Can Directors Get Away with Non-Payment of Wages?

Anita Lam, Of Counsel, DLA Piper

A recent wave of closures in the small and medium retail business in Hong Kong has left hundreds of employees jobless. Many are owed their wages, severance pay and holiday pay.

Can the directors of the collapsed company hide behind the corporate veil and avoid liability to pay wages and terminal payments? The short answer is “no”. Directors or managers can be fined and imprisoned if the company’s failure to pay wages is committed with their consent or neglect.

The Recent Collapses

In January 2015, 44 employees took cash-strapped broadcaster ATV to court for failing to give them severance payment. The 44 were among employees whose job contracts were constructively dismissed after they did not receive their November 2014 salaries.

In the latest closure of the 14 chain stores of Hong Kong retailer DSC, DSC is reported to owe its 900 employees approximately HK$10 million in outstanding wages, severance pay and holidays. The founders of DSC have since been arrested after the closure of its stores on 3 August.

The Law on Non-Payment of Wages

Liability for the company: The Employment Ordinance (“EO”) provides that all employers are required to pay wages as soon as practicable, and no later than seven days after the end of a wage period. Any employer who willfully and without reasonable excuse fails to pay wages commits a criminal offence. The maximum penalty is a fine of HK$350,000 and imprisonment for three years (Cap. 57, s. 63C of the EO).

Liability for delinquent directors and managers: If the Company’s failure to pay wages is committed with the consent or neglect of any director or manager, the director or manager will also be guilty of the same offence. This applies to current directors as well as ex-directors.

Recent case: In April 2015, the Chairman of the now defunct Hong Kong Mercantile Exchange was jailed for six weeks in Kowloon City Court after he admitted failure to pay his Company’s former senior corporate communications manager remuneration of up to HK$340,000. In that case, the Court noted that the Chairman was able to live in his HK$160,000 per month rented luxury home in Repulse Bay until the month before, and had changed his legal representatives several times in the past year. On that basis, the Court found that the Chairman had not given priority to paying wages to the employee.

Statistics on criminal convictions: In 2014, the Labour Department secured a total of 304 convictions against wages offences. In the same year, there were 48 cases where company directors or responsible company officers were convicted of wage offences.

Take Away Points:

  • Given the recent spate of cases involving non-payment of wages to employees, the Courts will likely be more inclined to impose harsher penalties on delinquent employers and directors.
  • There is no indication that there will be imminent changes to the legislation to raise the maximum fine and thereby increase the deterrent effect.
  • However, if a company is cash insolvent, the company should consider restructuring its workforce to avoid ending up in a situation where it cannot pay wages and terminal payments to its workforce.
  • In terms of priority of payment out of the assets of an insolvent company, employees’ wages and terminal payments are prioritised before most other creditors. If a winding up petition has been presented against the company, employees who have claims for unpaid wages may apply to the Protection of wages on Insolvency Fund for ex gratia payment.