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Employers must adapt to new gig economy and avoid pitfalls when hiring contractors in Hong Kong

Published on Saturday, 23 Apr 2016

The Changes

According to a 2015 report by the International Labour Organisation, informal employment, short-term contracts, contingent freelance workers, and irregular hours are becoming more and more widespread.

As such, planning the modern workforce will require consideration of talent that is both on and off the balance sheet. Unfortunately, the labour law in Hong Kong has not kept up with the changing needs of businesses and workers. As more companies engage short-term, freelance and contingent workers, these companies face scrutiny from government and law enforcement agencies.

The Problems

Common pitfalls when engaging on-demand workers include the misclassification of workers, poor record-keeping and failure to draft contracts effectively.

Firstly, labelling an on-demand worker as an “independent contractor” does not mean that the individual would be viewed as such by Hong Kong courts.

In Hong Kong, the legal difference between employees and independent contractors requires examination of all the features of the parties’ relationship. Relevant factors to consider may include the degree of control the company can exert over the individual; the extent to which the individual is an integral part of the company; whether the company has any obligation to provide work; and whether the individual is running his or her own business and needs to manage a schedule and financial risks.

Even if an on-demand worker is contracted as an independent contractor, if the overall impression of the working relationship between the company and the on-demand worker is one of employment, the label could be disregarded by Hong Kong courts when determining the worker’s rights and benefits.

Misclassifying an on-demand worker as an independent contractor rather than an employee can lead to disputes over vacation pay, MPF contributions, employee compensation and severance.

If the on-demand worker is ultimately found by the court to be an employee, the company risks criminal conviction, the penalty of which can include fines.

Secondly, it is important to keep a proper record of the hours and days worked to comply with the minimum wage requirements. In Hong Kong, the Minimum Wage Ordinance provides for the statutory rate of minimum wage, which is HK$32.5 per hour.

Companies engaging casual workers should monitor whether they work 18 hours or more each week for four consecutive weeks, in which case they would be regarded as “continuously employed” by law. This is because any employee who is continuously employed is entitled to at least one rest day in every period of seven days. The entitlements to paid statutory holidays and paid vacation also apply to all employees who are “continuously employed”.

The third common pitfall to note involves engaging piece-rated workers and contingent workers with no base salary. Employers should not assume that their remuneration (whether in the form of commission or otherwise) will cover holiday pay.

In 2015, a fitness and beauty centre was criminally prosecuted for not paying statutory holiday remuneration to one of its masseuses. The employee had no base salary, was remunerated for the hours worked in the form of commission, and would receive a minimum monthly commission of HK$10,000.

The employee argued that the company failed to pay her for statutory holidays. The fitness centre contended that her minimum commission was inclusive of holiday pay.

The company was ultimately convicted and fined for contravening the Employment Ordinance. The court found that the employee’s contract did not expressly state that her commission would cover statutory holiday pay.

The Action Required

Companies need to adopt an integrated and holistic approach when structuring its workforce, which means HR needs to work closely with the IT and outsourcing teams when determining how to best use the company’s resources.

When considering the off-balance-sheet talent, companies should be mindful of the risks when classifying workers, keeping records and drafting contract terms.

Getting it wrong can be costly.

This article appeared in the Classified Post print edition as Confusion over contractors could be costly.

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