Can A Benefits Policy To Pay Employees Ex Gratia Or Voluntary Payments Acquire Contractual Status By Custom And Practice?

Introduction

Employer companies may have benefits policies to help attract and retain talents. They can come in many forms, such as year-end bonus or ex gratia payment, travel benefit, retirement benefit and so on. These policies may be expressly stated in their employee handbook or implemented without anything in writing. Whilst employer companies may consider that some of their benefits policies (for example, ex gratia payment) do not form part of the employment contracts and they intend to provide these benefits at their absolute discretion, can these policies acquire contractual status by custom and practice?

When will an employee benefits policy
acquire contractual status?

An employee benefits policy may acquire contractual status by:

1.       incorporation by custom and practice; and

2.       variation of contract.

In addition, an employer may be estopped by convention (i.e. estoppel by convention) from not providing an employee ex gratia payment or other benefits if there is a common assumption between the parties for the employer to do so.

Incorporation by custom and practice

Albion Automotive Ltd v Walker

In Albion Automotive Ltd v Walker [2002] EWCA Civ 946, the English Court of Appeal (“English CA”) explained when an employee benefit policy may be incorporated into employment contracts by custom and practice.

Between 1990 and 1994, there were six redundancy exercises. The employer paid the redundant employees enhanced redundancy payments, which were more than their statutory entitlements. In 1999, 22 employees were made redundant but they did not receive enhanced redundancy payments. They claimed that they were entitled to enhanced redundancy payments on the grounds that the enhanced terms had been incorporated into their employment contracts by custom and practice. The employer maintained that the enhanced terms only applied to the six previous redundancy exercises.

The English CA ruled that a number of factors are important in assessing whether a policy originally produced by management has acquired contractual status, including:

1.       whether the policy was drawn to the attention of employees;

2.       whether it was followed without exception for a substantial period;

3.       the number of occasions on which it was followed;

4.       whether payments were made automatically;

5.       whether the nature of communication of the policy supported the inference that the employers intended to be contractually bound;

6.       whether the policy was adopted by agreement;

7.       whether employees had a reasonable expectation that the enhanced payment would be made;

8.       whether terms were incorporated in a written agreement; and

9.       whether the terms were consistently applied.

The English CA held that the employer was contractually bound after considering, among others, the following factors:

1.       The policy was reduced in writing and was the outcome of high profile negotiations with trade unions (although not expressly incorporated in the contracts of employment) and introduced after a period of protracted negotiations. However, in later exercises, the enhanced terms were simply applied without reference to negotiations with trade unions.

2.       The policy was subsequently applied to further redundancy exercises.

3.       Availability of the enhanced redundancy terms were drawn by the employer to the attention of all employees in writing at the time of each redundancy exercise and were well known among employees.

4.       The policy was followed for extensive period of time.

5.       The policy was followed for six redundancy exercises.

6.       All employees had a reasonable expectation that enhanced redundancy payments would be made.

Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd (CFI)

Is the English CA’s decision in Albion Automotive applicable in Hong Kong? In Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd [2009] HKEC 2073 (CFI); [2011] 1 HKLRD 10 (CA), the Hong Kong Court of First Instance (“CFI”) considered Albion Automotive.

In 1979, Chong commenced employment with Cathay Pacific as a cabin attendant. In 1991, Cathay Pacific issued an employee handbook containing a retiree travel benefit (“RTB”) policy. In 1993, Chong’s employment was terminated but she was not given RTB. She claimed RTB on the grounds that RTB had been incorporated by custom and practice. Cathay Pacific maintained that the handbook was not part of the employment contract. In any event the incorporation of the RTB policy was not supported by consideration.

The CFI considered Albion Automotive and concluded that the RTB terms had been incorporated by custom and practice since:

1.       an employee handbook generally contains terms intended to be contractual;

2.       the RTB policy had been followed for a substantial period; and

3.       Chong was made aware of RTB shortly after she commenced employment.

The CFI held that the incorporation of the RTB policy was supported by consideration as RTB was a reason why Chong decided to remain as an employee.

