Corporate Commercial Newsletter Employment & Pensions 4 July 2018 What s inside? Changes to Hong Kong anti-discriminatory laws coming soon 1 Hong Kong Court of Appeal reaffirms that termination payments are not taxable 3 Awards and Recognition 5 Events/Conferences 5 Recent publications 6 Changes to Hong Kong anti-discriminatory laws coming soon Cynthia Chung On 22 June 2018, the government proposed to introduce the Discrimination Legislation (Miscellaneous Amendments) Bill (Proposed Bill) with a view to implementing the recommendations of priority made by the Equal Opportunities Commission, following its review of the four anti-discrimination Ordinances, namely: the Sex Discrimination Ordinance (SDO), the Disability Discrimination Ordinance (DDO), the Family Status Discrimination Ordinance (FSDO), and the Race Discrimination Ordinance (RDO). The proposed amendments to the SDO, DDO, FSDO and RDO are outlined as follows: Express protection from discrimination against breastfeeding (1) In order to afford more comprehensive protection to all breastfeeding women, express provisions will be introduced in the SDO to prohibit direct and indirect discrimination against a woman on the ground of breastfeeding and to render such conduct unlawful. Such prohibition is intended to apply to all areas within the existing scope of the SDO, e.g., employment, education, the provision of goods, services, disposal or management of premises, and the activities of the government, etc. The definition of breastfeeding would include the expression of milk and the status of being a breastfeeding mother. However, no positive obligation will be imposed on any person to provide reasonable accommodation such as lactation breaks or facilities to breastfeeding women. 1
Replace reference to near relative with associate (2) Under the current provisions of the RDO, there is no protection from racial discrimination by association in relation to friends, carers or work colleagues. The government proposes to amend the RDO to prohibit direct racial discrimination and harassment to a person on the ground of the race of the person s associate in all areas of employment, education, the provision of goods, facilities and services, access to clubs, etc. Except in relation to shared accommodation with the discriminator or his/her near relative, the proposed amendment aims to replace references to near relative with associate, which would be defined to mean a spouse of the person, another person living with him/her on a genuine domestic basis, his/her relative, his/her carer and another person who is in a business, sporting or recreational relationship with him/her. Protection from racial discrimination and harassment by imputation (3) There is no protection from discrimination by imputation on the ground of race under the RDO. The government proposes amendments to the RDO to cover direct and indirect racial discrimination and harassment by imputation that a person is of a particular race or a member of a particular racial group. Thus, under the proposed amendment, a person will be held liable for racial discrimination or harassment if he/she discriminates against or harasses another person on the basis of a perception of the race of the other person (even if he is not of such race). Common workplace liability where there is no employment relationship (4) The SDO, RDO and DDO provide limited protection for a person who may be subject to harassment where such person and the harasser are working in a common workplace but there is no employment relationship between them. The proposed amendment intends to widen the scope of protection to workplace participants against sexual, racial and disability harassment under the SDO, RDO and DDO where such persons (i.e. the victim and the harasser) both work in a common workplace but are not employed by the same employer, e.g. consignment workers working in a retail shop. Under the Proposed Bill, workplace participants would cover an employer, an employee, a contract worker, a principal, a commission agent and a partner, and workplace would mean a place at which a workplace participant works or otherwise attends in connection with being a workplace participant. Liability of customers for harassing service providers (5) Under the RDO and the DDO, only customers are entitled to protection from racial and disability harassment, but not service providers. The Proposed Bill now seeks to provide protection also to providers of goods, facilities or services by amending the RDO and DDO. Under the proposed amendments, it would be unlawful for a customer to sexually harass a service provider and vice versa. The proposed amendment would also provide protection to a customer from harassment under the DDO not only where he wants to acquire the goods or services or to make use of the facilities, but also where he is acquiring the goods or services or making use of the facilities. 2
