Who Owns Your Company’s Creative Ideas?

As at September 2018, there were around 340,000 SMEs in Hong Kong.  They accounted for over 98% of total business units and provided job opportunities to over 1.3 million persons (around 46% of total employment, excluding the civil service). In this article we highlight the intellectual property and employment law issues for start-ups and SMEs to take into consideration, as well as some practical tips in going forward.

Intellectual Property (IP)

A well protected IP can provide with the owner a monopoly, or a unique selling proposition.  In terms of generating revenue, IP can be sold or licensed, thus providing additional streams.  As investors are increasingly aware of the importance and value of IP to a business, a company with a strong and well-protected IP portfolio would form the basis of a much higher than normal valuation, as compared to a rival who places less emphasis on IP protection.  On the defensive side, having well protected IP could afford a company more leverage and increased flexibility on exit options.  While SMEs would understandably devote time and resources on product or service development sales and marketing, getting ownership rights are not expensive.  IP protection should always be factored in when carrying out business planning and budgeting, as the benefits of well protected IP usually outweighs the financial input. 

As IP is territorial and different rules apply in different jurisdictions, businesses need to consider how and where its IP is created and used.  Generally, the creator of the IP owns the IP.  In the employment context, however, IP created in the course of the creator's employment belongs to the employer.  Businesses should take note as to the identify the ownership and IP rights, if it is knowingly using them.  If they belong to a third party, it is important that the business uses it legally - usually by a licensing arrangement. Alternatively, the business may consider direct acquisition of the IP rights.  

It is suggested employers do clearly define the scope of the employees' work, and make it expressly clear that any IP created by them belongs to the employer.  If the business is contracting out, it is advised to include the assignment of the IP created in the agreements in place with the contractors.  To avoid disputes, it is better to explain the position of the business regarding IP protection at the outset.  As job roles and scopes may evolve, regular reviews of job roles may also be helpful. 

Employment

Employment law often presents significant compliance challenges for start-ups and SMEs in Hong Kong. The attitude of SMEs to be flexible, agile, business-minded and forward-looking, tends to be in stark contrast to the employment law statutes and regulations in Hong Kong, which can be archaic and difficult to follow.

Calculation of statutory employment benefits. The Employment Ordinance includes a specific formula for the calculation of an employee's statutory employment benefits. Items such as holiday pay, annual leave pay and sickness allowance must be calculated on the basis of an employee's "daily average wage" i.e. all the wages earned by the employee in the preceding 12-month period. Importantly, "wages" is defined extremely broadly to included almost all forms of remuneration payable for work done or to be done and would include items such as cash allowances, overtime and commissions - not just base salary. This can cause problems for SMEs who reward staff using variable compensation structures, and these problems tend to go undetected until the business is faced with (potentially multiple) claims for backdated wages. Employers are, however, free to set their own rules with respect to company-enhanced benefits (i.e. anything over and above the statutory minimum) and, if doing so, should make this clear in the employment contract and company policies.

Confidentiality. It is tempting for start-ups and SMEs to think that because their employees may not be particularly high skilled and/or are relatively junior, confidentiality is less of a concern. The opposite may be true. SMEs are increasingly built on a model of collaboration and it can often be the lower-skilled employees who have access to confidential information and trade secrets from a very early stage. It is vital that these interests are protected during the early stages of business development with a robust confidentiality clause or a standalone NDA.

Restrictive covenants. Competition is rife among SMEs and the prospect of key employees leaving to join competitors is always a pressing concern. Post-termination restrictive covenants are the key weapon in the SME's arsenal in terms of providing protection after the employee leaves employment; however, they are vulnerable in that they must also be tailored to the individual circumstances of a particular employee in order to have any chance of standing up to scrutiny in the courts. The challenge for SMEs is that their business, and consequently the roles assigned to its key staff, are constantly changing and evolving.  Suddenly the covenants that were enforceable when the employee started working may no longer be applicable to their current role or are now simply too weak to give the business sufficient protection. At the very least, restrictive covenants must be constantly reviewed for relevance to staff roles and business/product lines, and updated to ensure their enforceability. On the other hand, SMEs may want to consider alternative protection in the form of suitable notice periods and garden leave provisions, which have a similar effect and can give equivalent levels of protection in most cases.

Immigration. When setting up a new business in Hong Kong, senior employees will typically be assigned from overseas to assist with the set-up operations.  Or as the SME starts to grow, it may start to look overseas to acquire talent. The Hong Kong Immigration Department has wide-raging discretion over all immigration applications, and it can be a daunting task for SMEs to handle these applications by themselves. In particular, newly incorporated businesses will be subject to a higher degree of scrutiny and the SME will need to explain the structure/intended transfer to the Immigration Department in more detail. If the applications are rejected for any reason, it could negatively impact the SME's ability to sponsor visa applications in the future.

Atypical workers. SMEs often rely on a higher proportion of independent contractors, agency staff and other atypical workers. In Hong Kong, even if an individual is labelled as a "contractor" in the contractual paperwork, the courts will still consider whether the relationship between the business and the individual is one of employment in substance. The court will still examine all the features of the parties' relationship against a list of factors to decide whether as a matter of overall impression the relationship is one of employment. In practice, misclassification claims are not as common in Hong Kong as they are in some other jurisdictions (e.g. the US); however, it can be prudent to engage individuals under an employment model in certain circumstances.

Growing pains. Growth is a nice problem to have. When a business is first incorporated, legal considerations often give way to commercial interests: employment law is no different. But what happens when the business begins to hit critical mass? The simple employment contract that may have been good enough for a handful of employees when the business started is unlikely to be capable of applying universally to all staff as numbers grow and employee skill sets become increasingly varied. Growth gives rise to workplace culture - suddenly it becomes important for staff to live and breathe the value of the business, and for employees to feel like they are being treated fairly. At this point the SME should really start to consider a comprehensive review of its employment contracts, as well as introducing workplace policies and staff handbook to the extent it has not already done so.

Isn't Hong Kong employer-friendly? By and large, Hong Kong is still generally regarded as business-friendly compared to most jurisdictions in Asia (second only to Singapore). However, SMEs should not fool themselves into thinking all is plain-sailing. Most importantly, Hong Kong is not an at-will jurisdiction. Employers must have a valid reason to terminate, and they may be on the hook for an unfair dismissal claim with respect to any employees who have accrued at least two years' continuous service. In addition, most breaches of the Employment Ordinance are technically criminal offences, and are punishable by a combination of fines and/or imprisonment. Directors and senior management can be held responsible in the most serious cases - particularly in the case of unpaid wages which the Labour Department has made a conscious effort of cracking down on.  Employers of all sizes also need to be aware of the implied terms that apply throughout employment and can become particularly relevant on termination, such as the term of trust and confidence.  Employees are increasingly seeking to bring claims for common law damages relating to breaches of implied terms, and any employee termination should be handled carefully and with forward planning.

Partner and Head of Employment, DLA Piper, Hong Kong

Partner and Co-Head of IPT, Asia, DLA Piper