As we approach the bonus season, many employers in Hong Kong will be looking back on an unusual year to work out what bonus, if any, to award their employees. For many employers, business has been down; for some, business performance has been good. Whichever group you fall into, there are obligations around determining whether to pay a bonus, and if so, what amount to pay. These are five things you need to bear in mind.
1. Comply with the Express Terms of the Contract of Employment (Of Course!)
If you have a contractual bonus which sets out eligibility and parameters for payment of the bonus, then you should comply with those obligations. So, if there are KPIs set, achievement of which will result in the award of a certain amount of bonus, then if the employee has achieved those KPIs they should be awarded the stated amount of bonus. Simple.
Some bonus schemes do not set out clear targets but may state that a bonus may be awarded based on "the Company's performance and your performance". In these circumstances the employer will need to take into account the company's performance as well as the employee's performance. However, what if the company's performance was poor but the employee's performance was good? Can you ignore the employee's good performance? No, but you will need to look at whether the objective intention of the parties at the time of entering into the contract of employment was that in these circumstances the company's poor performance can offset the employee's good performance with the net result that a nil or a lower (when compared to a good year) bonus may be awarded.
2. Be Wary of Representations and Other Documents
The written contract of employment may not be the only document that sets out the terms and parameters around a bonus. Employers should be careful to consider any representations that may have been made to the employee about what bonus would be awarded. These may have been conveyed verbally (e.g., at an appraisal meeting where employee objectives for the year are set) or in writing (in a separate document) such as a bonus scheme document, PowerPoint slides, or agreed KPIs at the beginning of the year. In certain circumstances these may be incorporated as a term of the contract of employment.
3. The Issue with "Discretionary" Bonuses
Where a bonus is expressed to be discretionary, it is important to work out which aspect of the bonus the discretion attaches to. Does the discretion attach to eligibility, the amount and/or the manner in which a bonus award is delivered (e.g., deferred payment, shares, etc.)? Sometimes a discretionary bonus is subject to the exercise of discretion and certain express parameters. For example, "you will be entitled to a discretionary bonus subject to the company's performance and your performance". In this case, you cannot ignore the express parameters (i.e., the company's performance and the employee's performance) in exercising discretion.
Any discretion to be exercised by an employer must be exercised not irrationally or capriciously. This is so that the employer complies with its duty of mutual trust and confidence that is implied into the contract of employment. What this means in practice is that the employer must not exercise the discretion in a way which no reasonable employer would. So, if the contract provides for a discretionary bonus based on the employee's performance, then awarding a nil bonus to a star performer who has in prior years been awarded bonuses for the same level of performance may not be a rational decision.
4. Is the Bonus an "End of Year Payment" Regulated by the Employment Ordinance ("EO")?
An "end of year payment" ("EOYP") is any annual payment or annual bonus of a contractual nature, but does not include any annual bonus which is of a gratuitous nature or which is payable only at the discretion of the employer. An annual bonus is presumed to be not of a gratuitous nature and not payable only at the discretion of the employer unless there is a written term or condition in the contract of employment to the contrary. So, if you do not have this written term, then the presumption operates to suggest the bonus is an EOYP.
A "discretionary" bonus may still be an EOYP if the above elements are satisfied. For example, if an annual bonus scheme promises payment of a bonus if certain targets for award of a bonus are met (e.g., "Exceptional" rating gives 101% to 115% of the award opportunity; "Exceeds Expectations" gives 86% to 100%; "Meets Expectations" gives 50% to 85%, etc.) but leaves discretion as to the amount for certain components (e.g., where the employer's operating performance is less than 90%, payment of bonus becomes discretionary), then this bonus will likely be an EOYP.
If a bonus is an EOYP, then there are certain obligations as to the timing for payment and the making of a pro rata payment where the employee is dismissed by the employer other than by way of summary dismissal at least three months into the bonus year. An employer will not be able to contract out of these requirements under the EO. A common issue faced by employers is where they do not want to pay a bonus (which is an EOYP) when the employee ceases employment before the payment date (which is usually after the end of the bonus year). There may even be a term in the contract or bonus scheme providing that the employee must be in employment at the time of payment of the bonus. However, under the EO if the employee ceases employment after completing a bonus year but before the payment date of the EOYP, the employer will be obliged to pay the EOYP within the prescribed time. The cessation of employment will not disqualify the employee from being entitled to the bonus. This is despite the express clause requiring the employee to be in employment at the time of payment, which will be void under the EO.
5. A Word of Caution around the Termination of Certain Employment
You should consider carefully the termination of employment and how that may impact any bonus award to the employee.
In certain circumstances, it may be possible for an employee to claim that there is a term implied into the contract of employment that the employer will not terminate employment in order to avoid paying the employee a bonus ("anti-avoidance term"). Whether such a term is implied into the contract of employment, and even if there is, whether there is a breach of that term, is highly dependent on the facts and circumstances around the formation of the contract of employment and its termination. However, where an employee's remuneration comprises a substantial proportion of a bonus and their employment is being terminated without payment of a bonus or a pro rata bonus, the employer should consider if there is a risk of an anti-avoidance term being implied into the contract and if there can potentially be a claim for a breach of any such term.