Liability of customers for harassment of service providers on aircraft and ships (6) The Proposed Bill seeks to extend the territorial extent of the harassment provisions in certain provisions of the RDO and DDO so that the protection to service providers from racial and disability harassment by customers would be extended to cover harassment which takes place outside Hong Kong, but on Hong Kong registered aircraft and ships. Liability of management of clubs for harassing members or prospective members (7) Amendments to the SDO and DDO are proposed to safeguard sexual and disability harassment by a club or its management against its members or prospective members, rendering such harassment unlawful. Awarding damages to victim of indirect discrimination claims (8) The Proposed Bill aims to repeal certain provisions of the SDO, FSDO and RDO to allow award of damages to the victim of unlawful indirect discrimination despite the fact that the respondent can prove that there was no intention to treat the victim unfavourably on the ground of the claimant s sex, marital status, pregnancy, family status or race, which was previously recognised as a defence. Comment The Proposed Bill will be introduced by the end of 2018. A number of the proposed amendments are employment-related, such as the proposed prohibition of direct and indirect discrimination against breastfeeding, and the expansion of the scope of protection from sexual, disability and racial harassment to persons working in a common workplace. In view of these imminent changes, employers should obtain a good understanding of the various proposed amendments. In addition, employers should be prepared to establish and implement a broader anti-discrimination/harassment policy and compliance training programs so as to reduce the likelihood of employer liability, and to provide a more harmonious work environment for their employees. Hong Kong Court of Appeal reaffirms that termination payments are not taxable Stefano Mariani Introduction The recent Court of Appeal decision in Poon Cho Ming, John v Commissioner of Inland Revenue CACV 94/2016 [2018] HKCA 297 affirmed the orthodox position in Hong Kong that terminal or severance payments are not taxable if they were paid wholly for the abrogation of the employee s rights under his contract of employment. The Court of Appeal allowed the taxpayer s appeal and overturned the decisions of the Board of Review and of the Court of First Instance, which had both found for the Commissioner of Inland Revenue (Commissioner). The judgment is of particular interest because it addressed two common classes of remuneration: cash bonuses and shares. Facts The facts of the case were typical of a terminal payment scenario: Mr Poon was a highly paid executive, employed by a renowned multinational clothing company. It was common ground that he had been highly successful in his role and had been appointed to numerous positions of prominence within his employer s group. Nevertheless, he eventually fell out 3
with his employer s management, which elected to dismiss him. Mr Poon decided not to go quietly. He instructed solicitors and sought to bring the matter to the attention of his employer s shareholders. With a view to avoiding a protracted and acrimonious dispute, his employer agreed to enter into a separation agreement with him, which provided for, among other things, a payment in lieu of discretionary bonus (Sum D) and the acceleration of the vesting schedule of certain shares which Mr Poon had been granted, but which had not yet vested (Share Option Gain). Under Mr Poon s contract of employment, a discretionary bonus could only be paid after a three-stage internal approval process, and, whereas the share option scheme provided that the vesting schedule of shares could be accelerated, such acceleration was entirely at the employer s discretion. When Mr Poon was paid Sum D, the first of the three steps for determining whether an annual discretionary bonus should be paid had not been commenced by the employer, and the shares with respect to which he received the Share Option Gain had not yet vested. Analysis Mr Poon argued that both Sum D and the Share Option Gain were not income from employment, in the sense that they were not reward for past, present or future services in employment; instead, they were payments for the abrogation of his contractual rights under his contract of employment and for his agreement to leave the employer quietly and on generally good terms. Conversely, the Commissioner argued that the payments, deriving from contractual rights, were inherent to Mr Poon s conditions of employment and were in substance taxable emoluments from employment because they arose from his employment contract. Whereas the Board of Review and the Court of First Instance found for the Commissioner, and identified the causal nexus of both payments in Mr Poon s contract of employment, the Court of Appeal found no basis to support those conclusions. The starting point for the Court of Appeal s decision was the landmark decision of the Court of Final Appeal in Fuchs v Commissioner of Inland Revenue (2011) HKCFAR 74, which laid out the fundamental test that in order to determine whether a payment is chargeable to salaries tax, one must first ask what it was paid for- if it was paid as a reward for past, present, or future services in employment, it will as a general rule be taxable, but if it was paid for some other reason, such as the abrogation of existing rights under an employment contract that was terminated at the instance of the employer, then it will usually not be taxable. In Mr Poon s case, the Court of Appeal held that it was clear that he had no contractual entitlement at the time of his dismissal either to Sum D or the Share Option Gain. Both payments were clearly not paid on the terms of the contract of employment, but were paid as consideration for the separation