To conserve cash and operate as cost-efficiently as possible, companies, including startups and SMEs, will often try to grow their teams by engaging independent contractors, interns, and other unpaid workers.
Although these alternatives may seem appealing, employers do not have unlimited freedom when it comes to choosing how they fill vacancies.
In Hong Kong, any individual who is essentially performing the work of an employee may be regarded legally by the Labour Tribunal and courts as an employee of that business, which could result in the business being liable for unpaid salaries and other employment entitlements. A person hired as an employee will typically be someone whose skills and experience will be needed on a continuous, longterm basis and who is prepared to make himself or herself available according to the company’s needs. The long-term nature of the role means that employers can rely on employees for the continuity that contractors and interns are unable to provide.
Legally, employers need to be aware of the following:
Employees have employment status under Hong Kong employment laws which entail specific entitlements that must be met by the employer (e.g., minimum wage, Mandatory Provident Fund (MPF) contributions, statutory holidays, leaves of absence, maternity protection, notice periods for termination, severance, etc.).
Any worker who has been employed continuously by the same employer for four weeks or more, with at least 18 hours worked in each week will generally be regarded as an employee.
Regardless of what your employment contract with the worker says regarding salary, vacation leave, notice and severance arrangements, as an employer you have to comply with statutory minimums for each of these as prescribed by various Hong Kong employment laws.
All employees covered by the Employment Ordinance, irrespective of their designated job titles or working hours, are entitled to the statutory rights and protections mentioned above. The Ordinance makes no distinction between permanent, temporary, full-time, part-time employees or “gig” workers.
Employers have statutory obligations with respect to reporting salary and termination of employment to the Inland Revenue Department (IRD) for the purpose of tax collection.
Hiring independent contractors or consultants
Typically, a contractor will be a person who can provide your business with short-term, niche expertise. They could hold any role from a projectbased programmer to an interim chief finance officer. He or she might work on premises or off-site depending on the agreed work arrangement. However, legally there are a number of features that set them apart from employees. For instance, contractors have no employment status. Their relationship with the business will not be regulated by Hong Kong’s employment laws or the MPF scheme and they will not be entitled to receive benefits offered to employees.
The relationship between the company and the contractor is dictated almost solely by the contract between the parties, which means the companymay terminate the agreement with the contractor at any time and will have no obligation to provide notice or compensation upon terminating the contractor’s service (subject to the terms in the contract).
Unlike employees, there is no statutory requirement to pay contractors at least the minimum wage. Companies are free to agree to whatever payment terms that make sense and are acceptable to the contractor.
Contractors are responsible for the input they provide, including the success or failure of their deliverables. They usually retain control over when, how, and where work is completed.
Contractors are allowed to contract with other companies at the same time.
Contractors generally use their own equipment (unless otherwise stipulated in the contract), which reduces the company’s overhead costs.
Contractors submit invoices to the company to receive payment for the work.
The company is not responsible for reporting the contractor’s income to the IRD much less withholding or collecting taxes on that income.
What happens if employers get it wrong?
The unique flexibility that contractors have, in terms of legal requirements, makes them a convenient alternative to hiring an employee to perform the same role. Unfortunately, start-ups sometimes fall into the trap of thinking that they have an independent contractor relationship with a worker and nothing to worry about because they have an agreement that says as much. The same applies to founders, who often mistakenly believe that they are somehow either independent contractors or exempt from Hong Kong’s minimum wage and employment laws. However, if an employeeemployer relationship is found to exist in substance, whatever title the worker has been given will be irrelevant. The IRD and courts will ignore it and again, the business could be on the hook for unpaid salaries and employment benefits.
Hong Kong employment laws generally don’t differentiate between different categories of employment per se. Contrary to popular belief, interns are not a “magical” category of worker that exists outside of the law. Subject to certain exceptions, interns are employees who are also entitled to rights and protections in Hong Kong employment laws. It is important to distinguish between paid and unpaid interns. Unpaid interns are essentially a special category of workers that are exempt from the minimum wage. There are essentially two subcategories:
• Student interns
• Work experience interns (WEI)
The main difference between a student and WEI internship is a student internship has to be endorsed by or part of the intern’s programme of study and forms a component of the programme, whereas a WEI internship need not be endorsed or related to the intern’s programme of study. If a student internship meets the legal criteria, the intern can be any age when starting the internship. However, with WEI internships, the WEI must be 26 years or younger when the internship commences.
Start-ups may agree with a WEI to treat the first 59 days of the internship, calculated on a calendar basis from the start date, as exempt student employment and if so, during that period, the employer will be exempted from paying the statutory minimum wage. However, for any period of employment beyond the first 59 days, a WEI is entitled to be paid at least the minimum wage. It is important to note that a WEI cannot have more than one exempt student employment period within the same calendar year whether with the same employer or not. Internships that meet the student internship requirements allow the intern to work in the business lawfully without being paid at all. Unlike WEI internships, there are no time limits exempting minimum wage requirements.
Describing anyone in Hong Kong as a “paid intern” is a bit of a misnomer since a paid intern could be someone who actually meets the above legal definition of unpaid intern (but the business has generously decided to pay) as well as an employee who doesn’t meet those criteria and must be paid at least the minimum wage.
The important thing to remember is that unless proof has been shown that a candidate meets all the relevant criteria for unpaid intern, it is safest to assume that this person will be joining the company as a paid employee.
An employer will be required to contribute to the paid intern’s MPF if he or she has reached age 18 and has been continuously employed for 60 calendar days or more. An employer could be liable for back-pay, unpaid MPF contributions as well as some serious legal penalties if all the criteria are not met.
Last but not least, regardless of the position, employers need to provide a properly drafted agreement that defines the position, responsibilities, remuneration, and any benefits during the engagement.