Introduction
Many employers may want to bind an employee for a certain period of time, by including a clause in employment contacts that requires the employee to pay wages for the balance of the fixed term should they terminate employment before the fixed term ends. However, such a clause may risk being challenged as a penalty clause and hence being struck down.
The recent Court of First Instance (“CFI”) case of Ng Yan Kit Alfred and Another v. Ever Honest Industries Ltd and Another [2022] HKCFI 1834 applied, in an employment contract context, the principles established in the Court of Appeal in Law Ting Pong Secondary School v. Chen Wai Wah [2021] CA 873 reflecting the modern judicial approach in the application of the penalty rule.
Case background
In Ng, the claimant, Mr. Ng, was a vice president and director of the defendant companies. In January 2016, he signed a letter of employment with the first defendant which contained a clause (“Subject Clause”) stating:
“The Group cannot dismiss you within three years upon the commencement of this employment agreement. If the Group dismisses you within three years after this employment agreement commences, you will be paid two whole years’ salary as compensation. If this employment is terminated by you within three years, one month’s written notice or one month’s salary in lieu of notice is required, and after resignation, you will not be allowed to work in an organisation that is in the same or relevant industry, or the...
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