Hiring employees vs independent contractors in Hong Kong
When you’re running an SME, you may come across the point that you need to hire workers for your company. This is an exciting milestone, but it can be challenging too.
You have now the choice to either hire employees, independent contractors, or freelancers– or a combination of both.
In this article, we will take a deep dive into all aspects of hiring employees vs independent contractors in Hong Kong.
Classifying Employees vs Independent Contractors
In Hong Kong – and several other countries – the terms in a well-drafted contract are not always determinative of the relationship. That means, even if you have hired someone as an independent contractor, the court may deem it an employer-employee relationship based on several factors.
One of the main factors is whether the person’s work is an essential part of your business. If so, they are more likely to be classified as an employee. Similarly if the work has a significant impact on the company’s profits.
The level of control the worker has over the job is another factor. The employer has a high degree of control if they determine what, when, where and how the work is done. Other examples of control are close supervision, needing to seek permission before taking leave and prohibition against working for others as this implies as master and servant relationship.
Independent contractors often have more than one client. Someone working at one employer full-time is more likely to be deemed an employee instead of an independent contractor.
If the employer provides machinery and equipment (including safety equipment) that are necessary to carry out the job, it weighs more towards an employer-employee relationship. Taking it even further, the kind of work involved is also one of the factors to be looked at. For example, laborers, which by nature involve a high level of monitoring and control, would usually be seen as employees.
The nature of benefits offered to the worker is also one of the indicating factors when determining whether the worker is an employee or an independent contractor. Generally, apart from salaries, an employee is remunerated/offered with Mandatory Provident Fund contributions, medical benefits, annual leave, sick leave or other compensation leaves while an independent contractor is generally not provided with the said benefits.
Independent contractors are considered self-employed persons for tax purposes in Hong Kong. As their profit comes from the provision of services or sale of goods, technically speaking, they are subject to profits tax.
The profits tax rate depends on whether the business is incorporated or unincorporated. Generally speaking, the profits tax rates are:
- 15% flat rate for unincorporated businesses, such as sole proprietorship The first HKD 2 million assessable profits are taxed at 7.5% while the assessable profits over HKD 2 million are taxed at 15%]
- 8.25% up to HK$2 million for incorporated businesses, and 16.5% above HK$2 million
Employees pay salaries tax on their taxable income. There is no withholding tax in Hong Kong, so employees file their own individual tax returns every year (normally around May). Hong Kong salaries tax has progressive rates based on the chargeable income, ranging from 2 – 17%.
As the employer, you have to maintain records of your employees, such as personal particulars, nature of employment, capacity in which employed, period of employment and more.
In an employer-employee relationship, employers in Hong Kong are required to make Mandatory Provident Fund (MPF) contributions from their own funds for their employees. Besides this, the employee also has to contribute to their MPF.
Each party has to contribute each month (at least) 5% of the relevant income, subject to the minimum and maximum relevant income levels of $7,100 and $30,000.
On the other hand, independent contractors make MPF contributions solely by themselves. Similarly to employees, the minimum contribution rate is 5% of the relevant income, subject to minimum and maximum relevant income levels of $7,100 and $30,000.
When contemplating hiring employees vs independent contractors, it’s important to know that employees’ interests and obligations are protected and governed by several statutory legislation in Hong Kong.
The primary legislation governing employment conditions is the Employment Ordinance (EO). The EO is generally applicable to parties in an employment contract. It states several employee benefits including rest days, wage protection, paid statutory holidays, paid annual leave, paid maternity and paternity leave, severance payment, protection against unreasonable and/or unlawful dismissal and so on.
Another important piece of legislation is the Employees’ Compensation Ordinance (ECO), applicable to all employees in an employment contract. It sets out any entitlements of employees who get injured or suffer from occupational diseases during their employment.
Related to this, the ECO states that employers are obliged to take out employees’ compensation insurance policies for all employees. The amount of insurance cover per event should not be less than $100 million if you have less than 200 employees. Over 200 employees, the cover amount is not less than $200 million.
The interests and obligations for a business-independent contractor relationship are merely set out in their respective service agreements.
In Case of Insolvency
If your company, the employer, becomes insolvent, the employees may file a winding-up or bankruptcy petition to recover the debts owed by your company, such as wages, severance payment, untaken annual leave and statutory holidays and so on. Similarly, independent contractors can do the same.
However, employees are protected by the Protection of Wages on Insolvency Ordinance (PWIO) in the sense that the aggrieved employees can apply for ex gratia payment under the PWIO, for any outstanding payment as stated above. Such protection is not available for independent contractors.
It’s more likely to find long-term commitment, certainty and continuity with employees.
Some advantages of employees are:
- They get to know how your business works inside and out
- They tend to have a lower hourly rate because they receive other benefits and have greater job security
- They are available when your business gets busy, as opposed to looking for extra contractors
- They usually have more company loyalty than an independent contractor
- Your business operations will continue if you take a holiday
Points to bear in mind when you’re hiring employees:
- Some extra costs are involved for the employer, such as MPF contributions and employees’ compensation insurance
- To stay competitive with other employers, you may want to add some benefits such as health insurance, but these will obviously cost you extra
- You’re responsible for your employees’ training, professional development and/or licensing
- You need to pay their salaries on time, every time – even if the business has a quiet period
- There are specific payroll compliance requirements you need to apply
Hiring Independent Contractors
With independent contractors, you can find flexibility, speed and choice.
Some advantages of hiring independent contractors:
- It’s easier to hire a contractor when you need help quickly
- They often have a specific or unique expertise
- You don’t have to pay for MPF or employees’ compensation insurance or commit to a regular salary
- You can save money overall if the job is done efficiently
- Terminating a contract with an independent contractor is easier than with an employee
However, there are some downsides to keep in mind:
- Their hourly rate is often higher than an employee’s
- They may have less company loyalty
- You may lose some control over how tasks are done
- Their availability is not always 100 percent guaranteed, which may be challenging if you look for a specific skill set for a project
- You don’t have a constant workforce
How HKWJ Can Help
Choosing whether hiring employees vs independent contractors can be pretty complex, especially if you’re operating an SME. But it is an important business decision, which shouldn’t be taken lightly.
Within the HKWJ Group, we have supported multiple companies in selecting the right type of worker for their situation.
Furthermore, whether you hire employees, independent contractors or both, we can help with:
- Setting up Labor contracts and service agreements
- Payroll services
- Bookkeeping and accounting
- Business advisory
- Tax filing and advisory services
Do not hesitate to reach out to us via the form below.