In this case, the District Court considered issues surrounding a substantial claim for untaken annual leave and an employer’s duty to monitor and keep track of their employees’ annual leave entitlements.
The Plaintiff (“Patrick”) was employed as the General Manager of the Defendant (“Far East”) from 22 January 2007 to 26 April 2015. Patrick resigned from his employment some time in March 2015 by providing Far East with one month’s notice.
Patrick subsequently brought an action against Far East in the Labour Tribunal, and, amongst other items, he claimed for outstanding annual leave pay in respect of 132 days of untaken leave amounting to the sum of HKD 421,967.
Far East - in taking the position that Patrick had, over the years, made a number of false business expense claims on the company, thereby breaching his fiduciary duty towards them and unlawfully misappropriating the company’s funds - made a number of counterclaims against Patrick for a total sum of just over HKD 650,000. Amongst other items, the company claimed for sums apparently used by Patrick for Octopus card top-ups, taxi fares and entertainment expenses in connection with the company’s business.
In view of the various claims and counterclaims, the Labour Tribunal transferred the case to the District Court.
By way of background information, Far East described Patrick’s role with them as unique as he was their most senior employee in Hong Kong and as such, he was in charge of the whole of its operations in Hong Kong and had control over a number of important aspects of the company such as its bank accounts. His role was also unique in the sense that his working hours were flexible and he controlled and co-ordinated his own working hours, time-off and various leaves.
Terms of employment
During the proceedings, the parties each produced a slightly different draft version of Patrick’s employment contract, both of which were unsigned. Far East’s position was that as neither version of the employment contract had been signed by both parties, the terms contained in those drafts were not binding upon the parties.
Far East further argued that Patrick’s terms of employment were therefore governed by the basic requirements as set out in the Employment Ordinance (the “EO”) and the terms set out in the Staff Information Handbook (the “Handbook”) for the C3S group (of which Far East is a part of).
Shortly after Patrick joined Far East, he went to the group company’s head office in the UK for training, at which point he was given a copy of the Handbook. The cover of the Handbook had Patrick’s name printed on it and Patrick had signed an acknowledgement confirming he had received and read the Handbook.
Clause 1.1 of the Handbook explains to employees that the terms of the Handbook “forms part of your contract of employment.”
As there is no requirement that employment contracts must be signed, Patrick’s position was that the terms of the contract were binding. He also denied that the Handbook was applicable to staff in Hong Kong, stating that when he received the copy of the Handbook, he was informed that the Handbook was being handed to him for his reference only as it was based on UK labour law.
Patrick’s claim for untaken annual leave
One of the main issues in dispute in this case was in relation to annual leave. The parties disagreed on (a) how many days of annual leave Patrick was entitled to and (b) whether there was any restriction on carrying forward untaken leave.
The relevant clause in the employment contract drafts stated:
“You will be entitled to 15 days annual leave after the completion of first year employment.”
As such, it is clear the annual leave clause in the employment contract offered more generous terms than the minimum entitlement under the EO.
Patrick alleged that shortly after he commenced employment, in or around October / November 2007, his employment contract was varied orally where he and his line manager (who was based in the UK) agreed that his leave entitlement would be increased to 20 days a year from 2008 onwards.
Patrick also alleged that his employment contract was then varied orally for a second time, in or around late 2007 / early 2008, when his line manager agreed to allow him to accumulate his untaken annual leave on the understanding that it had been and will continue to be difficult for him to take any leave due to the shortage of manpower in Hong Kong (the “Accumulation Agreement”).
Patrick explained he only took leave when time and circumstances permitted but he would send an email to his line manager requesting approval before he took leave on each occasion. His position was that he had taken only 30 days of annual leave during the entire course of his 8 year employment with Far East. Consequently, his 132 days of untaken leave should have been accounted for in his termination payments and Far East’s failure to do so was in contravention of the EO.
Far East’s arguments
Far East denied that the Accumulation Agreement was ever made. They stated Patrick’s leave requests were never declined and they did not keep tabs on his leave days because they trusted him. They were shocked when Patrick made such a large claim for untaken leave as Patrick never mentioned anything about his untaken leave during his employment.
