China And Hong Kong Employment Law Update.
Legal News & Analysis - Asia Pacific - China - Hong Kong - Labour & Employment
15 October, 2018
1. China abolishes work permit requirements for Taiwan, Hong Kong, and Macao residents
Taiwan, Hong Kong, and Macao (“THKM”) residents are no longer required to obtain a work permit to work in mainland China, following a decision by the State Council and the official abolishment of the system by the Ministry of Human Resources and Social Security (“MHRSS”). Previously, under the Provisions for the Administration of the Employment of Taiwan, Hong Kong and Macao Residents in the Mainland, THKM residents were legally required to obtain a work permit before they could work in mainland China. This involved the arduous process of submitting numerous items of paperwork and a wait of 1 to 3 weeks before a THKM work permit would be issued by the relevant authorities. Work permits were subject to a 2-year renewal period and were tied to a particular employer. This led to significant inconvenience as when THKM residents switched to a new employer under the same corporate group in mainland China, they were required to re-apply for a new THKM work permit.
In its decision to abolish the work permit requirement on 28 July 2018, the State Council instructed MHRSS to formulate substitute policies to govern employment services, social security, unemployment registration, and labor rights protection for THKM employees “as soon as possible”. On 23 August MHRSS promulgated its decision to formally annul the requirement, along with a notice and Q&A document which explain the effect of the State Council and MHRSS decisions and set a deadline of 31 December 2018 for MHRSS bureaus to adjust processes at the local level to facilitate the provision of services to THKM residents.
Existing work permits will cease to have effect from 1 January 2019. THKM residents can now use a Residence Permit for THKM Residents, Mainland Travel Permit for Hong Kong and Macao Residents, or Mainland Travel Permit for Taiwan Residents to engage with the employment and social security system. Furthermore, THKM residents can use business licenses, employment contracts, payslips, or social security payment records as evidence of employment in mainland China.
What this means for employers: The abolition of the requirement for THKM residents to hold work permits will reduce the administrative burden on employers seeking to hire THKM residents and on THKM residents working in the Mainland.
However, businesses should consider whether the reform may make it easier to argue that employment relationships exist between their Mainland Chinese operations and THKM resident secondees and contractors, which may give rise to employment law and tax risks.
While the annulment of the requirement to hold work permits does not seem to affect the statutory position of employers and employees in respect of social security and under employment law, the State Council decision appears to envisage that further changes are to be introduced in these areas. Employers should therefore remain alert to the release of further measures by the MHRSS, and to the implementation of such measures at the provincial level by local human resources and social security bureaus.
2. Higher pension contributions may be on the way in Hong Kong
The Mandatory Provident Fund Schemes Authority (“MPFA”) submitted a proposal to the government in July 2018 to increase the income level for exemption for MPF contribution from HK$7,100 to HK$8,250. The proposal also called for an increase in the maximum monthly income level of which employers and employees are required to make 5% mandatory contributions. If accepted, it will increase from HK$30,000 to HK$48,000. The implementation will take place in two stages: the maximum monthly income level will rise to HK$39,000 for the first two years, and then to HK$48,000 from the third year onwards. This means the maximum mandatory contributions made by both the employers and employees will rise from HK$1,500 to HK$1,950 for the first two years, and afterwards HK$2,400.
What this means for employers: If the changes go into effect, employer’s maximum mandatory MPF contributions will rise by 30% over two years. We will keep you updated on the status of this proposal.
3. Hong Kong’s highest court recognizes same-sex marriages
We previously wrote about the Court of Appeal’s (“CA”) decision which recognized the eligibility of same-sex couples married in other foreign jurisdictions to apply for spousal dependent visas in Hong Kong. Since our update in January 2018, the Court of Final Appeal (“CFA”) has re-affirmed this legal position in the case of QT v Director of Immigration  HKCFA 28. We believe the case is a significant step forward towards furthering equal treatment between homosexual and heterosexual married couples.
QT entered into a same-sex civil partnership with SS. SS was granted an employment visa in Hong Kong, but QT was refused a spousal dependent visa by the Director of Immigration (the “Director”). A spousal dependent visa allows the spouse to live and work in Hong Kong. A heterosexual married couple would ordinarily be granted a spousal dependent visa. QT challenged the existing immigration policy, where spouse as a dependent was based on the concept of marriage consisting of one male and female (the “Policy”). The Court of First Instance dismissed QT’s application, on the basis that “spouse” in the Policy refers to one whose marriage is heterosexual only. The CA allowed QT’s appeal, on ground that despite certain rights and obligations are inherited in heterosexual marriages, rights and obligations under immigration do not fall under this, and therefore such differential treatment was discriminatory and without justification. The Director filed an appeal to the CFA.
