The Important Difference Between the Employment Contracts of Contractors and Long-term Employees | Reap

The Important Difference Between the Employment Contracts of Contractors and Long-term Employees


3 min read

It is certainly true that employment contracts should be handled with care. However, since not all of us are legal experts, there are inevitably going to be details of which we are not too clear about. Did you know that the difference between the contracts for long-term and contractors is merely one word? Read on to learn about valuable information that will help you avoid any potential labor disputes and protect the rights and interests of your company.

Difference between contracts for contractors and long-term employees

In order to control staff costs, startups and small and medium-sized enterprises will inevitably employ contractors instead of employing full-time employees. To protect the rights and interests of the company and its employees, it is important to draw up contracts, especially when it comes to long-term contractors. But did you know that the difference between contracts for long-term employees and contractors is only one word?

Employment of service is a contract between an employer and an employee. In short, it works in a fixed place and time and is protected by the labor laws. The contract enables an employee to enjoy various employee benefits, such as statutory holidays, year-end remuneration, and long-term service payment. On the other hand, employment for service, also known as a Freelance Service Contract, is a contract between a customer and a service provider. The contract of contractors will indicate that the work is calculated on a per project basis. The mode of payment and the number of working hours are also determined by the terms of the contract. It should be noted that independent contractors are not protected by the Employment Ordinance, and there is no statutory minimum wage, work-related injury, sick leave, compensation nor MPF. Employers do not need to buy employees’ compensation to protect against the work-related injuries of independent contractors. Self-employed persons should take out personal accident insurance.

Does employment for service contracts exempt an employer from liability?

If you inadvertently sign employment of service contract with a contractor, can you simply change the contract into employment for service contract to exempt your company from liability? The answer is that doing so provides no immunity. If you want to turn an employee into an independent contractor, unless the previous contract has stated that it can be converted into employment for service contract, you must first obtain the consent of the employee, explain the difference between the two, and ensure that the work content meets the criteria of self-employed persons. The following are some common factors:

  • The employee can arrange the working procedure, time and mode of work by himself
  • The employee should provide the necessary equipment, tools, and materials
  • The employee is responsible for business, investment, and management
  • The employee is reasonably regarded as a member of the employer’s organization
  • The employee has the right to employ a helper to assist in the work
  • The employee is required to take on the financial risk of the business (risk of profit or loss)
  • The employee is responsible for insurance and taxation
  • The above factors are dependent on the traditional structure and practice of the industry or profession
  • Other factors considered relevant by the court

If the employee does not meet the above conditions, and the employer claims that the employee is self-employed or both parties have signed employment for service contract, the fact that the employee is an employee cannot be changed. The employer still needs to provide full-time employee protection to the employee and may be liable for violating the relevant laws. If there is a dispute over the definition of employees between the two parties, it will ultimately be up to the court to decide whether they are truly self-employed persons. However, the above factors are the most common elements that separate employees and independent contractors.

How to deal with an unsigned employment contract

If there is no contract signed by both parties, the employment contract can be concluded orally and contain explicit or implied terms. The implied terms are those that have not been stated orally or written. However, the relevant terms will be regarded as part of the contract according to the law or the previous transaction mode of both parties. In short, even if the two parties have not signed a contract, according to the section dealing with continuous contracts under the Employment Ordinance, the employer does not automatically have the consent of the employee if the contract does not specify that the change can be made. The employee can claim compensation from the employer for reinstatement, re-employment, or termination of employment. Therefore, it is better for the employer to enter into an employee contract in writing when employing the employee in order to avoid any unnecessary disputes.