Hong Kong

GH 2017 Hong Kong

a. Introduction

In Hong Kong, the Employment Ordinance (“EO”) is only applicable to employers and their employees that are engaged under employment contracts. In other words, only employers and employees are entitled to rights and benefits under the EO and not persons that are engaged as independent contractors. Consequentially, care must be taken to ensure that any staffing arrangement’s legal implications are consistent with those that are intended by the parties to prevent disputes. This article provides an outline of the employment law in Hong Kong, and the associated consequences in the event of a re-characterization of relationship. It will identify the factors that are likely to indicate the existence of an employment relationship, and will discuss the appropriate method of structuring independent contracting arrangements.

a. Factors that Determine Who is an Employee and Who is an Independent Contractor

Unfortunately, there are no hard and fast rules in differentiating whether an individual is an employee or an independent contractor under Hong Kong law. The Hong Kong Court will look critically at the factual matrix and all relative factors to determine the true relationship in substance, regardless of the label given to the parties’ agreement. In other words, a well-drafted and properly executed contract and the terms therein may not be determinative of the parties’ relationship. For example, even if a business hires a worker as an independent contractor, the Court may still find that there is in substance an employment relationship in which the business will be required to meet all the obligations under the EO to the contractor as if he was an employee of the business. As such, it is important to delineate between the status of an employee and an independent contractor when parties enter into a service agreement to avoid potential disputes and infringement of the law.

The starting point is for the Court to ask whether the person who has been engaged to perform the services is performing them as a person in business on his own account.1 If he is performing these services on his own account then the contract is more likely to be a contract with an independent contractor. On the other hand, if he is not performing these services on his own account but on the employer’s account, the contract is more likely to be an employment contract. This is a question of fact and the worker has the burden of proof that he is an employee on a balance of probabilities.2

Historically, different tests used by the Court include:

• the intention of the parties of their relationship;
• the degree of control the worker has over the job; and
• the structure and the arrangements; and so on.

The recent approach is that the Court will take an overall impression approach. It will examine all relevant factors including ones identified in the case law (which includes the intention test and control test as stated above) and any other relevant factors.3

The list of relevant factors is not exhaustive. Further, it is difficult to tell as to how important a particular factor should be or how much weight the considerations should carry in a particular case. All details are not of equal weight or importance in any given situation and the details may also vary in importance from one situation to another.4

Despite the fact that the Court takes an overall impression approach and will take all relevant factors of each specific case into consideration, there are factors which the Court has often found to be of relevance in making the determination, bearing in mind that the weight to be given to each will vary depending on the circumstances of a particular case.

Express terms of the wrinen contract
As mentioned above, an express term in an agreement stating that the worker is an independent contractor would not be determinative of the worker’s status. The express terms would be only one of the many factors in which the Court would consider and such terms would only be of minor influence.5 It is when the Court, in considering all the relevant circumstances, finds it doubãul as to the rights and duties the parties wished to provide for, that the wrinen terms would be useful.6

Degree of control and level of supervision
Control used to be a sufficient indicator of an employment status. Although it is no longer a sufficient indicator of an employment status, it nonetheless remains the most important consideration in many cases.

A high degree of control by the employer over the worker such as control as to what, when, where and how the work is to be done would oren give weight towards a finding of an employer-employee relationship. Examples of control are (i) prohibition against working for others; (ii) regular hours of work; (iii) close supervision; (iv) provision of transportation between work sites;7 (v) choice of co-workers; (vi) specific instructions as to when and where to work;8 (vii) requirement to wear uniforms;9 or (iix) requirement to seek permission before taking leave.10 On the other hand, if the degree of control from the employer is limited, such as the ability to reject the work, weight will be given towards the finding of a business-independent contractor relationship.

The kind of work involved can have some weight towards whether the relationship is one of employer- employee or business-independent contractor. For example, jobs such as laborers, which by nature generally involve a high degree of monitoring and control would usually be weighted towards an employer-employee relationship. On the other hand, although not determinative, jobs such as advisors or portrait artists which by nature generally involves very limited degree of monitoring and control would usually be weighted towards a business-independent contractor relationship.11

Work Delegation
Where the worker is allowed to freely delegate work to another or hire other workers for the job, this will be weighed towards there being a business-independent contractor relationship. In other words, any restrictions regarding work delegation or hiring of other workers to assist will often support the finding of an employer- employee relationship.