The CFA considered whether there had been discriminatory treatment under the Policy, and if so whether it can be justified. Noting that the difference in status between QT and a married spouse was itself the justification for her treatment through the Policy, the CFA held that such treatment was discriminatory, as there was no difference in general terms the inter-personal relationships between two civil partners and between a married couple. The CFA further rejected the CA’s suggestion that a person’s marital condition can determine presumptively discrimination does not exist. While the CFA accepted that the Policy had the legitimate aim of attracting talents, maintaining strict immigration control, and ensuring a bright line is drawn as to facilitate administration of immigration control, it held that the discriminatory treatment under the Policy was not rationally connected to these aims. The CFA found that it does not make sense for the Policy to only accept talented straight persons with a straight partner to join Hong Kong’s workforce, and that same-sex partners can just as conveniently produce their civil partnership/ same-sex marriage certificate to prove their relationship.
What this means for employers: The ruling strengthens Hong Kong’s ability to attract global talent, and its competitiveness as Asia’s premier international financial center. With the endorsement from Hong Kong’s highest court on the city’s commitment towards better protection from discrimination on grounds of sexual orientation, employers can expect a more diversified pool of foreign talent entering into Hong Kong’s workforce.
4. Mainland China introduces concept of tax residency
From 1 January 2019, persons “domiciled” or spending an aggregate 183 days or more in Mainland China in a given calendar year will be deemed to be “tax resident” and will be liable to pay individual income tax (“IIT”) in Mainland China on their worldwide income. This is a departure from the current position, whereby only persons with “domicile” or one year of residence in Mainland China are subject to individual income tax on income derived from outside of Mainland China.
The Draft Amendment to the PRC Individual Income Tax Law (the “Amendment”) was passed by the Standing Committee of the National People’s Congress (“NPCSC”) on 31 August 2018, and will take effect from 1 January 2019. Under the current law, an individual working in Mainland China who is not domiciled (habitually resident) in Mainland China, and has not stayed within the territory of Mainland China for one year or more, only pays IIT on income generated within Mainland China (the “one-year rule”). Following the Amendment, the concept of “tax residency” is introduced, such that any individual who is not domiciled but who has stayed within the territory of Mainland China for an aggregate of 183 days or more in a tax year in Mainland China (which runs from 1 January to 31 December) will be regarded as a “tax resident”, and will need to pay IIT on worldwide income (the “183 days rule”).
From 1 January to 31 December, all travel to and from Mainland China will be recorded, and the number of days spent in Mainland China will be aggregated as of 31 December of each year. If a person is defined as a tax non-resident under the new law, he/she will only need to pay IIT on income generated within Mainland China, and will enjoy a standard deduction on income calculated monthly. If a person is defined as a tax resident under the new law, he/she will need to pay IIT on worldwide income, and will only enjoy a standard deduction on income calculated yearly.
It remains to be seen whether the PRC government will now amend the Implementing Regulations of the Individual Income Tax Law of the People's Republic of China (the “Regulations”), which provide certain reliefs from the current IIT legislation. Under the Regulations, an individual who is not domiciled in Mainland China and who has not stayed in Mainland China for more than 5 years is only subject to IIT on income generated within Mainland China. Furthermore, an individual may be exempt from the “one-year rule” under the current law, if he/she is absent from Mainland China for a consecutive period of more than 30 days, or for an aggregate period of more than 90 days.
Maintaining these exemptions under the new law would undermine the 183 days rule.
The Amendment will affect persons who currently spend at least 183 days of each calendar year residing in Mainland China but less than a full year; the change is particularly likely to impact people from Hong Kong and Macau. Hong Kong political advisors to the central Chinese Government have submitted a proposal in the hope of obtaining an exemption for Hong Kongers from the 183 days rule, so as to safeguard their income generated in Hong Kong.
What this means for employers: Subject to the publication of detailed implementing regulations, the introduction of the concept of tax residency means Mainland Chinese IIT law is moving further into alignment with international norms in this area.
The change may impact on talent acquisition and retention, as working in Mainland China will become less attractive, given the increased tax burden.
5. Hong Kong to provide better protection from discrimination and harassment
We previously wrote about the Legislative Council (“LegCo”) Panel’s initial assessment of numerous recommendations to revise Hong Kong’s discrimination laws. Since our update in June 2017, such recommendations have reached an advanced stage of discussion in the LegCo. The Government announced plans of introducing the Discrimination Legislation (Miscellaneous Amendments) Billinto the LegCo by end-2018, and will first proceed with 8 prioritized recommendations with regards to the Sex Discrimination Ordinance (“SDO”), Racial Discrimination Ordinance (“RDO”), Disability Discrimination Ordinance (“DDO”), and Family Status Discrimination Ordinance (“FSDO”) in the legislative amendment exercise:
What this means for employers
Introducing express provisions prohibiting direct and indirect discrimination on grounds of breastfeeding in the SDO. The definition of “breastfeeding” will cover the expression of milk and the status of being a breastfeeding mother, in addition to the act of breastfeeding.
