Hong Kong - Offshore Economic Substance Requirements.Pet Line Company Limited v Wong Wai Hei  HKDC 227.
Legal News & Analysis - Asia Pacific - Australia - Hong Kong - Labour & Employment
14 May, 2019
This case concerned a claim by the plaintiff employer, Pet Line, against the defendant employee, Ms Wai Hei Wong, to recover damages arising from Ms Wong's negligence and/or breach of duty, as well as discretionary bonuses previously paid to Ms Wong.
Summary of facts
The defendant, Ms Wai Hei Wong, was an employee at the plaintiff's store, Pet Line. Pet Line sought damages arising from negligence and/or breach of duty and also sought the return of bonus payments made to Ms Wong.
Negligence/breach of duty
Ms Wong was alleged to have engaged in a series of wrongdoings involving misuse of Pet Line's loyalty programme and payment processes in order to benefit herself. The alleged wrongdoing included carrying out sham purchase transactions, combining separate transactions in order to generate discounts (which were based on the value of goods sold in a single transaction) thereby creating unlawful discounts, creating sham refund transactions, using her own credit card for certain customer transactions and misappropriating goods. Pet Line claimed that all of these acts were carried out in order to secure benefits for Ms Wong and sought to claim damages for the losses caused by these actions.
Return of discretionary bonus
Pet Line had paid Ms Wong discretionary bonuses over a period of three years based on a number of factors including punctuality, attendance, monthly sales and the size of individual sales transactions. It was argued that, due to Ms Wong's dishonest conduct, she was not entitled to the discretionary bonuses paid to her. Pet Line claimed that the bonus was paid to reward Ms Wong's performance and that, in circumstances where the bonus was paid based on false performance results and would not have been paid if not for the those false results, Ms Wong should be liable to repay the bonuses. Counsel for Pet Line also adduced evidence that, had Pet Line known about Ms Wong's conduct, it would have terminated her employment earlier and would not have paid her the discretionary bonuses.
The total amount claimed by Pet Line under six heads of damages for the wrongful transactions and recovery of bonuses was HK$444,843.86.
The Court found that Ms Wong had carried out a number of sham purchase and refund transactions and had used her own credit for certain customer transactions in order to benefit herself, thereby incurring unnecessary credit card charges and causing a loss to the company. Pet Line was awarded a portion of the damages claimed under three of the six heads amounting to HK$8,300.00. The Court declined to award damages based on the creation of unlawful discounts or misappropriation of goods due to the lack of evidence and Pet Line's failure to demonstrate loss.
The Court also rejected in its entirety Pet Line's claim for recovery of the discretionary bonuses. It found that Pet Line had failed to put forward any legal basis on which it could seek the return of the bonuses already paid to Ms Wong. In reaching its decision, the Court noted that there was no express term in the employment contract which allowed for the recovery of the bonuses, and that counsel for Pet Line had not put forward any argument to imply such a term. In considering whether such a term could be implied, the Court noted the high threshold in order to establish an implied term and expressed doubt that such an implied term would arise on the basis claimed in this case.
The Court also noted that Pet Line's submissions on why the bonuses were paid were not correct. For example, the payroll slips showed that a "good attendance" bonus was awarded for punctuality and various bonuses were paid by reference to monthly sales volume. Accordingly, the bonuses appear to have been paid on the basis of Ms Wong's good performance, not on the basis on any of the "sham" transactions as was claimed by Pet Line.
The Court also considered the contention that, if Pet Line had known about the misconduct, it would have terminated Ms Wong's employment much earlier and not paid the bonuses. As such, Pet Line argued that the bonuses paid represented its loss. On this point the Court noted that the purpose of damages is to put the innocent party into the position it would have been in if there had been no breach. The Court held that allowing Pet Line to recoup the bonus would not have achieved that result as Ms Wong had performed her side of the bargain (by punctually reporting to work and meeting sales targets). To allow Pet Line to recover these bonuses would have put Pet Line into a better position. None of these points were addressed by Pet Line's counsel. The Court therefore rejected Pet Line's claim for return of the bonuses already paid.
Although the Court disposed of the bonus issue based on the above grounds, it went on to consider the submissions made by counsel for Ms Wong that the bonus was not truly discretionary and that, once Pet Line decided to implement the bonus scheme, it was bound to pay Ms Wong according to its terms. The Court noted that, notwithstanding the express wording in the employment contract which provided that the bonus was of a gratuitous nature and which permitted deductions based on unsatisfactory performance or non-compliance with company guidelines, in reality, Ms Wong was contractually entitled to receive the majority of the bonus once certain criteria had been met. In those circumstances the Court found that Pet Line did not have discretion to withhold the bonus.
In reaching this conclusion, the Court was influenced by the fact that Ms Wong's base salary was very low at HK$5,500 per month, which was even lower than the minimum wage prescribed by law at the time. This pay structure illustrated that the bonuses were an essential part of Ms Wong's monthly income. The Court also took into consideration the structure of the bonus which provided for payment based on pre-set formulae once objective conditions had been met. Accordingly, the Court decided that the bonuses were not truly discretionary. Therefore, contrary to the express language in the employment contract that the bonuses were discretionary, it was held that (save for the end-of-year bonus), so long as the objective criteria were met, Pet Line could not withhold them. As a result, Pet Line's claim that bonuses should be repaid by Ms Wong necessarily failed "as it was not wholly up to Pet Line to decide whether to pay or not in the first place". The Court likened Pet Line's claim for recovery of the bonuses to asking Ms Wong to repay her base salary. While the bonuses were not salary, they were wages based on the Court's reasoning; hence the Court's remarks.
Key takeaways for employers
This case demonstrates that courts will not allow employers to recover bonuses paid to employees in the absence of a clear legal basis to do so. Further, even where the express wording of an employment contract or contractual incentive plan provides that a bonus may be withheld or recovered where an employee fails to perform their duties or meet certain requirements, an employer will not be entitled to rely on such provisions if the terms do not allow the employer to exercise true discretion. As such, an employer wishing to have the option of reclaiming bonuses already paid to employees will increase its chances of being able to do so if it:
- expressly states that any bonuses paid will be at the sole discretion of the employer based on a range of different factors as well as full compliance with express and implied duties under the employment contract, the code of conduct and the employer's policies;
- expressly reserves the right to withhold or claw back bonus payments in circumstances where the employee has failed to comply with the duties and obligations set out above or where the employee has been seriously negligent;
- ensures that bonus provisions are not formulaic, such that an employee is able to calculate his/her bonus payment (as this reduces the likelihood that the bonus is discretionary), and states that the attainment of any specific performance targets is subject to an overriding obligation to fulfil all express and implied obligations as stated above; and
- ensures that bonuses are administered in a truly discretionary manner.
For further information, please contact:
Pattie Walsh, Partner, Bird & Bird