This factor does not appear very often in case law but when it does, although not a decisive factor, it carries considerable weight.12 This is because the freedom to be able to hire other workers itself is inconsistent with the idea of the employer having control.

Equipment and Machinery
An employer providing machinery and equipment (including safety equipment) necessary for the job for a worker will be weighted towards the finding of an employer-employee relationship. Although not determinative, this factor is often mentioned in case law in a finding of an employer-employee relationship.13 There are also cases where the Court would consider the fact that certain workers such as artisans, drivers and other skilled workers would be expected to have their own tools and equipment by nature of their
job.14

Financial Risk
A worker being exposed to financial and profit risks would generally be weighted towards there being a business-independent contractor relationship. It is important to note that financial risk here does not include (i) a worker’s ability or chance to increase his salary by gaining more experiences and working harder or to decrease his salary;15 or (ii) a management worker having some discretion as to his salary and bonus. Rather, financial and profit risk here refers to a worker putting his own financial resources or other resources at risk in his business with the chance of gaining or losing.

Positive actions of the employer and employee
Although not determinative, the Court will consider certain positive actions of the employer or employee. One example is the payment of Mandatory Provident Fund (“MPF”) payments. Pursuant to the Mandatory Provident Fund Schemes Ordinance16, employers in Hong Kong are required to make contributions to the MPF for all their employees. The Court has in some cases treated an employer not paying MPF contributions for his worker as a factor weighing towards the worker being an independent contractor.17 However, the Court generally does accept that the employer can easily withhold from making MPF contributions to argue against the existence of an employer-employee relationship and hence, in general, this factor is not determinative.

On the other hand, if MPF contributions are solely made by the worker himself as a self-employed person, it will be a factor weighted towards there being an independent contractor relationship and more weight would generally be given, in comparison to the abovementioned scenario where no MPF contributions were made by the employer.18 Similarly, this is not conclusive and is only one factor which the Court would consider.

Another example is income tax filing. Employers are generally required to file tax forms for their employees and the filing of salaries tax returns by employers for their employees was found to be an important factor weighing towards there being an employer-employee relationship.19

b. General Differences in Tax Treatment

An independent contractor whose profit comes from the provision of services or purchase and sale of goods is usually considered a self-employed person for tax purposes in Hong Kong. As a self-employed person, he is subject to profits tax based on the profits of his business or his partnership’s business.

The exact computation of salaries tax in Hong Kong is outside the scope of this article but to give a taste of what it is like and to compare that with an employee below, generally speaking the current profits tax rate in Hong Kong is 16.5% of the assessable profits for corporations and 15% for unincorporated businesses, irrespective of their residential status and subject to certain reliefs and deductions as stated in the Inland Revenue Ordinance20 or other relevant rules and laws of Hong Kong. In this regard, a self-employed person is required to:

• prepare accounts and any relevant reports based on the accounting records;
• repare and file a tax return to report the profits or losses of the business;
• inform the Inland Revenue Department (“IRD”) regarding his tax liability within 4 months from the end of the basis period for the relevant assessment year, except where he received the relevant tax return of the IRD;
• pay the tax as required;
• maintain the business records for at least 7 years;
• if his business has ceased, inform the IRD within 1 month of the cessation; and
• if there is a change of address, inform the IRD within 1 month of such change.

On the other hand, an employee has to pay salaries tax on his taxable income derived from Hong Kong from any employment. Hong Kong salaries tax is calculated based on the chargeable income at progressive rates.

c. Differences in Benefit Entitlement

EO is the primary piece of legislation governing employment conditions in Hong Kong. EO is generally applicable to employers and employees that are engaged under employment contracts. Some examples of benefits include rest days, wage protection, paid statutory holidays, paid annual leave, paid maternity and paternity leave, severance payment, long service payment, protection against unreasonable and/or unlawful dismissal and so on.

The Employees’ Compensation Ordinance (Cap. 282) (“ECO”) is another piece of important legislation, which is applicable to all employees employed under an employment contract of service or apprenticeship. It sets out the entitlements of employees who are injured by accidents or who suffer from specified occupational diseases arising out of and in the course of their employment. ECO also requires an employer to take out proper employee insurance policies.

