Summary dismissal backfires: employer's lax expense controls and poor communications lead to wrongful termination ruling

What you need to know

• Summary dismissal should not be resorted to lightly, and employers considering dismissing their employees should be prepared to demonstrate clear and unambiguous evidence of, amongst other things, gross misconduct or dishonesty.
• In the case of dishonesty, different degrees existed and serious allegations would require stronger evidentiary proof. Summary dismissal would typically only be justified if the dishonesty was such as to constitute a repudiation of the employment contract.
• An employee would be entitled to rely on the directions of a person with apparent authority, notwithstanding the fact that the directions may said to be peculiar or commercially unusual.

What you need to do

• Employers should ensure that expense reimbursement policies are clear, unambiguous, and consistently communicated to employees, particularly where there are requirements as to the form and provenance of supporting documentation.
• It is crucial to clearly define and communicate who has authority to approve or make representations regarding the company’s affairs. In this case, the employee successfully relied on representations made by the Financial Controller because he had apparent authority to bind the company.
• Employers must conduct a thorough and fair investigation before making a determination of misconduct. Even in the face of irregularity, the fact that the company had been approving invoices for an extended period could indicate acquiescence or waiver, thereby undermining the justification for summary dismissal.
• Before proceeding with summary dismissal, employers should carefully assess whether the conduct in question meets the minimum threshold required under Hong Kong law. The more serious the allegation, the more robust the evidence must be.

Background

Hu Yangyong was formerly employed as a Chief Operating Officer pursuant to a three year fixed term contract. Mr Hu was entitled to the reimbursement of various family and business expenses upon submission of the necessary supporting invoices. Over the course of a year, Mr Hu duly submitted his expense claims on a monthly basis and these claims were routinely reviewed and approved by the company.

The company subsequently summarily dismissed Mr Hu from employment, alleging misconduct and dishonesty on the basis that he had fraudulently submitted invoices in order to reach the monthly claim threshold.

Mr Hu disputed this, and contended that it was the company's Financial Controller who had specifically instructed him not to submit his actual invoices, but to instead procure invoices from "other sources" which were issued under the company's name for submission in support of his monthly expense claims. As the company had reviewed and approved these claims, it had effectively represented to him that such an approach was acceptable.¹

Issues

The issue before the Hong Kong Court of First Instance was whether the company was justified in invoking Section 9(1) of the Employment Ordinance to terminate Mr Hu's employment on the basis that he had either misconducted himself (such misconduct being inconsistent with the due and faithful discharge of his duties) or was guilty of fraud or dishonesty.

Decision

The court held that there was no sufficient basis for Mr Hu's summary dismissal. The Financial Controller had apparent authority to approve Mr Hu's expense claims, and had indeed instructed him to procure invoices from "other sources". The company's ongoing approval and reimbursement of Mr Hu's claims, despite the unusual nature of the supporting invoices, also reinforced his belief that this approach was acceptable. It was also evident that Mr Hu did not gain personally from such an arrangement, as he had in fact incurred legitimate expenses in excess of the monthly claim threshold and could have submitted the genuine invoices at the time.

The court stressed that summary dismissal would only be justified where the employee had committed a fundamental breach of the employment contract. It was a strong and extreme measure, justified only in exceptional cases.

In cases involving dishonesty, different degrees existed, and serious allegations would require stronger evidence before the court would accept that the allegation was proved. Summary dismissal would only be justified if the dishonesty was such as to constitute a repudiation of the employment contract.

As there was insufficient basis for the company to have summarily dismissed Mr Hu, he was entitled to damages in excess of HK$5 million for the wages, end-of-year payments, service fees, out-of-pocket expenses and annual leave pay he would have earned for the remainder of the fixed term contract.

Key takeaways

This case is a cautionary tale for employers. Summary dismissal remains a remedy of last resort, requiring clear evidence of gross misconduct or dishonesty. Different degrees of dishonesty exist and serious allegations would require stronger evidence before the allegation can be said to have been proven.

The onus is on employers to ensure that internal policies are clear and that approval processes, if necessary, are robust and transparent. Where internal practices or representations may have led to employee misunderstandings, courts may be reluctant to find misconduct sufficient to justify summary dismissal.

In particular, employers are advised to review their expense reimbursement procedures and internal approval mechanisms to ensure clarity, consistency, and compliance with contractual and statutory requirements.