agreement under which Mr Poon agreed to forbear from pursuing specific actions, such as bringing legal proceedings, that his employer considered inimical to its interests. As regards Sum D, although he did indeed have an existing contractual right to be considered for a discretionary bonus, the process for determining whether such a bonus should be paid to him at all in the tax year in which his employment ceased had not even commenced. Logically, Sum D did not, therefore, flow from the contract of employment. It was paid by the employer specifically to placate Mr Poon and prevent any action he might otherwise have taken under his contract of employment. Had Mr Poon ceased employment absent the separation agreement, he would have gotten nothing at all. Similarly, the share options Mr Poon had acquired were subject to a strict vesting schedule, which meant that unless the shares had vested at the time he left employment, they would be forfeited. The Commissioner sought to argue that because Mr Poon s employer had agreed to accelerate the vesting schedule under the separation agreement, the Share Option Gain should be treated as a taxable employment related security, since the acceleration mechanism was expressly provided for in the terms of the share option scheme, which formed part of Mr Poon s contract of employment. The Court of Appeal, however, disagreed and reasoned rather subtly that the decision of the employer to accelerate the vesting schedule was made not as a reward for past, present or future services rendered by Mr Poon, but was itself consideration to induce him to enter into the separation agreement and, therefore, to leave his employment as quietly as possible. Had Mr Poon s employer declined to accelerate the vesting schedule, Mr Poon would not have received any part of the Share Option Gain, and the unvested shares in question would simply have lapsed. As with Sum 4
D, the mere fact that Mr Poon got what he could have gotten under his contract of employment under the separation agreement did not mean that the payments in question arose from the contract of employment itself, or were otherwise paid for his services. Correlation does not equal causation. Significance The judgment in Poon Cho Ming is important because it restores clarity to the tax treatment of terminal payments. Put briefly, if a terminal payment is itself contained in the contract of employment it will be taxable when triggered. That is because the payment is part and parcel of the contract of employment: the promise of a guaranteed terminal payment is plainly an attractive condition in a contract of employment, and thus operates to induce an employee to enter into the contract, such that it is, in effect, a reward for services in employment. Conversely, where the terminal payment, irrespective of how it is computed or its actual amount, is made wholly for some reason other than a reward for services, it will in the ordinary course not be chargeable to salaries tax. Employers and employees should now have greater certainty that terminal payments paid for the abrogation of contractual rights under a contract of employment will not in the ordinary course be taxable. In turn, this facilitates the structuring of termination agreements both for in-house functions and their legal advisors. The Court of Appeal s decision is also an important reaffirmation of the principle that the salaries tax analysis must follow from a clear and legally accurate understanding of all of the underlying contractual documentation. Arguably, the Board of Review and the Court of First Instance adopted an unduly narrow focus by concentrating their analysis on the contract of employment alone, and therefore omitting the equally important discussion of whether the severance agreement might, itself, have an independent vitality by way of the exchange of fresh consideration between employer and employee. Awards and Recognition Cynthia Chung named by Who s Who Legal as leading practitioner for Labour & Employment We are pleased to announce that Cynthia Chung, Partner, has been named as a leading practitioner in the following areas by the Who s Who Legal Guide 2018: Thought leader: labour and employment Labour, employment and benefits Events/Conferences Cynthia Chung speaks at The Women s Foundation s #MeToo Forum On 28 June, Cynthia was invited by The Women's Foundation (TWF), as a female thought leader to speak in their public panel #MeToo series entitled Engaging Men. The seminar, which also went live on TWF s Facebook page, was the last of a three-part public panel series. The panel provided a dynamic discussion on the #MeToo movement from professional and personal spheres from men s perspectives. Feedback was both frank and engaging, and gave the audience a diverse range of perspectives and actions to consider at any stage of their journey. 5
Recent publications A closer comparison between GDPR and PDPO (English) (Chinese) Want to know more? Cynthia Chung Partner cynthia.chung@deacons.com.hk +852 2825 9297 Elsie Chan Partner elsie.chan@deacons.com.hk +852 2825 9604 Vickie Leung Senior Associate vickie.leung@deacons.com.hk +852 2825 9408 Stefano Mariani Counsel Stefano.mariani@deacons.com.hk +852 2825 9314 Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice. If you would like advice on any of the issues raised, please speak to any of the contacts listed. 0718 Deacons 2018 www.deacons.com.hk 6