There is other legislation that governs the interests and obligations of the employers and employees. One example is the Minimum Wage Ordinance (Cap. 608) (“MWO”), which sets out a minimum wage requirement for employees. The Mandatory Provident Fund Schemes Ordinance (Cap. 465) (“MPFSO”) operates like a compulsory pension scheme which requires every employer to take all practicable steps to ensure its employees are members of a registered provident fund schemes, and requires both the employers and employees to contribute to the provident fund schemes set up in favour of the employees.

In other words, in addition to the employment contracts entered into by employers and employees, their respective interests and obligations are also protected and governed by statutory legislation. On the contrary, the respective interests and obligations for a business-independent contractor relationship are merely set out in their respective service agreements.

d. Differences in Protection from Termination

For employment contracts, generally speaking, except in special circumstances, either party to a contract of employment may at any time terminate the contract either orally or in writing, by giving the other party sufficient notice of his intention to do so. Pursuant to EO, the statutory length of notice required to terminate a contract of employment (except during expressed probationary periods) shall be as follows:

• for a contract for one month renewable month to month which does not make provision for the length of notice required to terminate the contract – not less than one month;
• for a contract for one month renewable month to month which makes provision for the length of notice required – the agreed period but not less than 7 days; and
• in every other case, the agreed period but not less than 7 days.

In addition, either party could also terminate the employment immediately by paying the other party a sum calculated by multiplying the number of days / months required as the notice period by the daily / monthly average of the wages earned by the employee during (i) the period of 12 months immediately before the date on which the party terminating the contract gives notice of the termination to the other party; or (ii) if the employee has been employed by the employer concerned for a period shorter than 12 months immediately before such date of notification, the shorter period. In contrast, without the protection of EO, an independent contractor’s relationship with a business is merely contractual in nature. Any termination of the contract shall be governed by the actual contractual terms (which may be expressed or implied).

e. Local Limitations on Use of Independent Contractors

Whilst workers in Hong Kong are generally free to enter into service agreements of any nature, there are certain professions, which are regulated by statute, industry rules and codes and where the use of independent contractors is restricted, for example judicial officers and pupils to barristers-at-law.

Having said that, the use of independent contractors in Hong Kong has become increasingly common. There is also a lifestyle trend where, instead of being confined by fixed working hours, people prefer to work from home independently, spend more time with their families, and to develop their own businesses.

In the meantime, Legislative Council Members and trade unionists have expressed concerns on the number of workers being labeled as self-employed persons notwithstanding that they have all the indicia of an employee (as discussed above).21

However, as mentioned, in Hong Kong, if in substance the relationship as stated in the contract is in fact one of an employer-employee relationship, how the relationship is labeled is immaterial.

Further, an employer cannot unilaterally modify an employee’s classification to an independent contractor. If the employer does unilaterally make such modification, a claim may be filed against the employer on the basis of variation of the employment contract unreasonably under EO. Alternatively, the employee might be able to claim against the employer for termination compensation on the basis of constructive dismissal.22

f. Other Ramifications of Classification

Insolvency Ramifications
When an employer becomes insolvent, its employees may file a winding-up or bankruptcy petition to recover the debts owed by the employer which includes arrears of wages, wages in lieu of notice, severance payment, untaken annual leave and statutory holidays and so on. Similarly, independent contractors may also file a winding-up or bankruptcy petition to recover the debts owed by the business or individual.

The Protection of Wages on Insolvency Ordinance (Cap. 380) (“PWIO”) protects employees during the winding-up of a corporation or bankruptcy of an individual employer in the sense that the aggrieved employees can apply for ex gratia payment under the PWIO for the outstanding wages, wages in lieu of notice, severance payment, untaken annual leave and statutory holidays and so on. It should be noted that such protection is not available for independent contractors.

a. Laws and Guiding Principles

Re-characterization may happen when a worker who was stated as an independent contractor on the service contract, alleges that he is entitled to employee’s compensation under ECO and argues that he is an employee in substance instead of an independent contractor.

The leading authority in Hong Kong on the issue of whether a person is an employee of another is Poon Chau Nam v Yim Siu Cheung23. As discussed above, it laid down the rule that the modern approach to the question of whether a person was an employee was to examine all the features of the parties’ relationship against the background of the indicia of employment, with a view to deciding whether, as a matter of overall impression, the relationship was one of employment.

