The Court of Appeal has recently affirmed a decision of the High Court that it is possible to imply an anti-avoidance term in an employment contract. The term will operate to place limits on employers exercising their discretion in bad faith or for an improper purpose – despite the fact that the contract of employment appears to give them unfettered rights to do so.
Tadjudin Sunny v Bank of America, National Association
Court of Appeal, CACV 12/2015
Hon Kwan JA, Barma JA and Chow J
Date of Hearing: 26 and 27 January 2016
Date of Judgment: 20 May 2016
On 24 December 2014, Mr Justice Anthony To handed down his judgment for breach of a contract of employment, awarding Sunny Tadjudin, the plaintiff, the sum of HK$3.9 million as damages for loss of bonus in 2007, but dismissed claims for underpayment of her bonuses for the years of 2005 and 2006. The bank appealed against the award of HK$3.9 million, contending that the judge was wrong to find that the plaintiff’s employment was terminated with the intention to avoid her being eligible for a discretionary bonus for 2007. The bank also claimed the judge was wrong in law to hold that there was an implied term in the contract of employment that the bank “shall not exercise its right to terminate the plaintiff’s employment by giving one month’s notice or by paying one month’s salary in lieu of notice in order to avoid her being eligible for the bonus under the performance incentive programme (“the anti-avoidance term”).
The plaintiff had received substantial bonuses during the period in which she was employed by the bank. Her employment was terminated by the bank on 28 August 2007 and she was given a month’s salary in lieu of notice, without any bonus for 2007. The annual bonus formed a substantial part of the plaintiff’s remuneration package. The bonus which she received for 2001 was more than double her annual basic salary. Her bonuses for 2002 to 2006 were two to three times her annual basic salary.
The plaintiff’s employment contract provided that she may be considered for a discretionary bonus if she was employed by the bank when such bonuses were payable. Under the performance incentive programme, the bank committed to a “pay for performance” environment in which an employee’s performance was a key consideration in determining the remuneration they would receive. The bank rewarded the highest performers the greatest rewards through basic salary, incentives and other benefits. Managers were supposed to aggressively compensate high performing employees who had achieved their targeted goals. There was an undisputed correlation between the size of the bonus and profit contributed by the employee.
Although the plaintiff had been a good performer as far as profit generation was concerned, she received poor performance ratings in respect of her teamwork and respect for her management team. She was put on a Performance Improvement Plan (PIP) by her supervisor John Liptak, who set the targets in the PIP. Although the plaintiff met the main targets in her PIP, her employment was terminated on the insistence of Liptak with no bonus. The plaintiff claimed that the an anti-avoidance term was implied in her employment contract such that the bank was prevented from terminating her employment if the termination was made in order to avoid the plaintiff being eligible for a discretionary bonus.
The Court of Appeal agreed with the decision of the lower court and found that:
- An employer does not have an unfettered discretion in exercising its contractual rights under an employment contract. An employer cannot exercise its discretion for an improper purpose, capriciously, arbitrarily or in bad faith.
- The anti-avoidance term was necessary to give effect to the reasonable expectation of the parties which, put plainly, was that the bank should not be able to exercise its right to terminate the employment of the plaintiff in order to avoid her being eligible for a bonus under the performance incentive programme.
- Without the anti-avoidance term, the plaintiff’s contractual right to be eligible for consideration under the performance incentive programme would become illusory and could be easily taken away by the bank exercising its right of termination even if the plaintiff was without fault. Such conclusion would be wholly unreasonable and inequitable and could not be what the parties intended to be the effect of the
- The Court of Appeal confirmed the findings of the lower court, that Liptak had terminated the plaintiff’s employment in bad faith. The PIP was initiated only as a tool to lead to her termination. Liptak’s malicious actions were attributable to the bank as he had been authorised to act on behalf of the bank and had misled and manipulated senior management of the bank into authorising the dismissal of the plaintiff.
- The plaintiff had to satisfy the burden of proof to the court that the bank terminated her employment with the intention of avoiding paying her bonus. However, as the bank was unable to show a valid reason for terminating the contract of an employee, the court was entitled to draw an inference that the termination was for ulterior motives such as depriving bonus entitlement. As the plaintiff had substantially met her targets under the PIP, her dismissal was in bad faith and for an improper purpose.
Take-away points for HR professionals
The effect of the “anti-avoidance term” is that an employer does not have an unfettered discretion in exercising its contractual rights under an employment contract. A power or discretion is generally subject to an implied requirement that it can only be exercised in good faith, rationally and for a proper purpose.
In the event that an employee’s contract is to be terminated, the employer should keep written records of the factors considered prior to determining whether the employee should be dismissed which can be used in court proceedings if at a later date the employee challenges the dismissal
If an employee is subject to a PIP and substantially meets the targets set for their improvement, the courts are likely to infer any subsequent dismissal as being in bad faith or for an improper purpose. The targets set in any PIP must be reasonable and fair and must relate to the performance issues.
Employers should be cautious when an employee subject to a PIP is being assessed by a manager with whom there is a history of bad blood. Any assessment of an employee must be carried out in good faith. Where a manager misleads the employer as to the true performance of the employee, the employer will be liable for any wrongful termination.
The above case does not have the effect of implying a universal anti-avoidance term into employment contracts generally. However, such terms will be implied by the court to give effect to the intentions of the parties. Where bonus payments are utilised as a tool to retain employees or where the payments consist of a substantial portion of the total remuneration package, the court will be inclined to imply an antiavoidance term.
This article has also been published in both Chinese and English in the September issue of Human Resources; the official journal of the Hong Kong Institute of Human Resource Management, and is reproduced with permission from HKIHRM and Classified Post.