Uncertain Distinction Between Employees and Independent Contractors

Uncertain Distinction Between Employees and Independent Contractors

Uncertain Distinction Between Employees and Independent Contractors 1602 900 Adam Hugill
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THIS ARTICLE WAS FIRST PUBLISHED IN HR MAGAZINE

Hiring independent contractors is common practice among many companies, in all market sectors.  Independent contractors are often engaged where there is a particular business need, usually of a temporary nature, where there is inadequate knowledge, experience or man-power internally.  Independent contractors are also engaged on assignments due to human resources, business or accounting reasons often for the purposes of reducing costs or headcount during periods of “ramp up” or “ramp down”.  In such situations, the line between the status of independent contractors and that of employees can become blurred.

In the event of a dispute, usually regarding pay, benefits, dismissal or following a work place accident, the actual status of the worker can become extremely contentious.  Workers who were once seemingly happy with their status as an “independent contractor” assert that they are employees with the same rights, in particular statutory rights, as those granted to other employees.

The current tests for distinguishing between an employee and an independent contractor were set by the Court of Final Appeal in Poon Chau Nam v Yim Siu Cheung [2007] 1 HKLRD 951, where it was held that the Court should examine all the features of the relationship between the parties in deciding, as a matter of overall impression, whether the relationship is one of employment or that of an independent contractor.

The judgment in Poon is now eight years old, which should be sufficient time for employers and those engaging independent contractors to ensure that disputes rarely arise and risks are mitigated.  However, there remains a great deal of confusion, uncertainty and litigation regarding the status of certain “independent contractors” and whether or not they are, in fact employees.  Why is this the case?  What are the risks of getting it wrong? How can the risks be minimized?

Employees are Special

The protections and benefits provided by employment legislation are as a result of the special status that is afforded to employees. Independent contractors do not automatically benefit from such protections and benefits, theirs being defined by the terms of the contract (whether written, oral or implied) between the independent contractor and the engaging entity.

While Hong Kong employment laws are often perceived to be “light touch” and employer friendly, as a result of employees’ special status, certain rights are protected by statute.  In addition to the statutory protection and benefits provided under the Employment Ordinance (Cap. 57), including the right to holidays and annual leave, period of paid sickness absence and maternity leave and minimum periods of notice, employees also benefit from protection under: (i) the Employees’ Compensation Ordinance (Cap. 282) which provides the right to compensation for injuries resulting from work place accidents; (ii) the Minimum Wage Ordinance (Cap. 608); (iii) the Mandatory Provident Fund Schemes Ordinance (Cap. 485) which governs minimum retirement scheme; and (iv) the Labour Tribunal Ordinance (Cap. 25) which provides a quick and informal forum for the resolution of employment disputes.[1]

Determining an Employment Relationship

Employment legislation is created to avoid exploitation and protect the safety and dignity of employees.  For this reason, section 70 of the Employment Ordinance contains the express prohibition against employees agreeing or “contracting out”, thereby ensuring that the Ordinance provides certain irreducible minimum rights, benefits and protections to employees.  Common law has developed to ensure the protection of employees, allowing Courts to look behind the actual wording of any agreement and determine the genuine nature of the relationship.

In the absence of any statutory requirements, how to distinguish an employee from an independent contractor is a question that the Courts in Hong Kong (and other common law jurisdictions) have anguished over for decades.

In Market Investigations v Minister of Social Security [1969] 2 QB 173Cooke J. stated “No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the consideration which are relevant in determining that question”.  In Lee Ting Sang v. Cheung Chi-Keung (1990) 2 AC 374, Lord Griffiths stated “This has proved to be a most elusive question and despite a plethora of authorities the courts have not been able to devise a single test that will conclusively point to the distinction [between an employee and an independent contractor] in all cases”.

Over time, the tests have developed from analyzing the question from the perspective of the master and servant relationship, with “control” being the central feature, to the modern day “overall impression test” advocated in Poon.

Getting it Right

Ribeiro PJ in Poon emphasized the intuitive, nuanced nature of the assessment exercise and not a mechanical approach, the object of the exercise being to paint a picture of the overall impression from the accumulation of detail with not all factors are of equal weight or importance in any given situation.  Such a broad, conceptual analysis is, however, difficult to apply and manage in a day-to-day work environment and continues to prove troublesome.  Therefore, particular factors of the working relationship are usually identified and assessed as to whether or not they point to an employment or independent contractor relationship.  Such factors include:

–       Remuneration

The remuneration of an independent contractor is likely to be by way of a specified fee or a specified number of periodic payments over a limited amount of time. In contrast an employee can expect to receive a regular remuneration which is generally not tied to the production of a specified output or the completion of a specific project.

The fact that an employer does not make MPF payments on behalf of a worker may be treated as an indication that the parties are not in an employment relationship. Even more persuasive of the absence of an employment relationship is if the worker makes the MPF payments themself.

–       Service delivery and work performance

Factors such as: regular, timetabled hours of work; prohibition against working for others; provision of transportation between job sites; regular and close supervision; instruction as to how, when and where to do the work; the requirement to wear a company uniform and/or display the company logo; submission to the employer’s internal rules, such as the necessity to seek approval before taking leave; and provision by the employer of the tools, equipment, protective clothing and the like needed to carry out the services are all strong indications of the existence of an employment contract.

However the ability of a worker to freely assign his work to others or hire workers to carry out his obligations on his behalf have been shown to carry considerable weight in convincing the court that the relationship is one of self-employment.

Other indications pointing to an independent contractor agreement are: that the worker typically provides services to the employer which do not require the full time commitment of the worker; the services provided are otherwise not provided by other employees; the engagement may cover a specified period of time only or a project; and the worker may be entitled to provide services to other third parties and is not exclusively tied to the employer. By way of contrast an employee can expect to be at the disposal of the employer, standing ready to take instruction from the employer and to devote his energies exclusively to requirements of the employer for the duration of the employment relationship.

–       Taxation

A key responsibility of any employer is to ensure the accurate filing of income tax forms with the Inland Revenue. Employers are obliged by statute to report the salaries paid to employees in order that the Inland Revenue Department can levy the appropriate rate of income tax. Consequently where a worker is not described as an employee in forms filed with the Inland Revenue it may be inferred that the intention was that the worker be considered as self-employed.

–       Documentation

In the circumstances of any dispute as to the employment status of a worker, the courts would consider the terms of any written agreement between the parties in order to try and determine the parties’ intentions. Whilst the courts have held that an express designation of employment status in an employment contract is only one of the evidential factors in determining the substance of the relationship, and a minor factor at that, employers should still clearly state the terms of the employment status as a relevant expression of the intention, as this may be useful in tipping the balance in favor of a determination of self-employment.

[1]The discrimination ordinances apply widely and encompass employees, independent contractors and other categories or workers.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Adam Hugill

Adam Hugill

Adam advises on a wide range of contentious and non-contentious legal and commercial issues, with a special emphasis on employment law in Hong Kong and the Asia Pacific region.

All articles by : Adam Hugill
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