DLA Piper Hong Kong reviews a recent case in the High Court which highlights potential legal risks for employers in Hong Kong regarding the drafting of disciplinary procedures incorporated into an employee's employment contract.

A recent Hong Kong appeal decision of the Court of First Instance concerned the application of disciplinary procedures to an employee whose performance had already been reviewed under a performance improvement plan (PIP). While Hong Kong has no statutory procedural fairness provisions, it is common for employers to drive organisational consistency via procedural requirements for disciplinary cases and PIPs. The case highlights the danger of having disciplinary procedures that are too rigid. Given that Hong Kong allows employers more flexibility in procedural requirements than in other jurisdictions, it can be helpful to retain flexibility over internal procedures and not to fetter the organisation's ability to decide what procedures apply. Procedures should build in enough flexibility to allow deviation (or departure altogether) in cases where standard procedures designed for the investigation of conduct issues may not be appropriate, for example general performance management issues.

Facts

In 2010, a former legal counsel (Employee) of a Hong Kong bank (Bank) was put on a PIP following a mid-year performance review. At the end of the PIP period, the Bank found that the Employee had failed to achieve the expected performance as set out in the PIP and took the decision to dismiss him with payment in lieu of notice. The Employee claimed that, before deciding whether to dismiss him, the Bank should have followed certain additional steps (conduct an investigation, hold a disciplinary hearing, etc) in accordance with the Bank's disciplinary procedure. The Employee claimed that the disciplinary procedure formed part of his employment contract and brought a claim for wrongful dismissal and claimed damages, including end-of-year payments, income loss, various contractual benefits/payments and aggravated damages (the specific details are not ascertainable from the judgment). The Bank, on the other hand, argued that the disciplinary procedure only applied to 'conduct-related performance issues'; not to several poor performance issues per se. Given that the Employee's performance issues did not touch upon conduct or anything conduct-related (this was simply a case of poor performance), the Bank argued it was entitled to dismiss the Employee without having to apply the disciplinary procedure to him, having already completed the PIP process.

Decision of the High Court

The case was taken all the way to the High Court of Hong Kong. On appeal, Andrew Chung J noted that the Bank's disciplinary procedure made a number of separate and distinct references to both 'conduct' and 'performance' issues as falling within its scope. The disciplinary procedure expressly carved out 'minor conduct and performance issues' from its scope – that is the implication being that the disciplinary procedure was appropriate for instances of more serious misconduct or poor performance. The language in the disciplinary procedure was therefore entirely consistent with it being intended to cover both:

1. conduct (including willful disobedience, dishonesty or conflict of interest); and
2. serious performance (including incompetence, neglect of duty or general sloth or indolence).

The case has now been remitted back to the Labour Tribunal to be heard by another Presiding Officer.

Key takeaways

This decision is concerning for any employers who use formal PIP procedures or capability/performance policies and who intend those procedures to be the final stage in the process, without then having to complete a separate disciplinary process. Disciplinary procedures in Hong Kong are often designed with the purpose of investigating and disciplining conduct issues rather than performance issues. The intention is rarely that they be used as a performance management tool. However, the decision in this case demonstrates that where disciplinary procedures are found to be incorporated into an employee's employment contract, those procedures may apply to general performance issues if they are not carefully drafted. Pending a further judgment in favour of the Employee and a possible further appeal from the Bank, employers should consider adopting the practical tips set out below.

Contractual or non-contractual?

Ideally, make clear that any disciplinary procedures do not form part of your employees' employment contracts. Particular care should be taken when referring to procedures contained in employee handbooks or standalone documents – these can render your procedures contractual if they are referred to in the employment contract without sufficient discretionary wording.

Be clear on scope

If you are comfortable with your disciplinary procedures being contractual or there are good business reasons for doing so, at least be clear on the types of issues that should fall within their scope and make necessary carve-outs for those which should not, for example conduct-related performance versus general performance issues.

Build in flexibility

Ensure you have enough flexibility to allow you to deviate (or depart altogether) from the disciplinary procedures or PIP process in the case of non-conduct issues, for example general performance management. Include cross references to other policies that apply instead and make clear if they are satisfied by use of another process.

Do you really need a PIP?

Employers will always have different views as to the effectiveness of PIPs in practice, and they may be more appropriate for some sectors than others. However, they should not be seen as a shortcut to justify dismissals – in fact, as this case (and previous case law) demonstrates, they can often complicate what would otherwise be a fairly straightforward performance or dismissal process in Hong Kong.

Keep a proper record of the decision

As always, best practice is to keep an accurate paper trail of the company's decision as to the applicability of disciplinary procedures to a particular case – particularly where the outcome is (or is likely to be) summary dismissal.

Breach of trust and confidence

Even though there are no statutory procedural fairness provisions in Hong Kong, in extreme cases disciplinary or performance procedures which become contentious can give rise to claims for potentially substantial damages if an employee can show that an employer acted in such a way as to breach the implied duty of trust and confidence. DLA Piper Copyright: 2016 DLA Piper