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Legal Update

Breaking Continuity Of Employment

7 August 2006
Mayer Brown JSM Legal Update


The Court of Appeal in Lui Lin Kam and Others v Nice Creation Development has shed light on what constitutes a "global contract" and whether or not an employer can structure employment arrangements by the use of successive fixed term contracts to avoid statutory severance pay or long service pay liability.

Full Update


Mr and Ms Chan were employed by Fu On Seafood Restaurant (the "defendant") as vice captain and waitress respectively until 15 March 2001, when their employments were terminated by a notice dated 14 February 2001. According to the defendant their employment was terminated because the restaurant needed to be redecorated and its scale of operation would be reduced thereafter. The court focused on Ms Chan's claim as there was no material difference between the employees' claims.

Ms Chan worked for the defendant between October 1996 and 15 March 2001 under 3 written contracts of employment. Each contract was for a fixed term of 18 months.

After having her third contract terminated, Ms Chan commenced proceedings in the Labour Tribunal claiming statutory severance pay in respect of the total period she had worked for the defendant commencing from October 1996 (i.e. the period commencing from her first contract through to the termination of her third contract).

The Law

In order to be entitled to statutory severance pay under the Employment Ordinance ("EO") an employee must, among other things, have been employed under a "continuous contract" for at least 24 months. Schedule 1 of the EO provides that an employee will work under a continuous contract if he/she works at least 18 hours per week for 4 consecutive weeks.

The Labour Tribunal Decision

It was the defendant's case in the Labour Tribunal that there was a break of employment for 2 weeks between the second and third fixed term contract. Ms Chan alleged that she had worked during those 2 weeks. However, this factual dispute was not resolved by the Presiding Officer because he did not find it necessary to do so. The Presiding Officer found in favour of the claimants on the basis that under Schedule 1 a break of 4 weeks was required before the continuity of the employment could be said to have been broken (following an earlier decision of Yam J in David Hot Blocking Press Ltd v. Ho King Yam [1996] 1 HKC 270).

The Court of First Instance Decision

On appeal to the Court of First Instance Deputy Judge Lam held that a period of working less than 18 hours within 1 week is sufficient to break the continuity of employment for the purpose of Schedule 1. The matter was remitted to the Labour Tribunal to consider whether there had indeed been a break of 2 weeks between the second and third written contracts.

Deputy Judge Lam accepted that the second and third contracts individually fell short of 24 months. However, he said that there was continuous employment for a period of not less than 24 months because there was a "global contract" covering the two contracts. A "global contract" is a contract that is an overriding arrangement which governs the whole of the relationship between an employer and employee notwithstanding the fact that there are a number of individual shorter engagements.

Deputy Judge Lam also found that to the extent that the defendant could show that there was an agreement to break the continuity of the contract, that agreement would be void under section 70 of the EO (an anti-avoidance provision).

The defendant appealed to the Court of Appeal.

The Court Of Appeal Decision

The Court of Appeal said that "to constitute a global contract there must be the irreducible minimum of mutual obligation otherwise there will be no contractual link between the individual engagements with the result that there would be no global contract". The Court of Appeal cited a number of UK decisions which 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 said that "a high expectation on the part of the employee, even when shared by the employer, of "re-employment" after the break, is not sufficient to create a global contract". Even virtual certainty of re-employment is not sufficient if there is no irreducible minimum of mutual obligation.

On the facts the Court of Appeal disagreed with Deputy Judge Lam's finding that on the evidence "it is an inescapable inference that there was a global contract". The Court of Appeal found that it was quite obvious from the evidence that the defendant had adopted the practice of entering into employment contracts for 18 months only with its employees, with the view to avoid liability to pay, for example, statutory severance pay.

Ms Chan sought to argue that the defendant's failure to pay statutory severance pay at the end of her second contract was evidence that there was continuity between the second and third contracts. The Court of Appeal found that even assuming that statutory severance pay was indeed payable at the end of the second contract, the non-payment was not evidence that the employment was regarded as continuing. The payment was not made either because the employer did not regard itself as liable to pay or that wrongly it had failed to pay.

The Court of Appeal found that on the facts Deputy Judge Lam was not entitled to find that there was a global contract and remitted the matter back to the Labour Tribunal.

In relation to Deputy Judge Lam's comment about the defendant's scheme of having successive contracts to avoid liabilities for severance pay or long service pay, the Court of Appeal said, "There is 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."


It is possible for employers to structure employment arrangements by way of successive contracts to break the continuity of employment for the purpose of determining entitlements under the EO.

For further information, please contact:

Name: Duncan A. W. Abate
Position: Partner
Phone: +852 2843 2203
Fax: +852 2103 5066

Name: Hong Tran
Position: Senior Associate
Phone: +852 2843 4233
Fax: +852 2103 5070

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