Employers Beware! Pitfalls of attempting the remedy of “self-help” in recovering sums due from employees

Apr162015

Employers frequently find themselves in a position where they may be owed money by an employee or feel strongly aggrieved by the actions of an employee which may have caused them loss – potentially when there is even a suspicion of fraud.  Where these situations arise it is extremely tempting for employers to cease payments of amounts due to employees and/or seek to recover amounts they consider as owed to them by deducting or setting off such amounts against the amounts due to the employee or ex-employee.

However employers need to be extremely careful in those circumstances and be aware of their extremely limited rights to make any deduction or to stop payments.

Legal Restriction on Deductions

Sections 23 and 25 of the Employment Ordinance (Cap 57) (“EO”) set out the requirement that wages due to an employee must be paid within 7 days of the end of the wage period or termination date.

Section 32 of the EO further prohibits any deduction being made by an employer from wages or other sums due to his employee other than in the very limited circumstances.  Some of the main exceptions to this general rule include:-

1.    Deductions for absence from work that is proportionate to the duration of the employee’s absence;

2.    Deductions for damage to or loss of the employer’s goods, equipment, or property, or for loss of money for which the employee is required to account, directly caused by the employee’s neglect or default.  However the total deduction must not exceed HK$300;

3.    Deductions for the recovery of any advance or overpaid wages to the employee.  However the total sum to be deducted shall not exceed one quarter of the wages payable to the employee in that wage period;

4.    Deductions, with the employee’s written consent, for the recovery of any loan made by the employer to the employee but even then only up to a maximum of half of the wages payable.

Unless with the approval in writing of the Commissioner for Labour, the total of all deductions (except those for absence from work) made in any one wage period shall not exceed one half of the wages payable to the employee in that wage period.

Therefore, if the employer considers that there has been any misappropriation of funds or that the employee is guilty of serious misconduct causing loss, it should consider potentially ending the employment summarily (i.e. without notice) and seeking to recover its losses.  To the extent that the employer continues to employ that employee, it remains subject to and bound by the prohibition upon deduction and must comply with it.

Criminal Liability of the Employer and its Officers

Failure to pay sums due to employees and the making of unauthorized unlawful deductions does not only give the employee the right to successfully sue for those amounts plus interest at 8% p.a., the employer would also be guilty of a criminal offence.
Section 63C of the EO provides that any employer who wilfully and without reasonable excuse contravenes sections 23 and 25 and is a criminal offence punishable by a fine of HK$350,000 and imprisonment for 3 years and section 63B of the EO provides that breach of section 32 is a criminal offence punishable by a fine of HK$100,000 and imprisonment for 1 year.

In the case HKSAR v Ching Yeung Development Co Ltd (HCMA 806/2002), the employer suspected that some of its employees had committed theft of company properties.  Following an internal investigation, the employer reported the matter to the police, suspended the employees’ duties and stopped paying them wages.  Regardless of subsequent settlement of the outstanding wages, the Labour Department issued a criminal summons against the employer for wilfully and without reasonable excuse withholding the wages of its employees.  The employer was later convicted in the Magistrates Court and the appeal to the High Court was dismissed.

Personal Criminal Liability

Directors and senior management in employer companies should be fully aware that they can also be personally prosecuted and convicted for the same offences.  Section 64B of the EO, provides that where an offence under section 63B or 63C is committed by the employer company and it is

“proved to have been committed with the consent or connivance of, or to be attributable  to any neglect on the part of, any director, manager, secretary or other similar officer of the body corporate”

such person shall be guilty of the same offence.

In recent years the Labour Department (which is the relevant prosecuting authority) have been far more active in bringing criminal prosecutions against individuals, such as

1.    The case of HKSAR v Li Fung Ching Catherine (FAMC 4/2012), where the Magistrate found that the company had deliberately failed to pay wages in order to meet other operating expenses and such was done with the connivance of the company’s directors.

Although in that case the director appealing the decision disagreed with her two fellow directors on the withholding of the wages, it was held that the Magistrate was free to find her “connivance” properly established on the evidence that she had remained a director and had ultimately gone along with the decision and was responsible for the company’s daily operations, personnel and finances.  By taking no step at all to stop the company from withholding the wages, the Magistrate was entitled to find that “it was obvious that she agreed to such a decision at the end of the day” and as such the director was personally rightly fined a total of HK$110,000 in the circumstances.

2.    In June 2013, two directors of Hiutone International Limited were held liable for underpayment of wages due to employees of the company totalling HK$478,000.  Even though the sums were paid in full by the hearing, the two directors were personally convicted and sentenced to:-

a.    Four months in prison, suspended for 24 months

b.    A fine of HK$18,000 each

The Labour Department has also commented on the above case that:-

“The judgment would send a strong message to all company directors and responsible persons that they have to ensure that wages are paid to employees in accordance with the Employment Ordinance,” a spokesperson for the Labour Department said.

“The Labour Department will not tolerate the offences and will spare no effort in bringing to justice directors and employers who defy the law,” the spokesperson added.

The above highlight the risks involved for the employer company and its directors and senior management in attempting the remedy of “self-help” by withholding or refusing to pay employees their entitlement to wages on the basis of sums the employer believes are due to it.

Notification of Deduction

Sections 45 and 46 of the EO further impose a statutory obligation on employers to notify employees of any deductions from wages.  By virtue of section 45 of the EO, employers must inform an employee of any changes which occur in respect of wages and on making a payment of wages, section 46 of the EO requires employers to provide an employee with particulars of the amount earned, including any deductions made from the wages of the employee and the reasons for making the deductions.  Such information must be communicated in a manner which is intelligible to the prospective employee and may be undertaken orally, in writing or partly orally and partly in writing.

Section 63D of the EO provides that an employer who contravenes section 45 of the EO is guilty of an offence and liable to a fine of HK$10,000, regardless of knowledge of the offence.  In the event of employers being convicted of an offence, the court has a statutory power under section 65 of the EO to order the payment of outstanding wages.  In a recent UK case, Ridge v HM Land Registry EAT/0098/10/DM, the Employment Appeal Tribunal (dealing with similar provisions) found that even where the deduction from wages is within the statutory exceptions, the deduction may still be improper if the employer fails to properly notify the employee of such deduction.

Conclusion

1.    Whilst an employer continues to employ an employee it must generally pay the employee all sums due to them.

2.    There are only very limited rights to make any deductions from wages and other sums due to employees and extreme caution should be exercised before any deduction is made or any payment stopped.

3.    The employer, its directors and senior management responsible for taking and/or implementing any decision which infringes the above provisions and are at risk of criminal prosecution and conviction.

4.    If a payment is stopped or a deduction made, the position should be remedied as soon as possible in order to reduce the prospects of any prosecution action by the Labour Department and to discharge the legal liability to pay those amounts.

5.    Any deduction from wages must be properly identified and explained to the employee.

For further information, please contact:
Russell Bennett
Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.