Basics reiterated – no strings attached for exercising termination rights

Article 22 November 2021 Experience: Employment

It is widely known that parties to an employment contract are entitled to terminate the contract without cause either by giving requisite notice or payment in lieu of notice to the other party. When handing out the termination package, responsible employers tend to state the reason(s) for the termination. The recently handed down case, Lam v Equal Opportunities Commission [2021] HKEC 4664, reiterated the well-established principle that no reason is needed to terminate an employment contract without cause. The case was first decided by the Labour Tribunal and subsequently appealed to the Court of First Instance. The Claimant was Lam, the employee, while the Defendant was the Equal Opportunities Commission (the EOC), the employer. The Labour Tribunal sided for Lam and the EOC appealed against such decision. It is interesting to note that even the EOC and the Labour Tribunal could err in respect of the basics, and thought that there was an implied duty of mutual trust and confidence and/or obligation to give reason(s) when dismissing an employee without cause.

The background of the case is as follows. Lam had been under the employment of EOC for 22 years and her last position was the Chief Equal Opportunities Officer. The terms and conditions of Lam’s employment comprised the letter of appointment and the “Memorandum on Conditions of Service in the Equal Opportunities Commission Office”. Clause 11.3 of the Memorandum as well as other policies specifying that EOC has the right to terminate Lam’s employment without cause. On 15 May 2018, Lam was told that her employment was terminated with immediate effect. The key paragraph concerned in the letter of termination stated that Lam’s “recent attitude and behaviour do not closely match with the requirements of this senior position”. The Labour Tribunal granted Lam common law damages for loss and damage resulting from a wrongful termination by the EOC and its breach of the implied duty of mutual trust and confidence.

Turning to the EOC’s appeal to the Court of First Instance, the Court of First Instance confirmed that the implied duty of mutual trust and confidence applies to both employer and employee in the course of performing the contract. In relation to the employer’s duty, an employer shall not “without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”. This duty covers a wide variety of situations in which “a balance has to be struck between an employer’s interest in managing his business as he sees fit and the employee’s interest in not being unfairly and improperly exploited”. Yet such duty does not extend to an employer exercising its termination rights.

It would be useful to highlight the following three points decided by the Court of First Instance, namely that:

  • the contractual right to terminate an employee can be … exercised unreasonably or capriciously so long as the right is exercised in accordance with the contract, and the court is not concerned with the rightness or wrongness of a dismissal”;
  • the duty of good faith should not be implied in the termination of an employment contract. To imply a duty of good faith means that reasons for termination has to be given, and such reason may be subject to scrutiny by the Labour Tribunal or other courts. Nonetheless, this exercise should be done by the legislature instead; and
  • it was unnecessary for the EOC to state any reason in the letter of termination, and that the EOC should not be in a different position than having given no reason for the termination.

The key takeaway of the case is that when an employer intends to terminate an employment contract without cause, it does not have to give any reason for the termination. A contractual right to terminate an employment contract can be exercised “unreasonably” as long as the right is exercised in accordance with the contract and the Employment Ordinance. Courts are not concerned with the correctness of the termination. Legally speaking, even if the employer provides a reason for termination, it shall be treated as if no reason was provided, and the reason provided shall not be held against the employer. However, when a reason is given but the employer fails to substantiate the stated reason, it tends to reflect badly on the employer and creates unnecessary hard feelings, as unfortunately illustrated in the present case.

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