WONG HUEY LAN v. COLGATE-PALMOLIVE (HK) LTD.

HCLA 77/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 77 OF 2001

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO. LBTC 4955/2001)

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J U D G M E N T

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1. The Claimant in this case was employed by the Respondent from August 1996 to June 2000. After she was laid off by the Respondent, dispute arose as to her entitlement under the Local Employees Incentive Plan ["LEIP"] of the Respondent. The Claimant commenced proceedings in the Labour Tribunal. On 28 September 2001, the Presiding Officer decided in favour of the Claimant and awarded her the sum of $15,857. The Respondent seeks to appeal against that decision. Leave to appeal was granted by this Court on 20 November 2001. Although several grounds were advanced at the application for leave to appeal, I only granted leave in respect of the following ground:

"That the Presiding Officer erred in law in equating LEIP as an end of year payment in that LEIP payments were discretionary and fell outside section 11A of Part II A of the Employment Ordinance, Cap.57 due to the following provisions:

(a) the Defendant's right to alter or withdraw the LEIP, if the business "health" of the subsidiary is in jeopardy;

(b) the award determinants of the LEIP being:

i. the Respondent's operating target; and

ii. the employee's performance."

2. Section 11A of the Employment Ordinance provides:

"In this Part, unless the context otherwise requires-

"end of year payment" (年終酬金) means any annual payment (whether described as "thirteenth month payment", "fourteenth month payment", "double pay", "end of year bonus" or otherwise) or annual bonus of a contractual nature, but does not include any annual payment or any annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer."

3. If the payment under the LEIP fell within the definition of "end of year payment", the Claimant would be entitled to a pro rata payment even if she was laid off before the end of a full payment period if she had worked for 3 months or more in that period (see Section 11F (1) of the Employment Ordinance). Further, by virtue of Section 70 of the Employment Ordinance, that entitlement could not be excluded by any provision in the employment contract. It is not disputed that the pro rata entitlement of the Claimant would have been $15,857 if the sum payable under the LEIP were end of year payment. The only issue in this appeal is whether the LEIP payment was payable only at the discretion of the employer.

4. The Presiding Officer held that the payment did fall within the definition of end of year payment. The Respondent contended that he was wrong in law in coming to that conclusion.

5. Before I deal with the law, I should set out the most relevant provisions of the LEIP. Parties agreed that for present purposes, the relevant set of LEIP is the 2000 version. Under the heading "Plan Objectives", it was provided that:

"The benefits of this plan are in addition to the discretionary year-end bonus i.e."13th month" of salary presently provided.

Management reserves to (sic.) right to alter or withdraw this plan, if the business "health" of the subsidiary is in jeopardy."

The terms of the plan were, and I quote:

"The 2000 LEIP will cover the results for the period January 1, 2000 to December 31, 2000.

The plan bonus will be award (sic.) during the first quarter of the following year when individual employee's performance appraisal rating and our company's operating target performance would be available."

At p.2, the document also referred to "eligibility" under the plan. For that purposes, employees were divided into three categories. Clause 6 under that section provided that employees terminated by reason other than death, disability, retirement, or who resign will receive no bonus under the plan unless employed for the entire plan year. This was rightly held by the Presiding Officer to be void by reason of Section 70. The Respondent did not dispute that if the payment under LEIP was held to be end of year payment, they could not rely on Clause 6.

6. I would also set out the section dealing with award determinants which provided for how the award would be calculated for each employee.

"Award Determinants

A. Operating target payout

Minimum operating target payout occurs at 90% and maximum at 105% (see Appendix A). Payout at 100% operating target performance level is equal (sic.) 50% of the participant's assigned award level.

This benefit is automatic except when your performance appraisal rating is below "Meets expectations".

B. Function/ Individual objective payout

The function / individual objective award portion is determined by multiplying 50% of the assigned award level by the participant's overall function / individual objective rating.

The rating scale for performance against individual objectives, as follows:

Exceptional	101% to 115%
Exceeds Expectations	86% to 100%
Meets Expectations	50% to 85%
Below Expectations	0% (no award granted)

The actual function / individual award may range from zero to a maximum of 115%of the function / individual award opportunity. Each function / individual point over 100% will yield additional 0.02 month salary. (Appendix B provides examples to illustrate the total award calculation under different scenarios.)