The modern approach involves a “nuanced and not a mechanical approach”, and is not an exercise of running through items on a check list to see whether they are present in, or absent from the situation. Its object is to paint a picture from the accumulation of details, whereby not all details are of equal weight or importance in any given situation and the details may also vary in importance from one situation to another. In undertaking the modern approach, the indicia includes the degree of control exercised by the employer; whether the person performing the services provided his own equipment; whether he hired his own helpers; what degree of financial risk he took; what degree of responsibility for investment and management he had; and whether and how far he had an opportunity of profiting from sound management in the performance of his task. As such, the Court will not necessarily endorse whatever labels the parties choose to put on their relationship.

In Wong Kin v Him Kee Food Distribution Co Ltd24, a recent case where the Court had to determine the status of the applicant, thereby entitling him to claim employees’ compensation under ECO for injuries sustained during the course of his employment, citing Chan Kwok Kin v Mok Kwan Hing25 and Ferguson v John Dawson & Partners (Contracts) Ltd26, the Court stated that the parties’ classification of their relationship is not conclusive and it is for the Court to evaluate the facts and determine the legal relationship.

It is important to note that the abovementioned indicia are again not exhaustive. As applied in Lee Ting Sang v Chung Chi Keung & Another27, no exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant, nor can strict rules be laid down as to the relevant weight which the various considerations should carry in particular cases28.

b. The Legal Consequences of a Re-Characterisation

Even if the person is called or has been labeled as an independent contractor in the contract, if in essence an employer-employee relationship exists, the employer will be required to fulfill its responsibilities under the relevant legislation by paying back statutory benefits retroactively to the worker who has been falsely labeled as an independent contractor.

As mentioned above, such rights and benefits include basic protection under EO such as paid annual leave, paid maternity and paternity leave, statutory holiday pay, sickness allowance, severance payment or long service payment, minimum notice of termination and right to make a payment in lieu of notice, etc.; the statutory Minimum Wage under MWO; statutory sick leave and compensation arising from work injuries under ECO; and employer’s MPF contributions under MPFSO.

c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status

Whether a person is or is not an employee is a question of fact, which is essentially a matter for the Labour Tribunal or the Courts of Hong Kong to determine. Apart from judicial remedies, a complaint hotline is in place to facilitate the reporting of non-compliant employers by employees who suspect that they have been deprived of statutory rights and benefits. As with the modern approach, the Labour Department will conduct investigation by examining the substance rather than the form of the relationship, and will prosecute the employer if it is found that the employer has breached the relevant statutory rules. The Labour Department has the general power to prosecute non-compliant employers.

a. How to Properly Document the Relationship

In Hong Kong, cases have shown that whether a person is acting in his or her capacity as an employee or an independent contractor is often a mixed question of fact and law. Therefore, such a distinction of the two relationships will not merely rest upon a written document, but also upon all factual circumstances of a particular case.

Notwithstanding such, if both parties intend to have an independent contractor relationship, they are strongly recommended to incorporate clear and express provisions into the independent contractor agreement to reflect such intention, and to put the matter beyond doubt as much as possible. Express provisions that reflect independent contractor factors can play a significant role in indicating the nature of the relationship between the parties. Among all express provisions, the most important provision will state clearly that the person is engaged as an independent contractor and not an employee or subsidiary of the principal. Other examples of these independent contractor factors include:

• contractor’s right to hire his or her own workers and delegate work to them;
• contractor’s right to control over how the work is to be carried out, for example by using his or her own work tools in completing the work;
• contractor’s right to select the site at which work is performed;
• contractor’s right to procure services from other potential clients;
• contractor’s right to fix his or her own time schedules as opposed to following a strict schedule prepared by the principal;
• contractor should take up liabilities for all of the debts, losses, and expenses on his or her income solely; and
• payments to the contractor should be result-based and not just based on hours spent on working.

In addition, the principal must avoid setting out conditions that imply subordination, such as assigning a supervisor to give contractor directions on how the work is to be carried out. The independent contractor should also undertake not to allege that he or she is the employee of the principal during and even subsequent to the termination of the independent contractor agreement.

b. Day-to-Day Management of the Relationship

Parties are advised to seek and obtain independent legal advice in the course of negotiating the independent contract agreement. All discussions should be documented by the parties to ensure that the clear intentions of the parties, at the time of the agreement, is delineated in the agreement. The significance of a properly defined and documented independent contractor relationship should not be overlooked as it sets out a clear and enforceable mutual understanding of the rights and obligations of the parties.