Their primary argument was that Patrick was not entitled to any untaken annual leave at all. This was because he was the most senior executive in Hong Kong and given he had arranged his own working hours and days off, he had enjoyed sufficient time off and days off and was therefore not entitled to any more leave, or alternatively, he had waived the untaken leave (the “Primary Argument”). They supplemented that Patrick had much free time during his employment and that such free time was already sufficient compensation to him.
As a further alternative argument, they stated that Patrick was now estopped from claiming his entitlement to untaken annual leave. As General Manager, Patrick has a duty to report to his line manager any untaken leave of all the staff in Hong Kong, including his own. Because there was no such report, Far East was under the impression that Patrick had no untaken leave. Had Patrick reported his untaken leave at the end of each year, Far East would have made arrangements for him to take his leave. Because he did not do so, it would be unjust to grant him any remedy in respect of the untaken leave (“Alternative Argument”).
In any event, as to the issue of annual leave entitlement, Far East argued that since no written employment contract was finalised and signed by the parties, the terms of the draft contract were not binding. As such, Patrick was entitled to only the basic annual leave entitlement as provided for under the EO.
Further, the Handbook provided that a maximum of 5 days annual leave may be carried forward from one year to the next provided that they were taken by the end of March of the following year. Any holiday not taken would be forfeited and the employee would not receive any payment in lieu (the “forfeiture clause”). It was Far East’s position that Patrick was bound by such term.
On the basis that the basic annual leave entitlements under the EO were applicable, and assuming Patrick had taken 30 days’ of leave as alleged, Far East argued that Patrick was only entitled to 51.1 days of untaken annual leave amounting to HKD 109,200.
In respect of the claim for untaken annual leave, the court found that the parties acted in accordance with the terms of the employment contract drafts as far as annual leave entitlement was concerned and therefore, rejected the argument that Patrick only enjoyed the basic and less generous entitlements under the EO. The court also found that the parties reached an oral agreement that Patrick’s annual leave entitlement would be increased to 20 days from 2008 onwards.
The court went on to reject Far East’s Primary Argument stating that as an employer, Far East had a statutory and contractual duty to grant annual leave to its employees. Even if Patrick had a lot of free time in his job, that free time cannot be translated into annual leave taken by him. An employer’s duty to grant annual leave shall not be discharged by the mere fact that an employee was not fully utilised whilst at work.
Far East’s Alternative Argument was also rejected. The court stated that as well as having a duty to grant annual leave, employers also have a duty to keep a record of all periods of annual leave taken by each employee under section 41G of the EO.
In consideration of Far East’s further argument that the forfeiture clause of the Handbook had been incorporated into Patrick’s employment contract and therefore, part of his untaken annual leave had been forfeited in accordance with that clause in the Handbook, the court looked at whether there was objective intention to incorporate that term of the Handbook into the employment contract. In the absence of any express term in the contract, the court considered whether such intention could be inferred.
The court noted that the Handbook appeared to be designed for and targeted at staff employed in the UK. As such, it was clearly not apt to be incorporated wholesale into the employment contract which was entered into and performed in Hong Kong. Given that it was unclear as to whether there was intention to incorporate some terms and not others, and in such case, which terms to incorporate and which to not, the court concluded that there was no intention to incorporate the terms of the Handbook into the employment contract. The forfeiture clause was therefore considered not to have been incorporated and so Patrick’s untaken leave could not be partly forfeited.
Takeaway Points for Employers
Although it was accepted in this case that Patrick was in charge of the operation of the Hong Kong office (including the management of human resource related matters) and Far East was entitled to place trust on him for handling matters properly, the court commented that when it came to personal benefits of Patrick himself, one would have expected that Far East would have had at least some checks and balances in place. It was held that the accumulation of untaken annual leave was partly due to the employer’s fault as they should have taken a more proactive role in the monitoring of whether their employee had taken his entitlements. Indeed, section 41G of the EO provides that “Every employer shall keep a record of - … all periods of annual leave taken by each employee…”.
What is clear from this case is that it is the employer’s duty to keep track of whether their employees’ have taken their entitlements and not the duty of employees to keep their employer informed of such matters. Employers should have mechanisms in place when it comes to monitoring entitlements for senior staff members who have responsibility for the management of the employer’s operations. Employers should take an active role in keeping records and should not simply allow their senior employees to manage their own and other employees’ entitlements.