When operating performance is less than 90%, payment of the function / individual award becomes discretionary, subject to the approval of Local Management. The discretionary award is the function / individual portion of the award opportunity, i.e. 50% of the assigned award level multiplied by the function / individual rating."

7. In essence, the Respondent submitted that because of the discretionary elements embodied in the award determinants and the provision as to withdrawal if its business health was in jeopardy, the payment under the LEIP could not be an end of year payment within the meaning of Section 11A. In respect of the award determinants, the Respondent argued that the discretionary nature of the payments manifested in the setting of the operating target (for the purpose of the operating target payout) and the appraisal of the employee (for the purpose of function / individual objective payout).

8. I agree with the submission of Mr Paul Lam for the Claimant that the first and foremost issue that I have to decide is construction of Section 11A. It is common ground between the parties that a payment could be contractual in nature although it has some discretionary elements. In several recent cases, the court accepted that an employee has a contractual right to see to that the discretion regarding a discretionary bonus is exercised by the employer rationally, properly and in good faith: Post Vanessa Jane v. Nomura International (Hong Kong) Limited [2001] 410 HKCU 1, 29.5.2001; Joanne Kay Wood v. Jardine Fleming Holdings, HCA No. 12524 of 1998, 16.2.2001. In both cases, the principles set out by Burton J in the English case of Clark v. Nomura International [2000] IRLR 766 was applied by the court. The conclusion of Burton J was that quite apart from any contractual straitjacket for the exercise of discretion, an employer's discretion in deciding whether to award any bonus is generally subject to a test of irrationality or perversity (of which caprice or capriciousness would be a good example), i.e. no reasonable employer would have exercised his discretion in this way. If the discretion was exercised irrationally or perversely, it would be a breach of contract and the court would then have to reach a conclusion as to what would have occurred had the employer complied with its contractual obligations and assess what position the employee would have been in had the employer performed its obligation. In effect, the court would then have to assess the employee's bonus on the basis of the evidence before it and to award damages for that sum. In Clark, Burton J awarded damages in the sum of £1.35 million. Although initially there were some reservations on the part of Mr Douglas Lam who appeared on behalf of the Respondent, in the end both counsel accepted for the purpose of this appeal that Clark set out the correct test. In my judgment, that concession on the part of Mr Douglas Lam was correct.

9. How does that fit into Section 11A? The first part of Section 11A refers to annual payment or annual bonus of a contractual nature. The second part excludes, inter alia, payments which, although falling within the first part being contractual in nature, are payable only at the discretion of the employer. Hence, it is not enough for the Claimant to show that her entitlement under the LEIP was contractual (as to which there is no dispute). She needs to show further that the payment was not payable only at the discretion of the employer.

10. The issue boils down to the meaning of the expression "payable only at the discretion of the employer". Mr Paul Lam emphasized the word "only". He submitted that the phrase referred only to payment at the absolute discretion of the employer. On the other hand, Mr Douglas Lam submitted that the expression referred to any payment which involved the exercise of a discretion on the part of the employer. Hence, it would apply to all kinds of contractual payments if they were calculated by reference to formulae in which there are elements of discretion. He submitted that a discretion to be exercised within a straitjacket was still a discretion and if the legislature intended to confine the exclusion to cases of absolute discretion, it would have said so. Although Mr Douglas Lam referred me to certain passages in the Hansard, I do not find that to be particularly helpful in resolving the issue which I have to decide.

11. Counsel have not referred to any direct authority on the point. The closest case seems to be New Bright Industrial Co. Ltd. v. Wong Sau Chi [1995] 2 HKC 357. In that case, Jerome Chan J held that the over limit bonus in that case was gratuitous in nature and did not fall within the definition of wages in Section 2 of the Employment Ordinance which contained a similar exception as the definition for end of year payment under Section 11A. The learned judge summarized the effect of the relevant provision in that case as follows (at p.365E):

"It is more likely than not that it was a mere expression of an intention to give a bonus when the employer decided to make one, and in a manner and amount as he liked. It is, therefore, more probable than not that payment of the bonus was gratuitous."