However, there will be no positive obligation on an employer to provide reasonable accommodation for breastfeeding employees.
Employers should raise staff awareness of the new statutory protection. They should be aware of possible risks that current company policies are indirectly discriminating against breastfeeding employees, if a blanket requirement or condition applicable to all employees has a disparate effect on them.
Replacing references to “near relative” in the RDO with references to “associate”, which has a wide definition including: a spouse of the person, another person living with the person on a genuine domestic basis, a relative of the person, a carer of the person, and another person who is in a business, sporting or recreational relationship with the person.
It will be unlawful to discriminate against or harass another person because of the race of the latter’s “associate” in employment.
Employers should raise staff awareness of the new statutory protection, and carefully review whether current diversity policies adequately address exposure to these new scenarios of potential liability.
Introducing in the RDO a protection from direct and indirect discrimination and harassment by imputation that a person is of a particular race or a member of a particular racial group.
Amending the provisions in the SDO, RDO, and DDO prohibiting sexual, racial, and disability harassment between workplace participants at a place that is a workplace of both workplace participants.
This will cover the situation where the harasser and the victim are working in a common workplace, but have no employment or employment-like relationship with each other.
Employers may potentially be liable for discriminating against contract workers and commission agents under this common workplace liability regime. Workplace policies and monitoring should be instituted to ensure both employees and non-employees are adequately protected from discrimination.
Aligning the provisions in the RDO and DDO, so as to offer express protection for a person providing goods, facilities or services from racial and disability harassment by a customer.
Employers should take note of these new amendments where relevant, and ensure staff members are aware of these new statutory protections.
Amending the provisions of the RDO and DDO to provide protection from racial and disability harassment of service providers by service users, where such harassment takes place outside Hong Kong but on Hong Kong registered aircraft and ships.
Introducing express provisions in the SDO and DDO to protect members or prospective members of a club from sexual and disability harassment by the management of a club, the committee of management of a club, or a member of the committee of management of a club.
Repealing existing provisions in the SDO, RDO, and FSDO so that a victim of unlawful indirect discrimination will be entitled to damages, even though there was no intention to treat the victim unfavorably with the requirement or condition.
Currently, employers have a defense from an award of damages where there has been unlawful indirect discrimination in the workplace, by proving that there was no intention to treat the employee unfavorably with the requirement or condition. The amendment will expose employers to new potential liabilities.
6. Proposed amendments to regulations on voluntary occupational retirement schemes
The MPFA proposed amendments to the Occupational Retirement Schemes Ordinance (“ORSO”) to address their concerns that certain investment products for non-retirement purposes were registered or exempted under the ORSO, and thereby compromising the integrity of the regulation on investment products in Hong Kong. These amendments were discussed in the Legislative Council in June 2018.
Key amendments include:
- employers of existing ORSO schemes are required to confirm that benefits are derived from an employment relationship;
- the MPFA will not accept new applications for ORSO exemption certificates;
- scheme administrators will only be permitted to accept a transfer of benefits from another scheme if the member of the scheme meet certain criteria; and
- the MFPA’s power to inspect, investigate, enforce, cancel registration, and withdraw exemption of existing schemes will be enhanced.
What this means for employers: If the amendments are adopted by the Government, employers will be required to file an annual statement to the MPFA to confirm that the employment-based criterion is met. New applicants for registration of their ORSO schemes will need a solicitor statement and an auditor statement confirming they have complied with this criterion.
7. Court case: Are termination payments chargeable to salaries tax?
In the course of ending a difficult employment relationship, employers often offer employees additional termination payments to reach a mutual agreement. The taxability of such payments may arise as a significant issue to be considered by both parties. In the case of Poon Cho Ming, John v Commissioner of Inland Revenue  HKCA 297, the Court of Appeal clarified that a termination payment made for some other reason than from an office of employment is usually not chargeable to salaries tax. Only payments that form the “substance of the bargain” between the employer and the employee are chargeable to salaries tax.
Mr. Poon’s employer sought to remove him from his office of employment with immediate effect. Mr. Poon refused to “go quietly” and wanted to challenge his employer’s decision in court, so as to create a negative image of his employer in the media. In view of their acrimonious relationship, Mr. Poon and his employer entered into a separation agreement, with a view to amicably resolve their differences. Under the separation agreement, the employer agreed to pay a sum of money to Mr. Poon, in lieu of a possible discretionary bonus which he was eligible for under his contract of employment. The employer further agreed to accelerate the vesting schedule for some share options which were granted to Mr. Poon under his contract of employment.