Variation of contract

Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd (CA)

Cathay Pacific appealed against the CFI decision and the case went to the Court of Appeal (“CA”). The CA reached the same decision (i.e. Cathay Pacific was required to provide Chong with RTB) but via a different route.

The CA considered that “custom and practice” was not in issue as the RTB “custom” did not exist in 1979 when Chong commenced employment with Cathay Pacific.

For the same reasons that the CFI found the RTB terms had been incorporated by custom and practice, and given that the handbook spelt out the eligibility requirement of RTB, the CA considered the employment contract had been varied to include the RTB terms. If there were other circumstances under which RTB should be withheld or if RTB was intended to be discretionary, Cathay Pacific could have easily specified this in the handbook but Cathay Pacific did not do so. The CA also considered that the consideration requirement was satisfied by Chong as she remained as an employee.

Estoppel by convention

Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd (CFI and CA)

Estoppel by convention was relied on by Chong as an alternative basis to claim RTB. However, since both the CFI and CA ruled in her favour, it was unnecessary for the court to consider this issue.

Tung Woon Hing Candice v Cathay Pacific Airways Ltd [2022] HKCU 1430

In this recent Hong Kong CFI decision, estoppel by convention was relied on as the sole ground for claiming ex gratia payment.

Cathay Pacific had a long practice of paying employees an extra sum at year end (referred to as “year-end bonus” or “ex gratia payment”) over the past 30 years except 2001. This extra sum was also paid to employees retiring after June in that year. The claimants retired as cabin crew in late 2017. Cathay Pacific then announced that an ex gratia payment of one-month’s salary would be paid only to employees who were on the payroll on 31 December 2017. The claimants were therefore not entitled to the 2017 ex gratia payment. The claimants argued that because of the long established practice of paying an extra sum even to employees retiring after June but before year end, Cathay Pacific was required to pay the 2017 ex gratia payment to them.

The Labour Tribunal took the view that the key element of estoppel by convention is a common assumption between the parties and ruled that there was no common assumption that Cathay Pacific would pay the 2017 ex gratia payment to the claimants because:

1.       from the Internal Guideline for the 2017 ex gratia payment, the requirements of being in service as at 31 December 2017 was a criterion for receiving the ex gratia payment;

2.       the rationale was to incentivise serving employees to stay with the company;

3.       Cathay Pacific did not make any assurance that retired employees would be entitled to the 2017 ex gratia payment; and

4.       the Internal Guidelines for the 2008 and 2009 ex gratia payments stated that the payment was made at Cathay Pacific’s absolute discretion (Cathay Pacific paid the usual “year-end bonus” of one month’s salary in all other years except 2001, 2008 and 2009 in the 30-year period).

The claimants appealed to the CFI.

The CFI stated that the requirements of estoppel by convention are as follows:

1.       the parties must enter into some legal relationship on the basis of a shared assumption of fact or law;

2.       the content of the common assumption must be sufficiently certain to enable the court to give effect to it;

3.       the assumption must have been communicated between the parties and acted upon;

4.       there must be an attempt by one party to depart from the common assumption which departure would be unjust; and

5.       the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption.

The CFI held that the Labour Tribunal was entitled to conclude that there was no common assumption as it did and dismissed the appeal accordingly.

Takeaway

From an employer’s perspective, if the employer wants to provide employee benefits at his absolute discretion and without being contractually bound to do so, then the employer should clearly state in writing that the benefits are to be made at his absolute discretion, where the employer reserves the right to withhold such benefits should he want to do so. The court may find an employee benefit policy had been incorporated into an employment contract by custom and practice if the policy was clearly communicated to the employees in writing and it has been followed for a substantial period: Albion Automotive. Alternatively, the court may find an employee benefit policy had been incorporated into an employment contract by variation of contract: Chong Cheng Lin Courtney.

Employers should review their discretionary employee benefits policies from time to time to ensure that they still maintain their control and discretion over them, and such policies have not unwittingly acquired contractual status. Employers are advised to seek proper legal advice and assistance when reviewing them.

Contributing Advisors