Distinguishing employees from independent contractors

By Anthony Lam, Solicitor, Au-Yeung, Cheng, Ho & Tin

Article exclusively contributed by Au-Yeung, Cheng, Ho & Tin

The question of whether a person is an employee or an independent contractor has been a key issue in a number of court cases in Hong Kong. Essentially, someone engaged to work under a "contract of service" is an employee while a person working under a "contract for services" is an independent contractor.

Hong Kong legislation provides various protections for an employee. For example, in Section 40(1) of the Employees' Compensation Ordinance, it is made clear that the employer is liable for taking out a proper insurance policy so that, in the event of injury at work, the employee can obtain compensation. Also, in Section 7(1) of the Mandatory Provident Fund Schemes Ordinance, it is stated that every employer must take all practicable steps to ensure that an employee becomes a member of a registered provident fund scheme.

An employer must know the precise status of any person providing services and may commit an offence by not acting correctly in cases like those outlined above. When it comes to distinguishing an employee from an independent contractor, the test widely adopted by Hong Kong Courts was set out in the Privy Council case of Lee Ting Sang v Chung Chi Keung.

The Court will first consider whether the person who has engaged himself to perform certain services is undertaking them as a person in business on his own account. If the answer is "Yes", then there is a contract for services rather than a contract of service. There is no exhaustive list of relevant considerations and strict rules to help decide, but the Court will take the following into account:

(i) whether the person performing the services is subject to the instructions of his employer as to how to do the work
(ii) if he provides his own equipment
(iii) whether he hires his own helpers
(iv) what degree of financial risk he bears
(v) the responsibility he has for investment and management
(vi) whether and how he has an opportunity of profiting from sound management of the performance of his task.

The District Court case of Chan Wai Hon v Pang Kwok Chung and others applied the principles established in the test case. A part-time registered electrician was engaged by Mr Pang to install a number of switches. While working on site, he fell from a ladder and was injured and, as a result, made a claim for employee's compensation against his employer and the principal contractor. The only issue the Court had to consider was whether he was an employee or a subcontractor.

The District Court analysed the facts of the case as follows:

  • Control and supervision - the electrician's work was assigned and arranged by Mr Pang. Although there was no need for close daily supervision, the electrician had to follow Mr Pang's instructions and would consult him in case of difficulties.
  • Organisation - the Court found that the electrician's work was only part of a contract undertaken by Mr Pang and that he did not work for his own business.
  • Choice of co-workers - Mr Pang was able to employ or fire the co-workers. The electrician was engaged for specific work and paid a daily wage.
  • Payment of wages - the electrician had a fixed daily wage. The Court found that it was Mr Pang's direct responsibility to make these payments.
  • Provision of equipment - the electrician had to provide basic tools. However, Mr Pang was responsible for buying materials and reclaiming any relevant expenses as part of the total costs of the job.
  • Working hours and place - the electrician could not choose the working hours or the place.
  • Financial risk - the electrician had an obligation to work but was not concerned with the profitability of the project and had no profit share or bonus. On the other hand, Mr Pang received a lump sum for the whole project and had to bear any losses. Furthermore, he had to pay the electrician's wages, no matter when the lump sum was actually received.

    Taking all these factors into account, the District Court had no hesitation in ruling that the electrician was Mr Pang's employee and entitled to receive employee's compensation.

    Q & A on differences between employees and contractors
    Q1 What other tests or factors will the Court consider?
    A1 The Court will also consider the Intention Test i.e. what was the intention of the various parties. This will involve factors like whether payment was calculated by reference to work done or time worked, as opposed to remuneration being for a fixed term; whether the services were performed at the premises of the employer, the employee or of a subcontractor; whether the worker was engaged without reference to any particular project; and the terms used in agreeing the contract.

    Q2 Is it conclusive evidence if the worker describes himself a contractor or a partner?
    A2 No. It is for the Court and not the worker to evaluate the facts and determine the legal relationship. The description of the worker has no significant evidential value.

  • Taken from Career Times 17 December 2004

    (Last review date: 23 August 2013)

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