Cross-border employment arrangements in Hong Kong and China are very common and as such, employees’ business expenses incurred that are to be reimbursed by employers could be an administrative nightmare to manage. The issues of establishing employment relationship, entitlement to reimbursements and validity of summary dismissal were carefully examined in the recent Court of First Instance case of Alcohol Countermeasure Systems (HK) Limited & Anor v Li Chi Kong, Peter  HKCFI 227.
Alcohol Countermeasure Systems (HK) Limited (ACS Hong Kong) (“HK Employer”) is incorporated in Hong Kong to engage management personnel to oversee a factory set up in China. Alcohol Countermeasure Systems (Dongguan) Limited (ACS China) was the PRC company which ran the factory (“PRC Employer”).
The defendant, Mr Li, was employed as the general manager of the factory in China by the HK Employer and an employment contract was entered between them (“HK Employment Contract”). Five months after the HK Employment Contract, Mr Li further entered into 2 PRC employment contracts with the PRC Employer (“PRC Employment Contracts”).
The HK Employer initially dismissed Mr Li with one-month’s written notice and required Mr Li to provide information regarding business expenses incurred of over HK$1,500,000 which reimbursements had already been made by the PRC Employer. After Mr Li did not respond to the requests to provide information, the HK Employer summarily dismissed him and claimed breach of duty of good faith owed under the HK Employment Contract. The PRC Employer also commenced an action for fraudulent misrepresentation regarding the business expenses claimed, cash withdrawal and payments to suppliers made on its behalf by Mr Li. The HK Employer claimed that Mr Li had not incurred those business expenses as alleged or he was not entitled to be reimbursed for them, as provided under the PRC Employment Contracts. Mr Li disputed the claims and counterclaimed against the HK Employer for wrongful dismissal.
(a) Which Terms of Employment Apply ?
The first question for the Court to determine is what the terms of Mr Li’s employment are. The court considered the brevity of the HK Employment Contract where there was no mention of Mr Li’s benefits. The PRC Employment Contracts that were subsequently entered into provided that the employee was entitled to be reimbursed, subject to provision of proof for meal, transportation and other expenses. The specific standard and mode were also set out regarding meal allowance in the PRC Employment Contracts. The Court found it to be more probable that Mr Li was employed by both employers, with the HK Employment Contract and the PRC Employment Contracts all being binding and effective.
(b) Claim for Reimbursement Proper or Not ?
After establishing that the terms of employment were contained in both the HK and PRC Employment Contracts, the court determined that Mr Li’s expenses were proper and legitimate as well. He was entitled to the reimbursements claimed and the claims against him for breach of duty and fraudulent misrepresentation were dismissed. This was because both employers were not able to prove on a balance of probabilities that Mr Li had submitted fake receipts or pocketed money payable to suppliers.
(c) Wrongful Dismissal
As stated above, the HK Employer initially dismissed Mr Li by giving one-month’s notice, along with requests to account for business expenses claimed within three days. Upon receiving no response from Mr Li and after divers means to contact Mr Li, spanning over two weeks, which were all ignored, Mr Li was summarily dismissed. Mr Li counterclaimed against the HK Employer for wrongful dismissal. The Court ruled that there was no credible reason to explain Mr Li’s claimed failure to receive emails and letters and found that Mr Li wilfully disobeyed his HK Employer’s lawful and reasonable requests for explanations regarding the business expenses which requests he was aware of.
Section 9(a)(i) of Employment Ordinance (Cap. 57) provides that an employer may terminate a contract of employment without notice or payment in lieu if an employee, in relation to his employment, wilfully disobeys a lawful and reasonable order. The breach of this provision rendered the summary dismissal justifiable and Mr Li was not entitled to salary for the day he reported back for duty after the summary dismissal, payment in lieu of notice nor severance payment.
The case makes it clear that all employees must comply with lawful and reasonable instructions by employers. Failure to cooperate may justify summary dismissal under the Employment Ordinance.
A key takeaway for employers is to carefully draft employment contracts to set out the employment relationship especially in the case of cross border employment. If it should be a placement or secondment with no employment relationship between the employee and another group company whether in or outside of Hong Kong, the contract should expressly state so. It is also important to include terms that cover expenses incurred by employees and reimbursement policies, internal guidelines for claiming business expenses should be provided to employees stipulating the time-limit for submitting receipts and standard of evidence, etc.
If you have any questions about the above eNews or need advice regarding any employment issues in Hong Kong or China, experienced employment lawyers in our firm will be happy to assist you.