parent. The employee was employed by the Subsidiary as its company secretary under a written employment agreement (the Contract). The employee was later dismissed from his position.

The employee sued the Subsidiary and the Parent in the Labour Tribunal claiming outstanding wages, payment in lieu of notice, a severance payment and salary adjustment. The Labour Tribunal held the Subsidiary liable as the employee's sole employer and dismissed the claims against the Parent. As the Subsidiary could not afford to pay the sums involved, the employee appealed to the CFI.

CFI's Decision

Although the CFI did not disturb the Labour Tribunal's finding that the Subsidiary was the employee's employer, it held that the Parent was a joint employer and liable for the employee's claims.

Overall Impression Test

In determining whether the Parent was a joint employer of the employee, the CFI applied the "overall impression" test formulated by the Court of Final Appeal in Poon Chau Nam v. Yim Siu Cheung (2007) 10 HKCFAR 156. The CFI examined:

  • The proper interpretation of the Contract;
  • The parties' conduct, relevant circumstances and other contemporaneous documentary evidence; and
  • The Parent's breach of Appendix 14 Corporate Governance Code and Corporate Governance Report of the Main Board Listing Rules (Appendix 14) in assessing whether the Parent employed the employee.

1. Proper interpretation of the Contract

The CFI held that the Contract had to be construed as a whole document in order to ascertain the parties' true intentions. Although the Contract states that "the [employee] should serve the [Subsidiary] as a [company secretary] and ... perform... such duties as the [Subsidiary] may assign or vest in him from time to time", after considering the entire Contract including the preamble, the CFI held that "such duties" were limited to duties performed for the Subsidiary and could not be construed to extend to duties for other group companies, because the preamble contemplated that the employee would perform duties as the Subsidiary's company secretary only.

As the Contract did not impose any legal obligation on the employee to perform duties for the Parent, the CFI inferred that the employee was performing work for the Parent under a separate employment contract.

The CFI further held that the term in the Contract stating that the employee had no other agreements with any other group companies (including the Parent) did not prohibit or preclude the employee from entering into a separate employment agreement with the Parent.

Although the provisional liquidators for the Parent submitted that the employee was working for the Parent under a secondment arrangement with the Subsidiary, the CFI rejected that argument on the basis that the provisional liquidators were unable to provide any evidence to prove the existence of a secondment arrangement.

2. The parties' conduct, relevant circumstances and other contemporaneous documentary evidence

The CFI took the view that the employee's recruitment process, the parties' subsequent conduct and other contemporaneous documents indicated that the Contract did not reflect the true intentions of the parties. In particular, the CFI took into account the following factors:

  • The employee responded to a recruitment advertisement placed in the name of the Parent;
  • The Parent and Subsidiary shared the same office and webpage;
  • The employee was interviewed at the Parent's office by a person identifying herself as the Parent's Vice President;
  • The employee's email to the Parent/Subsidiary's employees to introduce himself stated that he was joining the Parent as company secretary;
  • A contemporaneous email from a colleague of the employee congratulated him for joining the Parent as company secretary;
  • The employee's business card stated that he held the position of the Parent's company secretary;
  • The employee's main job duties were to provide services to the Parent and such duties were typical of duties provided by an employee to an employer;
  • The notice regarding the adjustment of the employee's salary was signed by the directors of the Parent and stamped with the Parent's company chop;
  • The then chairman of the Parent once responded to the employee that the employee was employed by the Parent but the Contract was signed with the Subsidiary for administrative convenience only.

Based on the above, the CFI concluded that the Contract did not accurately reflect the true intentions of the employee, the Subsidiary and the Parent. The compelling overall impression was that the employee was the Parent's employee and the Parent was unable to provide sufficient evidence to prove the contrary.

3. The Parent's breach of Appendix 14

Appendix 14 states that a company secretary should be an employee of the listed company. If the listed company wishes to deviate from this rule, it is required to comply with a range of disclosure and reporting obligations, but the Parent did not comply with them relating to the employee. The CFI started with a rebuttable presumption that the employee was the Parent's employee. As the provisional liquidators failed to raise any evidence to rebut this, the CFI inferred that the employee was an employee of the Parent.

Lessons for Employers

This case does not answer some important questions. For instance:

  • If there had been a separate employment agreement with the Parent, what were the agreed wages, benefits and entitlements?
  • Why was the Parent only liable for the termination payments and not wages during the employee's employment?
  • Had the Parent committed an offence by failing to pay the employee's wages throughout his term of employment?

It seems that the judge may have wanted to find a way for the employee to be paid. The Subsidiary had a share capital of HK$100 but owed hundreds of millions in debt while the Parent had provisional liquidators appointed.

Be that as it may, the use by a business of a company within a group of companies to employ the employees to work at or for other group companies is not an unusual arrangement. There is also a tendency to treat these employees as employees of the group even though the employment relationship is only with the employing company. There are many advantages to doing this. However, care does need to be taken to ensure that the legal employment relationship and employment obligations remain with the designated group company. Steps you should take include:

  1. Set out duties in the contract of employment. There should be a written contract of employment with the employing company that sets out, among other things, the employee's duties. If those duties involve assisting other group companies, then the contract should state that to avoid any suggestion that the work for the other group company may be under a separate contract.
  2. Document secondment arrangements. If there is a secondment of the employee to another group company, then that secondment arrangement should be appropriately documented.
  3. Monitor and document changes to duties. An employee's duties can change over time. Keep track of changes and where there have been any material changes to the employee's contract of employment and/or duties, these should be documented in writing.
  4. Comply with any Listing Rules requirements, naturally. If a particular position requires reporting and disclosure obligations, such as Appendix 14, then steps should be taken to comply with those obligations.

The judgment is available at the following link (in Chinese only): https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=130255&QS=%2B&TP=JU

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