Independent contractor or employee?

by Judith Wong, Consultant, The Employment Law Group, Allen & Overy

Article exclusively contributed by Allen & Overy

Employee benefits can account for a significant part of the total remuneration package. Because of this, hiring workers with the status of "independent contractors" rather than "employees" may save costs, since many statutory benefits only apply for workers who are classified as employees. Therefore, it is of fundamental importance to know who is viewed as an employee in the eyes of the law and why.

If a dispute arises, it makes no difference what the parties have chosen to call themselves in a contract. The court will look into the substance of the relationship to decide what is actually in place.

For example, in Wong Sham & Others v Hong Kong Industrial (Woodwork) Co, the company admitted that it owed the plaintiff money for work done as a craftsman, but it did not admit this was as arrears of wages, since it had regarded the craftsman as a contractor, not an employee. On this basis, the company also denied claims for severance or long service payments. There was no written contract between the parties.

The court admitted that there was no definitive list of relevant factors in such cases, but in reaching a judgment, it considered the following:

(1) Degree of control - the company claimed there was no supervision of the craftsman except in matters of quality control. The court, though, viewed quality control as effective supervision
(2) Any prospect of profit or risk of loss - the craftsman had no initiative or room for manoeuvre over costs or prices
(3) Whether part of the employer's organisation - the craftsman was judged to be a part of the company's organisation
(4) Whether carrying on business on his own account - the company alleged that the craftsman could hire his own workers but, in fact, he never did or was told that he could. The company also alleged that he had worked on other jobs while being the company's contractor. However, no objective evidence supported this
(5) Provision of equipment - the company provided practically all materials and equipment for the craftsman
(6) The incidence of tax - the company said that although they had filed several tax returns for the craftsman, this was a mistake by their accounts department
(7) The parties' own view of their relationship - the judge noted that the company did nothing to make it clear to the craftsman that his status was as a contractor. In a number of ways, their actions would have led him to understand he was an employee
(8) The traditional structure of the trade or profession concerned and the arrangement within it - there was no evidence of such structure or arrangement in this particular case

The judge said that the fact that the craftsman was paid a "piece rate" rather than a regular salary shown on the company's payroll was neither here nor there. Furthermore, he refused to draw any inference from the non-payment of allowances for sick leave, statutory holidays and annual leave because there have been regular instances of employers simply failing to comply with these requirements. Therefore, the judge concluded that the craftsman was an employee of the company and awarded him a severance payment and arrears of wages.

When deciding on the structure of a formal working agreement with a contractor, employers should note the above factors and realise how a court may interpret them to test the substance of the relationship.

Q & A on differences between an independent contractor and an employee
Q1 Are there ways to structure an employment agreement to reduce the employee benefits payable?
A1 The Employment Ordinance provides for a concept of "continuous employment" and "continuous contract" (i.e. working at least 18 hours per week for four weeks consecutively). Employees who are not under a continuous employment contract will be entitled to far fewer benefits. See table below.

Q2 What are the possible disadvantages of hiring independent contractors?

Contractors can disappear with little or no notice, and can work for your rivals at the same time. However, the more notice and non-competition provisions you try to impose, the more likely the contractor will be regarded as an "employee". Documentation carefully recording the proposed relationship with the contractor can help to protect your position in this regard.

Taken from Career Times 10 March 2006

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor

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