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Employee vs. Independent Contractor – What’s in a Name?

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Reshaping the Job Market

The rise of the gig economy, the impact of COVID restrictions and the ensuing debate over flexible working options have brought the issue of independent contractors into the spotlight. An increase in on-demand jobs through app-based platforms, such as for food delivery, courier and ride services, is reshaping the job market. In November 2021 a strike by Foodpanda delivery workers in Hong Kong raised the thorny old question of whether a specific working arrangement constitutes employment or an independent contractor relationship. This is important because the legal differences and implications are significant.

The EO’s Stance 

Under the Employment Ordinance (Cap. 57) (“EO”), employees enjoy significant statutory rights and protections. The EO also provides that employees cannot contract out of their statutory rights and protections conferred by the EO. Employees are entitled to paid holiday and annual leave, paid sickness and maternity/paternity leave, as well as minimum periods of notice, certain protections against termination and potential termination payments (based on length of service). Employees also receive other protections and benefits, such as minimum wage requirements, pension contributions through the Mandatory Provident Fund scheme and the right to compensation for injuries sustained through workplace accidents.

By contrast, aside from statutory protection against discrimination, independent contractors are not entitled to any of the statutory rights and protections afforded to employees. Such relationships are based on what is contractually agreed between company and individual. This typically means that arrangements are quite fluid, with remuneration based on hourly rates and the ability for either company or individual to terminate without notice or with only very limited notice.

Independent contractor arrangements are generally viewed as more flexible. Contractors normally control when, where and how they provide deliverables; and are free to work for other companies at the same time. Companies in many sectors use such arrangements for particular business needs, especially when these are of a temporary nature or where specific or niche expertise is required. While employees may be seen as more loyal to a company, more knowledgeable about its business and ethos, and providing continuity and stability for the company, independent contractors can be a nimble and cost-effective means of covering business functions.

Blurred Lines

In practice it is easy for the distinction in status to become blurred. The issue normally arises in the context of a disagreement between individual and company over remuneration, rights and benefits or termination of contract. For example, if a “contractor” arrangement is terminated (or not renewed on expiry of a fixed term), a disgruntled individual who was previously content to be considered as an independent contractor may seek to claim statutory protections or termination payments by claiming that technically they are in fact an employee. Similarly, this situation can arise if individuals feel that their remuneration is affected or that other benefits are being reduced, which would not be permissible if they were considered to be employees.

The difficulty is that there is no set statutory mechanism or test to distinguish definitively between employment and independent contractor status. Accordingly, the Courts in Hong Kong are faced with making decisions in this complex area. Merely labelling a relationship as one or the other, or stating that the “worker” accepts and agrees that the relationship is that of an independent contractor, for example, is not in itself determinative. The approach of the Courts now is to look at all the features of the relationship to develop an “overall impression” in making such decisions. 

Distinguishing the Difference Between an Employee and an Independent Contractor

The Poon Chau Nam v Yim Siu Cheung [2007] 1 HKLRD 951 case emphasizes that the assessment should be intuitive and nuanced in nature to achieve this overall impression. Against that background, the Courts typically will look at the following factors (and any others they consider relevant):

  • Control over work procedures, working time, timetables and methods – including whether the individual must provide records of time spent or provide reasons for absence;
  • Supervision of work and submitting to hierarchical reporting or management structures;
  • Structure of remuneration and whether this is more in the nature of regular fixed “salary” or time and project driven “fees” (which many vary from time to time or based on work done or hours spent)
  • Regular or compulsory attendance by an independent contractor at designated company sites to deliver the work;
  • Ownership and provision of work equipment, tools and materials;
  • Exclusivity and prohibition on working for other organisations;
  • Whether the individual is free to hire employees to assist in the work; and
  • Whether the individual is required to wear a company uniform, display the company logo or carry company namecards or ID cards; and
  • Whether the individual has management responsibilities or may generally be regarded as part of the organisation for whom the work is done.

While there is no exhaustive list of relevant factors and no single test which will conclusively point to the distinction, factors such as regular scheduled working hours, exclusivity of services, the requirement to be on company premises, wear company uniform or use company equipment, typically suggest an employee relationship. 

By contrast, having the right to provide services to others, working to the individual’s own schedule, time and project-based remuneration and irregular or un-fixed hours are factors which tend to indicate an independent contractor relationship.

The Foodpanda Situation

The Foodpanda situation seems to illustrate how the employee vs independent subcontractor issues can arise. Delivery workers were engaged to work with a remuneration structure based on the number of deliveries made. While the intention seems to have been for this to be an independent contractor relationship, problems arose when workers struggled to make the expected income due to long waiting times, difficult and undifferentiated delivery venues, and technical issues with the app. The situation was further complicated when it appeared that workers were being asked to wear uniforms, not to work for competitors and had contracts which referred to “employment”. 

The Foodpanda strike was resolved through dialogue with management and the lesson here seems to be that if workers are happy with their remuneration and other terms and conditions, the exact legal status of the relationship becomes far less relevant. As described above, however, companies need to be aware that this is a complex area which can lead to potential claims. If workers are found by the Courts to be employees rather than independent contractors, employers may be liable for payment of benefits and entitlements and will have less flexibility in their obligations and how they treat such personnel. In addition, tax and MPF issues would arise, as employers have obligations to file income tax forms and make mandatory contributions to MPF for employees. 

Protection from Potential Claims – Doing the Right Thing

There is no one-size-fits-all formula, but companies who engage independent contractors should review and consider their criteria and standard policies and documents for such relationships, to avoid unexpected and potentially troublesome consequences down the line.

For further information on the difference between employees and independent contractors in Hong Kong and other employment law related matters, please do not hesitate to contact our employment lawyers

Contacts:

Felda Yeung, Partner
Tel +852 3405 7674
feldayeung@gallhk.com

Vanessa Ip, Associate
Tel +852 3405 7656

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