12. Hence, in that case, the focus was on the gratuitous nature of the bonus and I do not think that judgment shed much light on the point which I have to decide in the instant case. The provision in issue in that case is also very different from the one before me.

13. Mr Douglas Lam referred me to the ejusdem generis rule. In my judgment, the rule could be applied with regard to the construction of the second part of Section 11A. Reading that part as a whole, the excluded payment is one which is of a gratuitous nature or which is payable only at the discretion of the employer. Applying the ejusdem generis rule, a narrow interpretation is called for in respect of sum "payable only at the discretion of the employer". If the intention of the legislature was to exclude all kinds of annual payment the calculation of which involve a discretionary element, the word "only" was not necessary and a clearer expression would be "payable upon the exercise of a discretion by the employer".

14. If discretion as to payment has to be exercised subject to certain criteria, and if the wrong exercise of such discretion could result in an award being made by the court, it must follow that the employee must have some substantive contractual right regarding such payment recognized in the eyes of the law. Mr Douglas Lam submitted that the right of the employee was limited. He said it was limited to a right to demand the discretion to be exercised properly. It was not a right to the payment of a specific sum. But in Clark, Burton J did award a sum to the plaintiff by way of damages. More importantly, the submission does not address the question whether in such circumstance the payment could still be described as being payable only at the discretion of the employer. In my judgment, that is the crucial question and the answer is "No". Although the amount may be calculated by reference to some criteria which depends in some respect as to the exercise of a discretion, the annual payment is payable by reason of the contractual provision and the satisfaction of certain criteria by the employee and the company as a whole. It would, in my view, be a misuse of language to describe such a payment as payable only at the discretion of the employer.

15. In fact, I have some doubts whether it is appropriate to regard the payment as one of discretionary in nature just because of the three matters relied upon by the Respondent in the present appeal. To recap, the three matters are the setting of the operating target, the assessment of the performance of the employee and the option to cancel the plan. Whilst these involved certain discretionary elements in the process, the discretion can only be properly exercised with regard to clearly identifiable objective criteria. The setting of operating target has to be set by reference to the track record and the prospect of the company. The assessment of the employer must depend on objective appraisal of the employee. The option to cancel could only be exercised if the financial health of the company is in jeopardy. The LEIP seems to me to be a formulaic incentive payment rather than a discretionary bonus. In this respect, the LEIP is very different from the kind of discretionary bonus considered by the court in the three cases mentioned in Paragraph 8 above. In those cases, on the face of the contractual documents, the bonus was at the unfettered discretion of the employer.

16. As Mr Paul Lam quite rightly pointed out, the parties themselves did not regard the payment as discretionary. This is borne out by several clauses in the plan. A distinction was drawn between the benefit under the LEIP and the discretionary thirteenth month salary. Payment of the operating target payout was automatic except when the employee's performance appraisal rating fell below "Meets expectations". Regarding the function / individual objective award, it was only when operating performance was less than 90%, its payment became discretionary. Whilst these are not conclusive, I am entitled to take them into account in resolving the question whether the payment could be regarded as payable only at the discretion of the employer.

17. In the end, despite the able arguments of Mr Douglas Lam, I am of the view that the payment under the LEIP could not be regarded as payable only at the discretion of the Respondent. If the Respondent did not set an operating target or set a wholly unrealistic target, that decision could be set aside by the court. If the Respondent did not assess the performance of an employee rationally, properly or in good faith, again that assessment could be challenged and reviewed by the court. Likewise, if the Respondent withdrew the plan without proper basis, that decision would be void. Whilst the operation of the plan calls for certain judgment on the part of the Respondent, it does not have an unfettered discretion in the matter. The Respondent is contractually answerable to the employee with regard to the payment under the plan. It would be more accurate to describe the payment as a contractual benefit, the calculation of which involves some exercise of discretion on the part of the employer, rather than as a discretionary benefit pursuant to a contractual formula.

18. For these reasons, the Presiding Officer was correct in his decision and the appeal must be dismissed with costs. I wish to add that my decision is based on the very facts of the present case. I would leave open the question whether in the situation of a truly discretionary bonus as in the case of Clark, the bonus could still be regarded as payable only at the discretion of the employer in the light of the impact of that decision. That would have to be considered on another occasion.