LAW SHU FAT AND OTHERS v. NG KWONG YUI t/a NG YIU KEE TRANSPORTATION CO

CACV 187/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 187 OF 2005

(ON APPEAL FROM HCLA 126 OF 2003)

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JUDGMENT

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Hon. Woo VP:

1.  I agree with the judgment of Yuen JA.

Hon. Yeung JA:

2.  I agree with the judgment of Yuen JA.

Hon. Yuen JA:

3.  This appeal arises from claims made in the Labour Tribunal by the Claimants against their employer ("the Defendant").  Since the hearing in the Labour Tribunal, two claimants (the 4^th Claimant and the 7^th Claimant) have resigned for health reasons, and the 10^th Claimant’s employment has been terminated by the Defendant, but the rest are still employed by the Defendant.  

4.  It is worth noting from the outset that the claims are only in respect of:

(a)  "failure to grant statutory holidays", statutory holidays being governed by Part VIII of the Employment Ordinance ("the Ordinance") and

(b)  "failure to grant annual leave", annual leave being governed by Part VIIIA of the Ordinance.

It should also be emphasized that the position of the parties under the Transfer of Businesses (Protection of Creditors) Ordinance cap. 49 did not fall for this court’s consideration in this appeal.

5.  Before I deal with the issues, it may be helpful to summarize the background facts. 

Background facts

6.  The Defendant’s father ("the father") was the sole proprietor of a small transportation business and employed the Claimants as labourers.  Apparently he (the father) never gave the Claimants any statutory holidays or annual leave.    

7.  In 1990, the Defendant started to manage the business for his father but he was not a partner.

8.  On 23 November 1998, the father died.  After the father’s death, the Claimants carried on working as before.  The Defendant used the lorries that the father had used in the business, as the father had signed transfer documents for the lorries before his death.  The Defendant finished the balance of the calendar year’s contract that the father had entered into with the business’s only client.

9.  In February 1999, the Defendant signed a new contract with the client for that calendar year.  On 15 March 1999, the Defendant filed a business registration, stating that he had commenced business on 1 March 1999 as sole proprietor trading under the same name as that used by the father. 

10.  In 2000, the Defendant obtained Letters of Administration to his father’s estate.

11.  In 2003, the issue arose as to whether the Claimants could claim against the Defendant in respect of (a) the statutory holidays and  (b) the annual leave which the father had not given them. 

Labour Tribunal’s decision

12.  On 4 August 2003, the Presiding Officer (Mr Winston Leung) found that there had been no transfer of business from the Defendant as administrator of the father’s estate to himself personally.  Upon the father’s death, his business had come to an end and the contracts of employment between the father and the Claimants ceased.  In working for the Defendant after the father’s death, the Claimants were doing so under new contracts of employment made with him.  On the basis of those findings, the Presiding Officer dismissed the claims against the Defendant which were predicated upon the father’s business having been transferred to him.

Appeal to Court of First Instance

13.  The Claimants’ appeal was heard before Yam J on 24 November 2004. 

Inference of transfer of business

14.  After considering the evidence before the Labour Tribunal, some of which had not been referred to by the Presiding Officer in his judgment, the judge concluded (para. 25):

"From all the evidence in this case before the Tribunal the natural inference to be drawn is that the son has taken up the business of the father and by this taking up of the business which including all the accounts receivable and assets of the company including the two lorries, the business had already been transferred from the father to the son for the purposes of the Employment Ordinance".

First Schedule of Employment Ordinance

15.  The judge considered para. 5 of the First Schedule of the Ordinance.  That Schedule provides as follows:

"1(a) The provisions of this Schedule are to ascertain whether or not any contract of employment is a ‘continuous contract’ for the purposes of this Ordinance.

  (b) [Transitional provisions regarding commencement of the Ordinance].

 2. Subject to the following provisions, where at any time an employee has been employed under a contract of employment during the period of 4 or more weeks next preceding such time he shall be deemed to have been in continuous employment during that period.

3(1) [What counts as a "week"].

  (2) [What counts as an "hour"].

4. [Effect of strike or lock-out on counting of time].

5. If a trade, business or undertaking is transferred from one person to another, the period of employment of an employee in the trade, business or undertaking at the time of the transfer shall count as a period of employment with the transferee, and the transfer shall not break the continuity of the period of employment.  