On top of safeguarding the rights of the parties whilst concluding the agreement, the principal should make every effort to preserve the level of independence granted to the independent contractor. These include the rights provided in the independent contractor agreement as stated above. Any interference of these rights by the principal might be a factor hinting an employer-employee relationship instead of a business-independent contractor relationship. As such, principals are recommended to draw up written evaluations on a routine basis concerning the independent contractor’s scope of work. Such evaluations may be useful in refuting any future claim of re-characterization.

a. New or Expected Developments

The recent case of Wong Kin v Him Kee Food Distribution Co Ltd29 reaffirms the idea that the Court would look at all the relevant factors overall in determining the relationship between contracting parties and Independent Contractors.

In the said Judgement, the Court reaffirms that there is no single test that can conclusively point to the distinction between an employee and an independent contractor. The approach taken by the Court is to examine all features of the parties’ relationship against the background, and the Court will then decide, as a matter of overall impression, whether the relationship is one of employment.

b. Recent Amendments to the Law

The Contracts (Rights of Third Parties) Ordinance (Cap. 623) (“CRTPO”) came into force on January 1, 2016. Before the enactment of the CRTPO, only parties to a contract (such as a company and its customer in a sale of goods contract) should have the rights to enforce the contract terms. Even if a contract confers certain rights and benefits on a third party, the contract cannot be enforced either by or against such third party. With CRTPO coming into force, subject to certain requirements below, independent contractors may be able to enforce their rights as third parties in a range of business-related contracts.

CRTPO does not apply to all types of contracts. It only applies to contracts entered into on or after the commencement of CRTPO. Existing contracts will not be affected. The following types of contract are explicitly excluded from the operation of CRTPO30:

• bills of exchange;
• promissory notes;
• negotiable instruments;
• deeds of mutual covenant;
• any covenant in relation to land;
• contracts of carriage;
• leners of credit;
• a company’s articles of association; and
• a term of contract of employment against an employee.

Under the CRTPO, third party rights will only be conferred if the contract expressly provides that the third party may enforce a term of contract, or if the contract contains a term that purports to confer a benefit on the third party. In addition, the third party must be expressly identified in the contract by name, as a member of a class or by as answering a particular description31. If these conditions are satisfied, the third party would be entitled to any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract32.

For example, if there is a contract between a company and the company’s customer and the contract anticipates the engaging of an independent contractor to perform work for the company, where the independent contractor is expressly identified, CRTPO would allow the independent contractor, although being a third party to the contract, to claim his rights against the customer. Section 4 of CRTPO also provides an option, wherebycontracting parties do not wish to enable third party enforcement, to make a clear express provision to that effect in the contract. In that case, the third party or independent contractor in our example above will no longer be able to rely on CRTPO to claim his rights under the contract (if he was not made a contracting party).

The foregoing summarises some of the major distinctions between employees and independent contractors under Hong Kong law.

In determining whether the person in question is an independent contractor or an employee, the Court will adopt the modern approach and examine all the features of the parties’ relationship against the background of the indicia of engagement.

The parties’ labeling of their relationship is not determinative, nor would it be considered the sole factor, which the Court takes into account. Hence, on top of stating the nature of the service relationship, it is important for parties to clearly define any employment/ contract of services relationship and delineate the scope of work and each party’s responsibilities and obligations from the outset, in order to ensure that the terms reflect the parties’ common intentions and that the terms are consistent with the service relationship stated. The parties should also remain cognisant of the engaged person’s scope of work throughout the service period, and regular checks and review should be in place to ensure the scope of work and service, remain consistent to the service relationship as stated in the contract. The parties who conduct themselves in a manner that properly reflects their true intention as to the nature of their relationship during the day-to-day management can also help to avoid any potential adverse consequences on re-characterization.

Zhong Lun Law Firm
Dorothy Siron, Partner
dorothysiron@zhonglun.com
T: 85222987620
www.zhonglun.com

Zhong Lun Law Firm
Dorothy Siron, Partner
dorothysiron@zhonglun.com
T: 85222987620
www.zhonglun.com