A GUIDE TO IMPLEMENTING REDUNDANCIES | Hampton, Winter and Glynn

A GUIDE TO IMPLEMENTING REDUNDANCIES

What should you consider when making redundancies?

Downsizing, rightsizing, de-layering or letting people go. Call it what you will, but these are simply euphemisms for one thing – redundancy.

Legally, a redundancy situation arises when the requirement of a business for employees to carry out work of a particular kind (either generally or in a particular place) has ceased or diminished - or is expected to. This article looks at various issues which an employer should consider when making employees redundant. If an employee is being terminated because of performance or conduct or for any other reason and will be replaced, this not a redundancy situation and different considerations may apply.

Making people redundant is never easy, but if you think things through carefully before you take action, there should be less cause for confusion and less likelihood of departing employees bearing a grudge or, worse, trying to take legal action.

How to carry out the termination?

You can give notice in accordance with the individual’s employment contract to terminate the employment on expiration of the notice period. This is appropriate if you need the employee to help you to wind down the business. You can also terminate the employment of an employee immediately by paying the wages payable in the notice period. This is appropriate where you think the employee may cause trouble or you have no further need for them. You may be forced to pay an employee off if (s)he has a fixed term contract or a long notice period which extends beyond the closure of the business.

Ideally you should hold a face-to-face meeting with the member or members of staff involved and, at this time, you should also provide them with formal written notice.

Legally, if you are terminating an employee by notice or payment in lieu of notice, you are not required to give any reason for the termination. Generally, of course, if a termination is due to redundancy and not to the behaviour or performance of the individual, it makes sense to explain this. However, if you are not closing down the whole business or terminating a whole division, then it may not be appropriate to explain the reason why certain employees are selected to stay while others are leaving.

Irrespective of what explanation you give, you should be quite clear in your own mind why you are selecting the employee(s) being made redundant in case you are asked to justify your position subsequently.

If I need to reduce headcount, what should I consider in the selection process?

Unless you are closing your business or a whole division (in which case everyone will be terminated) you will need to have a selection process to select those who will be made redundant so that the selection can be justified if necessary. The following criteria are often used in the selection process:

Age. If you have to slim-down your workforce, it is easy to apply an enforced age limit for employees. However this is not necessarily the best course of action. If you set an age limit which applies to everyone, you stand to lose some experienced employees you might normally wish to keep.
Performance. Poor performance is the best reason for making someone redundant – but it requires you to show a proper record of appraisals and clear communication with your employee prior to the decision to terminate their employment. Dismissal on grounds of poor performance that can not be backed up by proper performance management records is open to legal challenge.
Breach of duty. If you feel that an employee has failed to fulfil his or her job responsibilities, appropriate warnings should be given. If there are internal disciplinary procedures, they should be followed.
Job Duties. In certain cases, operational requirements may dictate who to keep and who to make redundant.

Please note that selection based on gender, disability, family status or race is illegal in Hong Kong. If the redundancy process you apply is discriminatory, it is possible that you will be subject to legal action.

Particular caution is required if it is necessary to make an employee in any of the following categories redundant:

a woman who has just returned from maternity leave;
someone who is the only male or female in the workforce;
a disabled employee;
an employee who has a particular family status (e.g. single parent);
an employee who has a particular racial status (eg is the only representative of a particular racial group in your workforce)

In such cases, you must ensure that you can justify the selection other than on the grounds of gender, disability, family status or race, in the event that a complaint is made to the Equal Opportunity Commission.

Note also that you are not allowed to terminate the employment of an employee who is on maternity leave or on any sickness day in respect of which sickness allowance is payable.

Apart from any salary owed, do I have to pay anything else?

You must pay the employee’s salary up to the termination date, plus compensation for any outstanding annual leave entitlement, rest days and public holidays.

Employees who are made redundant and have been employed under a continuous contract for two years will be entitled to severance pay. If severance pay is payable, long service will not be applicable. Severance pay can be offset against your contribution to their MPF scheme.

All payments due on termination must be paid as soon as practicable, and in any event not later than 7 days after termination.

Do I risk any legal repercussions?

Employees who are faced with redundancy may feel they are being unfairly targeted and may take legal action against you. This might be done in a number of ways. For example:

Discrimination. The employee may say that he or she is being dismissed on the grounds of discrimination. In Hong Kong, it is illegal to discriminate against an individual based on their gender, family status, disability or race.
Unreasonable Dismissal. The employee may say that he or she has been dismissed to avoid paying them a benefit – for example, termination just before a two-year period of service, to avoid long service payment.
Unlawful termination. This may be cited if the employee feels that the correct procedures were not followed or if the dismissal is in contravention of the law.

Apart from the legal process, are there any practical issues to consider?

First, try to preserve goodwill with your outgoing employees. It almost always comes as a shock when someone loses their job, and not everyone reacts in the same way. So try to handle the situation carefully and with as much empathy as you can. Be calm and factual and do not enter into an argument. If you have an HR representative in your organisation, it often helps to have them at the exit interview.

Remember that redundancies can be upsetting and destabilising for your remaining staff too. Rumour mongering and gossip can quickly get out of hand, and employee morale can drop as a result.

Good internal communications are of paramount importance in these situations.

Make sure you keep everyone informed and, if possible, offer them counselling and discussion sessions with their immediate manager or HR if they want to ask questions. Once the redundancies have been handled, provide assurances to remaining staff that the redundancy round is complete.

What about “housekeeping” issues?

There are a number of things that fall under the category of “housekeeping”. Here are some guidelines, but they are by no means exhaustive:

Security. When the employee leaves, you should take back any office keys (s)he may hold, block access to computers and change door codes.
Personal and company property. Asking the employee to pack his or her belongings and leave immediately may not be necessary but you should request that all valuables are collected before leaving. Other personal belongings can be collected at a later stage. You should also ensure that any property that belongs to the company is returned.
Contractual obligations. You should remind the employee of any restrictive covenants agreed to in the employment contract. For example (s)he may be prohibited from joining a competitor within a certain timeframe. Where appropriate, you should also remind the employee of confidentiality duties.
Housing. If the position included housing – such as a company apartment – it may not be practical for the employee to vacate the premises immediately. If the employment contract has no provision for this, you should take legal advice before you discuss this with the exiting employee.
Benefit refunds. If advance payments were made for such things as medical insurance policies, school fees and so on, there might be a refund required. Again, if there were no stipulations on this in the employment contract, the position may be unclear. You should take legal advice before discussing this further.

Note that in all of the situations above, the employee is under no obligation to acknowledge anything or sign any documents other than a receipt.

Is there anything specific I must do if I am making a foreign employee redundant?

If you sponsored the employee, you must inform the Immigration Department that you have terminated their contract. You should also inform the Inland Revenue if you think they are likely to leave Hong Kong and you should withhold all payments until the individual has cleared his or her tax position. This overrides the obligation to pay within seven days of termination, as noted above.

The above article is for your general information only and should not be treated or relied on as legal advice. For further information please contact:

Mr. Vanky Mak, Partner, Hampton, Winter and Glynn
vankymak@hwg-law.com (852) 2847 2338