6. [Definition of an "hour" in certain situations].

7. [Definition of strike and lock-out]"

(Emphasis added).

Judge’s decision

16.  The judge then held (para. 32):

"It will be quite odd that paragraph 5 would only continue the contract of employment for the purpose of long service payment but not for the other benefits conferred on an employee under the same contract of employment.  It is, therefore, my decision that the said paragraph 5 continued the contract of employment for all the benefits of a contract of employment". (Emphasis added).

On that basis, the judge held that the Defendant was liable to pay the Claimants in respect of statutory holidays and annual leave that the father had not given them. 

Leave to appeal

17.  The Defendant sought leave to appeal.  Section 35A Labour Tribunal Ordinance provides that if any party is dissatisfied with a decision of the Court of First Instance on an appeal from the Labour Tribunal, such party may within 7 days after the decision, apply to the Court of Appeal for leave to appeal, and if the Court of Appeal considers that a question of law of general public importance is involved, it may grant leave. 

Question of law

18.  On 26 May 2005, this Court (Yeung JA and Yuen JA) gave leave to appeal in respect of the following question of law:

"Whether para. 5 of the First Schedule to the Employment Ordinance Cap. 57 per se has the effect of making the transferee of a business liable for all the liabilities and obligations of the transferor to his employees under the said Ordinance".

Notice of Appeal

19.  On 1 June 2005, the Defendant filed a Notice of Appeal asking for an order that Yam J’s judgment be set aside and that the Claimants’ appeal from the Presiding Officer’s decision be dismissed with costs, the only ground of appeal being that for which this court had given leave on 26 May 2005.

Summons to amend Notice of Appeal to include additional question

20.  However on 2 May 2006, nearly a year after the grant of leave on 26 May 2005 and about a week before the hearing of this appeal,  the Defendant issued a summons for leave to amend his Notice of Appeal. 

21.  The first part of the proposed amendment related to the order sought.  The Defendant asked that in the event this court found in favour of the Claimants on appeal, the matter be remitted to the Labour Tribunal "for enquiry with such directions as the Court of Appeal should think fit". 

22.  More important however was the second part of the proposed amendment.  This suggested that the Court of Appeal "has granted leave on the following questions of law", and in addition to the question of law I have set out at para. 18 above, the following was proposed to be added ("the additional question"):

"Whilst under s.35(2) of the Labour Tribunal Ordinance Cap. 25, the Court of First Instance (‘CFI’) may draw inference of fact, whether the CFI has jurisdiction to make by drawing inference, a different finding on a question as to fact from that made by the Labour Tribunal". 

The Claimants opposed the summons. 

23.  We did not give leave to add the additional question.  First the application was wrong procedurally.  What the Defendant should have done was to have sought leave to appeal on the additional question, not to have sought leave to amend the notice of appeal as if leave had been given. 

24.  Further there was no explanation as to why the additional question had not been raised when the Defendant sought leave to appeal in December 2004, or even when this court heard the application for leave to appeal in May 2005. 

25.  In respect of this point, counsel for the Defendant argued that the additional question had been advanced in 2004-5, albeit in a different form.  If that is the case, then the additional question is different only in form and not in substance from a question for which this court had refused leave in 2005, in which case there is even less reason for this court to revive it now.  Accordingly we dismissed the summons with costs. 

26.  I come then to the question of law raised on this appeal which is whether para. 5 per se has the effect of making the transferee of a business liable for all the liabilities and obligations of the transferor to his employees under the Employment Ordinance. 

First Schedule

27.  I have already set out the relevant provisions of the First Schedule in para. 15 above.  The First Schedule is incorporated into the Ordinance under s.3 which provides:

"3(1) In this Ordinance, ‘continuous contract’ means a contract of employment under which an employee is deemed by virtue of the provisions of the First Schedule to be in continuous employment".    

Discussion 

Para. 5 not applicable to extra-statutory benefits

28.  The first point is that the judge’s holding that para. 5 of the First Schedule of the Ordinance "continued the contract of employment for all the benefits of a contract of employment" is in terms too wide, and liable to be misunderstood and misapplied.  It is clear from para. 1(a) of the First Schedule that the provisions of the Schedule were enacted for the express purpose of formulating the parameters of a “‘continuous contract’ for the purposes of this Ordinance” only.  The concept of a “continuous contract” is a purely statutory concept affecting to various degrees (as we shall see) certain benefits conferred by the Ordinance.  There is nothing in the First Schedule or other parts of the Ordinance that purports to apply any provisions in the Schedule to extra-statutory benefits (by which I mean benefits other than those covered by the Ordinance e.g. a share allocation scheme) in a contract of employment. 

