Importance of Employment Contracts
Employment contracts may be created verbally or through writing. Very often, following an interview, satisfied employers will fervently enter into a verbal agreement with their employees based on a handshake. As convenient as that may seem, absent a written agreement, if conflicts arise as to the terms of the agreement, the situation can turn into the employer’s word against the employee’s.
Written employment contracts need not be lengthy or contain complex legal jargon. A clear account of the parties’ duties and obligations in an employment relationship will go a long way to create expectations and minimize costly disputes. For example, what kinds of expenses can an employee receive reimbursement for? Can an ex-employee recruit his or her co-workers and set up a crepe cake business at the Elements one month after leaving his or her job at Cake Shop A (X Shopping Mall)? Can this ex-employee solicit Cake Shop A (X Shopping Mall)’s corporate clients?
Key Terms in Employment Contracts
This part outlines the key terms that employers should consider to include in an employment contract. Please note that this checklist is not exhaustive. Contract terms will vary depending on the position and the nature of the employment relationship.
- Full Names and Addresses of the Parties
- Commencement Date
- Job Title and Description
This term should correspond with the job title and description in the recruitment advertisement and the subsequent offer letter. The term may also allow for flexibility in the employee’s role in future.
- Type of Employment
This term specifies whether the employment is on a full-time, part-time or casual basis.
- Place of Work
This term specifies the location that the employee will work and may allow the employer to specify any other location in future.
- Working Hours
This term specifies the employee’s working hours but the employee will also agree to work additional hours if the employer reasonably requests it.
- Probation Period
The employer can specify a trial period for the employee. If the employee does not fulfill the company’s expectations, the employer may choose to extend the trial period or have a short notice period at the end of the trial.
This term details the employee’s salary, entitlement to bonuses, commission payments and when payment is made.
The employer can state when the employee will receive his first work assessment and the timing of all subsequent regular assessments, for example, every 12 months.
The employer can agree with the employee, which work-related expenses will be covered, when and how the employee will be reimbursed. However, to prevent errors and disputes, this term will typically require the employee to produce proof of payment.
The employer can specify the number of days per year that an employee can take, subject to the statutory minimum (please refer to the Labor Department’s website for details: http://www.labour.gov.hk/eng/faq/cap57i_whole.htm). The employer can also restrict the timing for holidays. This is important for hospitality, retail or entertainment businesses that will need additional staff in peak seasons such as Christmas Day and New Year’s Eve. Further, this term details matters such as holidays rolling over into the next year and restrictions on holidays that the employee has given notice.
- Sickness and Absence from Work
This term states by what time an employee must inform the employer that he or she will be unable to attend work, when the employee will have to produce proof such as a doctor’s certificate and sick pay arrangements. It is advisable to have a separate Sickness and Absence Policy.
Employment contracts will typically include contractual terms restricting an employee’s activities during and/ or after the termination. These terms are particularly important for exiting senior employees with valuable connections and access to confidential information. However, terms restricting competition, solicitation of existing employees and clients, disclosure of confidential information restrain trade and are contrary to public policy. The Hong Kong court will only enforce these terms if, in the particular case, their scope and duration are reasonably necessary to protect the employer’s legitimate interest. There are three established categories of legitimate interests: goodwill and trade connections with customers and suppliers; trade secrets and other confidential information; stability of the workforce.
The employer can insert a non-competition restriction to prevent the employee from setting up or working for a competing business. To be enforceable, the duration, geographical area and scope of restriction must be reasonably necessary to protect the employer’s interest. When deciding what is reasonably necessary, the employer should consider, for example, the minimum period the business will need to rebuild loyalty from its existing customers and employees after the employee leaves, the employee’s seniority and the degree of influence he or she has over the business.
- Non-Solicitation of Existing Employees and Clients
A blanket ban on approaching all employees or customers is unlikely enforceable. To ensure that a restriction on non-solicitation of employees and clients is reasonable, the employer should limit the target group of employees or clients that the exiting employee had a personal connection with or could exercise significant influence over.
- Non-Disclosure of Confidential Information
The employer can insert a non-disclosure restriction to prevent the employee from using or disclosing confidential information during and after employment. This restriction often does not have a set time limit but apply for as long as the information remains confidential.
To give force to the above restrictions, the employer can insert sanction provisions for non-compliance. For example, a ‘forfeiture-for –competition provision’ if the employee breaches the non-competition covenant, the employer will have the right to recover compensation paid to an employee or cancel an outstanding but unvested stock option award.
|Things To Note When Drafting Restrictive Covenants|
Draft restrictive covenants clearly and precisely. Those drafted clearly and precisely have a better chance of being enforceable. Restrictive covenants, even if drafted with clear and precise language, are not automatically enforceable. To be enforceable, they must also be reasonably necessary to protect a business’ legitimate interest. Please see above for the established categories of legitimate interests. Ideally, each restriction should be tailored according to each employment relationship. If this is not possible, consider using a shorter period and smaller geographical area of restriction necessary to protect the business’s interest.
- Prior Agreements
This standard term states that the employment contract contains all the terms that the employer and employee have agreed. No previous agreement, written or verbal, counts.
 Gary Catherwood, Labor, Employment and Human Rights Group, Fasken Martineau, ‘The Importance of Written Employment Contract’ <http://www.martindale.com/labor-employment-law/article_Fasken-Martineau-DuMoulin-LLP_519758.htm>
 CompactLaw, ‘Employment Contracts – What should be included?’ <http://www.compactlaw.co.uk/employment-contracts.html>
 HRM Contracting & Consulting, ‘Factsheet: The importance of Employment Contracts’ <http://www.hrmcc.com.au/_literature_133798/The_importance_of_employment_contracts>
 Duncan Abate, Hong Tran, Kay McArdle, Mayer Brown, ‘A global guide to restrictive covenants’ <https://www.mayerbrown.com/files/uploads/Documents%5CGuide%20to%20Restrictive%20Covenants/MB_rest_cov_asia.pdf>
 Gareth Thomas, Helen Beech, Herbert Smith Freehills, ‘Hong Kong High Court Considers Reasonableness Of Restrictive Covenant’ <http://webcache.googleusercontent.com/search?q=cache:eKHTolc_9uwJ:www.herbertsmithfreehills.com/-/media/Files/ebulletins/Hong%2520Kong%2520High%2520Court%2520considers%2520reasonableness%2520of%2520restrictive%2520covenant.htm+&cd=1&hl=zh-TW&ct=clnk&gl=hk&lr=lang_en%7Clang_zh-TW>