The Commissioner of Inland Revenue (“Commissioner”) argued that both the sum of money received by Mr. Poon in lieu of his possible discretionary bonus (the “Sum”), and the notional gain derived from the share options whose vesting schedule was accelerated for Mr. Poon (the “Notional Gain”), were taxable payments and chargeable to salaries tax. The Inland Revenue Board of Review found for the Commissioner, concluding that the true nature of both the Sum and the Notional Gain stemmed from Mr. Poon’s employment, and therefore they were chargeable to salaries tax. Mr. Poon appealed to the CA.
The CA decided that the Sum and the Notional Gain were consideration to induce Mr. Poon to enter into the separation agreement, and did not arise from his contract of employment, despite the correlation. The CA found that Mr. Poon’s contract of employment did not provide for these type of payments as reward for his services, and that they were only made to stave off Mr. Poon’s threatened court action. Accordingly, both the Sum and the Notional Gain were not chargeable to salaries tax.
What this means for employers: Where employment relations are terminated acrimoniously, the employee may seek to protect his or her interests by ensuring that termination payments made are not chargeable to salaries tax. This will require careful structuring of termination payments when drafting a separation agreement. Watch this space, as the legal position on the taxability of termination payments may be subject to change. The Commissioner has applied to the Court of Final Appeal for leave to appeal.
8. Court case: Senior employees may owe fiduciary duties
Employers may be able to seek redress against misbehaving senior employees in the form of breach of fiduciary duties. In the case of South China Media Ltd v Kwok, Yee Ning  HKDC 194, the District Court (“DC”) held that senior employees who assume wide responsibilities and powers in a company may owe fiduciary duties to the company as de facto directors.
Ms. Kwok was employed by the complaining company as its “advertising director”. The complaining company alleged, among other things, that Ms. Kwok diverted away maturing business opportunities to her husband’s company, and allowed her husband’s company to use its logo and name without authority. The complaining company argued that although Ms. Kwok was not formally appointed as a director, by reason of her role in and functions she performed for the complaining company, she was a de facto director.
The DC held that since Ms. Kwok held out to clients as the complaining company’s “advertising director”, and that she had the authority to negotiate and enter into contracts for and on behalf of the complaining company, Ms. Kwok exercised the powers and discharged the functions of a director. Accordingly, Ms. Kwok acted as a de facto director and owed fiduciary duties to the complaining company. Ms. Kwok’s motivation or belief was irrelevant in reaching this determination.
By diverting business opportunities and permitting the unauthorized use of the complaining company’s name and logo, the DC held that Ms. Kwok failed to act in good faith and with single-minded loyalty to the complaining company. She acted for the benefit of a third party without the informed consent of the complaining company, and placed herself in a position of conflict.
Therefore, she was in breach of her fiduciary duties to the complaining company.
What this means for employers: Senior employees are often handed key responsibilities in a company. In the unfortunate event of senior employees engaging in serious misconduct, employers may have redress against them in the form of a breach of fiduciary duties, in addition to a breach of express and/or implied terms under their contracts of employment.
9. Employers – are you prepared for the next Typhoon Mangkhut?
On Sunday 16 September 2018, Super Typhoon Mangkhut swept across Hong Kong, damaging major public transport facilities and infrastructure. However, because the typhoon had passed by the following day (Monday 17 September 2018) there was no statutory mechanism to universally make the day a non-work day. Accordingly, employees were expected to report for duty subject to agreement with their respective employers. Ensuing chaos and confusion followed, as employees tried to reach work amid large-scale suspensions of public transportation services and on roads that were severely damaged during the typhoon (and which in some cases were impassable).
When questioned as to why Monday was not declared a day-off for the city to recover from disruption and destruction, Chief Executive (“CE”) Carrie Lam Cheng Yuet-ngor replied that there is no legal mechanism in place for officials to assess the legal consequences and impact of such a move.
Currently, the laws of Hong Kong do not provide for a power by the Hong Kong Government to declare a public holiday in response to emergency situations. The Emergency Regulations Ordinance provides the CE with powers to make regulations in response to occasions of emergency or public danger in the public interest, however it is unlikely suited for responses to short-term emergency scenarios such as Typhoon Mangkhut. The employment laws of Hong Kong (the Employment Ordinance, Occupational Safety and Health Ordinance, and Employees' Compensation Ordinance) do not provide for a statutory mechanism outlining possible Government responses to severe inclement weather conditions, typhoons or rainstorms. While the Labour Department has promulgated the non-binding Code of Practice in times of Typhoons and Rainstorms which is generally observed by employers, it only states generally that employers should be “flexible in handling cases of employees failing to report for duty or resume work on time due to genuine difficulties”.
Key takeaway: To avoid another post-typhoon work and travel arrangement crisis such as Super Typhoon Mangkhut, and in the absence of an express power for the Hong Kong Government to declare a public holiday in response to emergency situations, employers should consider allowing non-emergency workers to stay home after severe weather conditions.
Jennifer Van Dale, Partner, Eversheds