Even for statutory benefits, judgment too generalized

29.  Secondly, even if the judgment were read down to refer only to statutory benefits, I take the view when the judge held that para. 5 had the effect of imposing on the Defendant as transferee of the business liability for "the other benefits conferred on an employee under the same contract of employment", that conclusion was too broad-brush.

30.  In fact there is no express stipulation to that effect in the Ordinance, and it seems to me to be unlikely that a provision with such a significant effect would be hidden obscurely in a paragraph in a schedule of the Ordinance. 

Purpose of First Schedule

31.  In fact para. 5 is only one of a number of provisions in the First Schedule the express purpose of which is:

"to ascertain whether or not any contract of employment is a ‘continuous contract’ for the purposes of this Ordinance" (para. 1(a) First Schedule). 

In other words, the provisions in the Schedule (including para. 5) do not themselves confer any benefits. 

32.  What the provisions do is to specify whether a period “counts”  or does not count towards a period of employment.  Paragraphs 3, 4 and 5 actually use the word "count" frequently.  Paragraph 5 provides that if a business is transferred, "the period of employment of an employee in the ... business ... at the time of the transfer shall count as a period of employment with the transferee, and the transfer shall not break the continuity of the period of employment”. 

33.  It is clear from the words I have emphasized that para. 5 is, as it were, a computing provision enacted for the calculation of an  employee’s period of employment, as the Ordinance confers certain benefits on persons employed under a continuous contract.  A computer search of the Ordinance shows that there are no less than 20 references to a "continuous contract" or "a period of employment under a continuous contract" in the Ordinance.

How concept of continuous contract may impact on conferment of benefits

34.  There are different ways in which the concept of a continuous contract (incorporating the provisions in the First Schedule, including pre- and post-transfer provisions in para. 5) may impact on the conferment of a benefit under the Ordinance.

35.  If, after applying the provisions in the First Schedule, it is ascertained that an employee is (or is deemed to be) in employment under a continuous contract, then one must see from such of those 20 provisions of the Ordinance as are relevant (a) whether or not an employee enjoys a benefit from being employed under a continuous contract and (b) if so, the extent of that benefit.

Where a continuous contract is the only relevant factor

36.  There are some benefits conferred when the only relevant factor is that the employee is (or is deemed to be) employed under a continuous contract.  One example is the requirement for notice for termination of a contract of employment.  Even though parties to a contract of employment may agree on a period of notice, in the case of a continuous contract, the period must be at least 7 days: s.6(1)(c).   

37.  Applying that example to the facts of this case, if an employee (X) had been employed by the father for only 3 weeks before the transfer and by the Defendant for only 1 week after the transfer (thereby making up the minimum period of 4 weeks for continuous employment to be deemed: para. 2 of the First Schedule), he would have been entitled to 7 days’ notice if the Defendant had wished to terminate his contract of employment in December 1998 at the end of that 1 week with him.

38.  X’s entitlement to that period of notice would be the same as that of another worker (Y) whom the Defendant employed after he took over the business in 1998 and who has been working for the Defendant for 7 years now.  That is an example where the benefit is conferred on an employee purely on account of his being employed under a continuous contract, irrespective of his length of service. 

Where length of continuous contract determines qualification for benefit

39.  Then there are other provisions where the length of the period of employment under a continuous contract determines an employee’s qualification for the benefit.  One example is the entitlement to severance pay.   An employee would only be entitled to severance pay if he has been employed under a continuous contract for a period of 24 months before he is laid off: s.31B. 

40.  There are different qualifying lengths for different benefits e.g. for long service pay, the qualifying period is employment under a continuous contract for a period of 5 years: s.31R(1)(a).

Where length of continuous contract determines extent of benefit

41.  Then there are other benefits where the extent of the benefit depends on the length of the period of employment under a continuous contract.  One example is the amount of long service payment,   which falls to be calculated by applying as the multiplicand a certain proportion of the employee’s wages, and as the multiplier "every year ... of employment under a continuous contract by his employer ... " subject to a stipulated maximum: s.31V.

