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A position is made redundant in Hong Kong and you have been asked how much the employer should offer the employee as an ex gratia payment. This of course depends on the circumstances, but there are a number of points you should consider.

  1. Does the Contract Provide for a More Generous Payment?

    Naturally, you must comply with the contract of employment, so check it. Some employers have termination or severance policies that provide for payments on top of the usual termination payments. A policy we sometimes see is for the payment of half a month or a month's salary for each year of service, capped at 12 months' salary. If these policies are contractual, then the employer must comply with them. In checking the contract of employment, you should also consider if there are any implied terms providing for an ex gratia payment as well as if there have been any representations made to the employee that on termination they would be paid an ex gratia payment.

  2. Is the Employer Asking for Something from the Employee Where it Needs to Provide Legal Consideration?

    You may be asking the employee to sign an agreement on termination of employment where they agree to something additional to their obligations under their contract of employment. This may be, for example:

    • An agreement to waive or release claims against the employer;
    • An agreement to abide by non-competition and non-solicitation restraints; or
    • Post-termination assistance with an ongoing investigation or litigation.

    That agreement will need to be supported by legal consideration provided by the employer for it to be binding. Legal consideration can be any benefit (e.g., an ex gratia payment on top of what the employer is already legally obliged to pay) or the agreement by the employer to some sort of detriment (e.g., waiving post-termination restrictive covenants under the contract of employment). One of the simplest types of legal consideration is the payment by the employer of an ex gratia payment on top of other legally required payments.


  3. Where You Intend to Make an Ex Gratia Payment, Should You Be Asking for Something in Return from the Employee?

    If you intend to make an ex gratia payment, then a relevant consideration is whether you should ask for something in return from the employee such as a release of claims and/or an agreement that the ex gratia payment may be used to discharge any liability that the employer may have to the employee. The last thing an employer will want is to pay an ex gratia payment, only to find that the employee then brings a claim against the employer and that the employer has to pay an additional amount in damages on top of the ex gratia payment already paid. Therefore, it would be prudent for the employer to at least consider whether to require the employee to agree to certain things by entering into an agreement with the employer to be eligible for the ex gratia payment.

  4. A Separation Agreement May Be the Only Option to Exit the Employee Early

    In Hong Kong, there are certain prohibitions on an employer in terminating the employment of an employee, even on the ground of redundancy. These apply to employees who are entitled to statutory sickness allowance, entitled to compensation under the Employees' Compensation Ordinance or pregnant. However, they do not prohibit an employee from resigning or agreeing a mutual separation that is not a termination of employment by the employer. So, if the employer wants to exit an employee by reason of redundancy before these prohibitions are lifted, then the only option would be to try to reach a separation agreement with the employee whereby the employee agrees to resign or a mutual separation.

    Of course, the employee will need sufficient incentive to agree to a separation agreement (e.g., the payment of an ex gratia amount). If you are considering paying an ex gratia amount in circumstances where the above prohibitions on termination apply, then you should bear in mind things like the loss of remuneration and any medical benefits during the protected period. If you find that the medical and/or maternity cost under the employer's medical insurance plans are substantial, you can consider allowing the employee to remain employed so that they can claim on the insurance plan rather than to have the employer foot the bill.


  5. What Other Considerations Should I Take into Account to Determine the Ex Gratia Payment?

    In addition to the above, you should consider employee relations and public relations issues for the employer. How an employer treats its employees on termination will be a consideration not just for prospective employees that it may look to target in future, but also its existing employees who are unaffected by the redundancy exercise (but who may be feeling less secure in their position given the redundancy exercise).

    The size of the redundancy exercise and public perception of how the employer is treating its employees may be a relevant consideration. Naturally, affordability and what the employer is able to pay is also an important consideration. Another consideration that may help employers determine the size of an ex gratia payment is possibly the state of the labour market into which the terminated employees will be released. If no-one is hiring, then the employer can consider if paying a slightly larger ex gratia amount is warranted to tie the employee over (bearing in mind the length of the notice period and the other considerations mentioned above).