Managing legal risks during a crisis

Businesses in Hong Kong are currently facing an unparalleled crisis resulting from the recent outbreak of the COVID-19. The effect of the pandemic is not only disrupting many organisations’ daily operations but it also wreaking havoc on the long term prospects of their businesses. 

We highlight some of the key legal issues which organisations may wish to consider to develop an effective crisis management plan.

Employment risks

Can an employer require employees to work remotely because of the COVID-19?

Under the Occupational Safety and Health Ordinance, an employer has to ensure that the workplace, so far as reasonably practicable, is safe and without risks to health.

Given that employers have an obligation to provide a safe workplace for their employees, they should implement policies to safeguard the workplace against the risk of the COVID-19. With many employees working closely together in the workplace, it may pose a risk to those employees most at risk of serious infection, e.g., pregnant women, people with compromised immune systems or individuals with chronic medical conditions. It would be prudent for employers to implement plans for their employees to work remotely, wherever practicable.

An employer who fails to provide a safe working environment for employees commits an offence.

If work-from-home is offered, employers should ensure that their existing insurance policy covers injuries arising out of or in the course of the employee’s employment under a remote working scenario.

Is an employer required to pay wages to an employee who is quarantined by reason of COVID-19?

If an employee is required or ordered by a Health Officer to be placed under quarantine, he/she will be issued a medical certificate with the statement of "under medical surveillance" or “mandatory quarantine”. In such event, the Labour Department encourages employers to grant paid leave to such employee.

What if an employee has contracted COVID-19?

In the case where an employee has contracted the COVID-19, his/her employer should grant him/her sick leave in accordance with the relevant provisions of the Employment Ordinance and the terms of the employment contract. Employers should not dismiss their employees who have been infected and are entitled to paid sickness allowance. Otherwise, an employer may be liable to prosecution and, upon conviction, to pay a fine of $100,000.

Can an employer request an employee to take no pay leave?

There is no provision under the Employment Ordinance for an employer to request an employee to take no pay leave.

During a time of crisis, if employees are required to take no pay leave due to the needs of the business, employers should endeavour to obtain the prior consent of their employees before implementing any no pay leave or wage reduction measures, so as to avoid a breach of the employment contract.

Can an employer dismiss an employee by way of redundancy etc. during a crisis?

There could be situations where an employee is terminated because a business ceases operations or has to downsize.

Under the Employment Ordinance, an employee is taken to be dismissed on the grounds of redundancy if the employer has ceased or intends to cease his business in the place where the employee was employed, or if the requirement of the business for the employee to carry out work of a particular kind, or for the employee to carry out work of a particular kind in the place where the employee was employed, ceases or diminishes or is expected to cease or diminish. In those situations, an employer will be required to pay a statutory severance payment to an employee who is eligible. 

Furthermore, there are a number of statutory restrictions on the termination of employment contracts. Where those circumstances apply, it would, except for the circumstances described under the Employment Ordinance, be unlawful for an employer to dismiss an employee, regardless of the employer’s intention to cease operations or downsize. The circumstances include an employee who is pregnant; on paid sick leave; giving evidence or information in any proceedings in connection with the enforcement of the Employment Ordinance, or suffering from a work-related injury. Employers who terminate an employee under these circumstances are liable to prosecution and, upon conviction, to pay a fine of $100,000.

Upon termination of an employee, employers must make the termination payments (except for severance payment), to the dismissed employee as soon as practicable and in any case not later than seven days after the date of termination or expiry of the contract. For severance payment, payment must be made not later than two months from the receipt of a notice from an employee claiming for severance payment. An employer who fails to pay the termination payments when they become due is liable to prosecution and, upon conviction, to pay a fine of $350,000 and imprisonment for three years.

In addition to terminal payments and compensation, employees who are unreasonably or unlawfully dismissed may claim reinstatement or re-engagement. If successful, the Labour Tribunal may make an order for reinstatement or re-engagement or an award of terminal payments and/or compensation not exceeding $150,000.

If an employee is dismissed due to redundancy, should an employer pay an employee both the severance payment and the long service payment?

An employee who is dismissed by reason of redundancy is eligible for severance payment only and is not eligible for long service payment.