Claims in this case

42.  In the present case, we are concerned with claims emanating from the father’s:

(a) "failure to grant statutory holidays", statutory holidays being governed by Part VIII of the Ordinance, and

(b)  "failure to grant annual leave", annual leave being governed by Part VIIIA of the Ordinance.

It is therefore necessary to examine whether, and if so how, a continuous contract impacts on these benefits.

Statutory holidays

43.  The benefit of statutory holidays is provided in Part VIII.  Section 39 provides that all employees shall be granted holidays on certain specified days of the year, mainly festival days.  The only reference in this Part to a continuous contract is in s.40 which provides:

"Subject to section 12(11) [which deals with maternity pay and is irrelevant for present purposes], an employee who has been employed by his employer under a continuous contract for a period of 3 months immediately preceding a statutory holiday shall, not later than the day on which the employee is next paid his wages after that holiday, be paid by his employer holiday pay at the rate specified in section 41, whether the employee takes a holiday on the statutory holiday or on an alternative or substitute holiday or a holiday under s.39(4)".  (Emphasis added).  

44.  In other words, whilst all employees can enjoy a day off on a statutory holiday, an employee who has been employed under a continuous contract for a period of 3 months before the holiday also gets paid for the day, and he is entitled to receive pay for that day ("holiday pay") on the next wage day.  An employer who without reasonable excuse fails to grant a statutory holiday or to pay an employee holiday pay on time is guilty of an offence: s.63(4).

45.  It follows that the only impact of the concept of continuous contract on the benefit is to qualify a person employed under a continuous contract for the required length to receive holiday pay on his next wage day i.e. the type of benefit I have discussed in paras. 39-40. 

46.  Does the "counting" provision in para. 5 affect that benefit?  In my view, that depends on whether, in each individual case, the concept of continuous contract has a bearing on the conferment of the benefit.  Depending on the facts, the computation of pre- and post-transfer employment under para. 5 may or may not be necessary for the conferment of the benefit.  The following two situations illustrate the position.

47.  In the present case, the judge found that the transfer of business occurred on 23 November 1998 when the father died.  Christmas Day is a statutory holiday.  Say an employee (X) had been employed by the father for 2 monthsbefore the transfer on 23 November 1998 and continued working for the Defendant.  By Christmas Day 1998, pursuant to para. 5, he would be deemed to have been employed under a continuous contract for 3 months, and he would be entitled not only to have Christmas Day off but also to be paid by the Defendant for that day on his next wage day.

48.  Compare X’s situation with that of another employee (Y) who had worked for the father for 3 months before the Chung Yeung Festival in 1998, which fell before the date of transfer.  Y was eligible to receive the day off with pay.  The father did not give him the day off and did not pay him on the next wage day.  The father would be guilty of an offence and would be liable to pay Y.  But would the Defendant be liable because of para. 5? 

49.  In my view, the answer is ‘No’ because in Y’s case, the benefit conferred by the Ordinance is not affected by the computation of the period of employment pre- and post-transfer.  Paragraph 5 – a "counting" provision – does not by itself transfer the father’s liability to the Defendant, nor does Part VIII itself contain any provisions transferring a transferor’s liabilities to a transferee. 

50.  I would only add as a matter of completeness that the alternative holiday provision under s.39(2) is a matter for the discretion of the employer, and the substitute holiday provision under s.39(3) is a matter for agreement between the parties.  These provisions (and s.40A(2) which is ancillary to them) are therefore irrelevant to the issue.

51.  As far as the Claimants are concerned, the original claims lodged with the Labour Tribunal straddled the transfer, and covered both pre- and post-transfer statutory holidays.  However we have been told that since then the Defendant has settled the post-transfer liabilities.  On that basis, I would dismiss the Claimants’ claims against the Defendant for the father’s "failure to grant statutory holidays".

Annual leave

52.  I then come to the claim against the Defendant for "failure to grant annual leave".  Again the question is what bearing does the concept of continuous contract have on the conferment or extent of this statutory benefit? 

