Beware legal minefield lurking in consultant agreements
One question frequently asked of an employment lawyer is: “can we engage an individual we really want to hire as a consultant, not an employee?” In places where employment law is, or is perceived to be, employee-friendly, the question is asked even more often.
On the face of it, the situation is fairly simple. Parties can agree whatever they want and enter into any contractual arrangements they wish. If a company wants to engage an individual as a non-employee, and treat them as a consultant, they are obviously free to do so with that person’s consent.
But this simple approach fails to appreciate the legal minefield involved. The first point is that in most jurisdictions, the law does not simply accept that an agreement freely entered into between an individual and a company is the end of the matter. The oft-cited inequality in bargaining positions between an individual and the hiring company has resulted in many legislatures accepting that individuals do need protection.
Even if the parties willingly enter into arrangements which fail to meet minimum local levels of protection, the law invariably intervenes. The Hong Kong Employment Ordinance expressly prevents employers from relying on any agreement under which staff effectively give up their employment law rights.
The issue as to whether or not a particular contractual arrangement triggers employment law protection differs widely between countries. It is sometimes difficult for organisations familiar with the legal principles applied in jurisdictions such as the US and Britain to fully appreciate the fundamental differences in Asia. In some Asian countries, the very concept of an individual consultancy arrangement is alien; the mainland is a good example. In others, it is accepted in principle, but rarely applied in practice.
The Crucial Distinctions
There are several key risks for businesses which seek to rely on labelling an arrangement a consultancy agreement. Courts and tribunals invariably look behind the label to determine the reality of the relationship. There are several key factors taken into account when determining whether an individual is, in fact, an employee and is subject to the full protection of employment law. Some of these are listed below.
Is the person subject to the company’s day-to-day control? Employees are subject to such control, but truly independent consultants usually are not.
Can the individual decide how to carry out the work to be performed? A genuine contractual arrangement for services usually focuses on the actual outcome rather than how it is achieved.
Can another person be substituted to carry out the services? This is a key factor. If only one named individual can perform the contract, this is more indicative that an employment-type relationship exists.
What about working for others? An employee can, of course, be expected to work only for their employer. But a genuine consultancy arrangement should generally not restrict a person from working for others at the same time. It should be about delivering the services, not an indication of loyalty.
How does payment work? Paying through the payroll or other usual employment-type arrangement suggests an employment-type relationship. Genuine consultants would normally bill as per the contract on invoice or through another usual commercial arrangement.
What do the documents say? As highlighted already, the labels applied to the arrangements and documents are not conclusive of the legal status. But written evidence and documentation is the obvious starting point in any analysis of the situation. It is vital that the paperwork does not appear to evidence any existing employment relationship.
Providing employee-like benefits such as MPF contributions or rental housing reimbursement in Hong Kong fundamentally undermines any real argument that the person is not an employee.
What happens if a company does get it wrong and is deemed to have created an employment relationship it treats as a consultancy contract? The answer depends on the jurisdiction. In countries where employers should withhold tax and other statutory payments, costs can be substantial. The prospect of picking up the tab for all the payments that should have been withheld, potentially on both behalf of the employee and the company, along with penalties and fines, can be significant.
In Hong Kong there are no withholding obligations, but the firm is likely to be in violation of various obligations such as breaches of reporting in respect of tax, immigration and employment law.
Do not underestimate the degree to which practices accepted elsewhere may not work in Asia. Appreciating the risks makes informed decisions possible.
DLA Piper is a global law firm with 4,200 lawyers located in more than 30 countries throughout the Americas, Asia, Europe and the Middle East. Pattie Walsh is a partner and head of DLA Piper’s Asia-Pacific employment practice. She writes extensively for legal and HR publications, with a particular focus on multi-jurisdictional employment work.
The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.