Currently, an employer can offset the statutory severance payment that an employee is entitled against the accrued benefits derived from the employer’s contributions to the mandatory provident fund scheme or the occupational retirement scheme. However, the off-setting mechanism may be abolished in the near future.

Contractual risks

Commercial activities are often regulated by contracts that define the rights and obligations of the parties. The outbreak of COVID-19 has resulted in many businesses that are finding it difficult to perform their contracts, or cope with default by others.

In case businesses are seriously impacted by the COVID-19, it is worth reviewing the contracts to ascertain if there are any provisions which provide for epidemic or pandemic situations. It is not uncommon that force majeure clauses are incorporated in a contract, which set out how the contract should be performed in case of interruption by unforeseeable and uncontrollable events. It may provide for suspension or even termination of the contract if the force majeure lasts for a significant period of time. Businesses should assess the risks involved, and be clear about what kind of remedies and reliefs are available. In any event, parties should seek legal advice before invoking these provisions, or if the counterparty invokes such provisions. Even if a contract does not expressly include a force majeure clause, the common law doctrine of frustration may be relevant to your circumstances and should be considered.

For more information on contractual risks, please see our recent client alerts - “HKSAR: Legal Implications of the New Coronavirus-Covid-19” and “Novel Coronavirus: How the construction industry can manage the impact of the outbreak on projects”.

In the context of a commercial lease, if due to financial crisis an organisation wishes to downsize or cease its business operations, can it terminate its tenancy/lease before the expiration of the term?

A tenant is contractually bound by the terms of the lease. Therefore, the tenant cannot unilaterally terminate the lease before its expiry unless it contains a break clause.

Commercial leases in Hong Kong are generally in favour of landlords. They do not usually contain a break clause allowing the tenant to terminate the lease before the expiration of the lease term. In addition, there are usually provisions in commercial leases which prohibit alienation. Alienation refers to provisions in leases which govern the tenant’s ability to assign, sublet, change control and change business name. These restrictions will apply unless the tenant has obtained the landlord’s prior consent.

In the absence of a break clause or right to alienate, the only option available to a tenant who wants to end a lease before the expiration of the term is to offer to surrender the lease to the landlord on mutually acceptable terms.

The landlord is free to accept or reject the tenant’s offer. If the tenant breaks the lease without the landlord’s consent, then the consequence of a breach follows. The landlord would be entitled to claim damages against the tenant, which includes the following:

  • forfeiture of the deposit (depending on the terms of the lease, in some cases, the court may allow credit to be given to the deposit when the loss and damage is assessed);
  • rent and charges that the landlord would have received during the remainder of the term, subject to a duty to mitigate; and
  • management fees, rates, cost of repair due to damage to the leased property by the tenant, utility charges payable on the leased property, stamp duty and estate agent’s commission spent on re-letting the leased property, etc.

Data privacy and confidentiality risks

Following the announcement by the Hong Kong Government of work-from-home arrangements for civil servants, more and more companies are giving their employees the option to work from home. Technological advancements have made it possible for employees to have remote access to office files and client information from their personal computers at home, and employees are no longer confined to the walls of an office space. Yet, there could be legal consequences for transmission of significant business data, proprietary information and confidential information for this new working option such as implications under a non-disclosure or confidentiality agreement. In addition, there are also security, privacy and confidentiality issues involved with remote access to the company’s IT infrastructure, personal computers, and other communication devices. Companies who allow employees to work from home should therefore consider the implications of confidentiality and data protection principles under the Personal Data (Privacy) Ordinance, as well as cybersecurity issues. IT policies should be implemented, revised or enhanced, as the case may be, to deploy protection measures before employees are allowed to access the company’s internal network.

For more information, please see our recent client alert – “Coronavirus pandemic: Extra precautions needed for data protection and cybersecurity?

Tax – efficient solutions

Asset structuring is an important element of risk mitigation. Deacons can provide tax-efficient solutions for the restructuring of assets, including shares and immovable property, and businesses outside of Hong Kong for clients who wish to spend more time abroad or simply want to spread their jurisdictional risk. For those who see Hong Kong as a safe haven in challenging times, Deacons is also experienced in inbound redomiciliation to assist clients in moving the undertaking, assets, and personal and family lives to Hong Kong.