53.  The benefit of annual leave is provided in Part VIIIA.  The statutory scheme is that an employee who is employed under a continuous contract for a period of at least 12 months is entitled to annual leave: s.41AA(1);  and he is entitled to be receive pay for that period ("annual leave pay") on the next wage day: s.41B.  An employer who without reasonable excuse fails to grant annual leave or to pay an employee annual leave pay on time is guilty of an offence: s.63(4).

54.  Pausing there, in the context of a transfer of business, para. 5 would have the effect of adding a pre-transfer period of employment to a post-transfer period so as to render an employee eligible for the benefit of annual leave with pay. 

55.  Further, the extent of the benefit increases with the length of the period of employment under a continuous contract: s.41AA(2).  The correlation of the number of days annual leave to the number of years employment under a continuous contract is set out in the Table at s.41AA.  Paragraph 5 would thus have the effect of adding an employee’s pre-transfer period of employment to a post-transfer period so as to increase the employee’s entitlement to the number of days annual leave.

56.  However I do not consider that para. 5 has the effect of rendering a transferee liable generally for annual leave pay which the transferor had failed to pay an employee and which the employee would have enjoyed without adding up pre- and post-transfer periods of employment.  The Ordinance provides that annual leave should be granted by the employer and taken by the employee “within the period of 12 months beginning immediately after the expiration of the leave year to which it relates”: s.41AA(5)(a) and prohibits an employer from paying remuneration to an employee in lieu of leave: s.41E.  These provisions support the belief that the benefit of annual leave with pay is intended to be granted by the employer and taken by the employee as soon as it arises.

57.  In this connection however s.41AA(8) provides:

“Where –

(a) an employer continues to employ an employee after the expiration of a period during which annual leave should have been granted to him and the employer has not granted that leave, then at the option of the employee but subject to paragraph (b) the employer shall (whether or not proceedings have been taken for an offence under section 63(4)(e)) – 

(i) pay to the employee, in addition to any pay due to him, compensation equal in amount to the annual leave pay which he would have received had the leave been granted so as to end on the expiration of the period during which it should have been granted; or

(ii) grant the employee paid leave equal to the leave which should have been granted;

(b) an employee opts under paragraph (a) to take paid leave, he shall take the leave on such day or days as may be agreed to by the employer and him or, if there is no such agreement, as shall be specified by the employer”.  (Emphasis added). 

58.  In the section the word  "employer" must mean the same person (or company) in all the places where it appears.  The section governs the situation where “an employer” continues to employ an employee after the expiration of a period during which annual leave should have been granted to him and “the employer” (who must refer to the same person) had not granted that leave.  Under s.41AA(8), “the employer” (who again must refer to the same person) would be liable to pay the employee compensation or grant paid leave "whether or not proceedings have been taken for an offence under section 63(4)(e)".

59.  Take the simple example of an employee who was employed by the father in 1995.  Since "an employer" (the father) had continued to employ the employee after the expiration of a period during which annual leave should have been granted to him, and “the employer” (i.e. the father) had not granted that leave, then “the employer” (who again must refer to the father) would be liable to pay the employee compensation or grant paid leave under the section whether or not he (the father) had been prosecuted for the offence of failing to grant annual leave with pay.

60.  As the employee would have been entitled to that tranche of annual leave with pay well before the Defendant took over the business and without the need to incorporate pre- and post-transfer periods of employment under para. 5, I do not see how para. 5 would have the effect of making the Defendant liable to pay the employee.   

61.  That view is supported by the words "whether or not proceedings have been taken for an offence under s.63(4)(e)" after the reference to "the employer[’s]" obligation.  The only person who would have been open to prosecution would have been the father.  So understood, the Defendant would not in my view be liable under s.41AA(8) for the father’s failure to grant annual leave with pay.

62.  In the circumstances, insofar as the Claimants’ claims are all claims against the father only, I would also dismiss the claims against the Defendant for the father’s "failure to grant annual leave”. 

Order

63.  For the reasons given, I would allow the Defendant’s appeal.  Although normally costs should follow the event, in this case taking into account the nature of the appeal, the capacity of the respondents and the fact that the grounds for this judgment had not been advanced by the appellant, I take the view that there should be no order as to costs here and below, save for the costs order relating to the summons which I have mentioned in para. 25 and save that the 4^th and 10^th Claimants’ own costs are to be taxed in accordance with Legal Aid regulations.