To conserve cash and operate as cost-efficiently as possible, many startups and SMEs will 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 to choose how they fill vacancies. 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.
This article breaks down the main legal requirements for hiring employees, independent contractors and interns and offers tips to ensure your business is entering into legal work arrangements.
In Hong Kong, a person hired as an employee will typically be someone whose skills and experience will be needed on a continuous, long-term basis and is prepared to make herself available according to the needs of the business. 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 entails very specific entitlements that must be met by the employer (e.g., minimum wage, 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 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 vs. “gig” workers.
- as an employer, you will have statutory obligations with respect to reporting salary and reporting termination of employment to the IRD for the purpose of tax collection.
Hiring independent contractors or consultants (“contractors”)
Typically, a contractor will be a person who can provide your business with short-term, niche expertise. They could be anything from a project-based programmer to an interim CFO or CTO. And he or she might work on your premises or off-site depending on your requirements and theirs. However, legally there are a number of features that set them apart from employees:
- contractors have no employment status. Their relationship with your 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 your employees.
- the relationship between your business and the contractor is dictated almost solely by the contract between the parties so your business may terminate the agreement with the contractor at any time (subject to the terms in the contract) and will have obligation to provide notice or compensation upon terminating the contractor’s service.
- unlike employees, there is no statutory requirement to pay contractors at least the minimum wage. You are free to agree 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 your overhead costs.
- contractors submit invoices to the company to receive payment for the work.
- your business is not responsible for reporting the contractor’s income to the Inland Revenue Department (IRD) much less withholding or collecting taxes on that income.
What happens if we 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, startups 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 somehow they are either independent contractors or exempt from Hong Kong’s minimum wage and employment laws. However, if an employee-employer relationship is found to exist in substance, whatever title the worker has been given will be irrelevant. The IRD and the courts will ignore it and again, the business could be on the hook for unpaid salaries and employment benefits.
As mentioned above, 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 below, interns are employees who are also entitled to rights and protections in Hong Kong employment laws. First, let’s 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 sub-categories:
- Student interns
- Work experience interns (“WEI”)
The main differences between them are that whereas a student internship has to be endorsed by or part of the intern’s programme of study and forms a component of the programme, 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.
Startups 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.
This brings us to paid interns. 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 who your business has generously decided to pay) as well as an employee who doesn’t meet those criteria and who you must pay at least minimum wage to.
The important thing to remember is that unless you have been shown proof that a candidate meets all of the relevant criteria for unpaid intern, it is safest to assume that this person will be joining your team as a paid employee.
Please note that as an employer, you will be required to contribute to the paid intern’s MPF if she has reached age 18 and has been continuously employed for 60 calendar days or more. When in doubt, seek clarification from an experienced lawyer before hiring such candidates because if it turns out that any don’t meet all of the criteria, you could be liable for back-pay, unpaid MPF contributions as well as some serious legal penalties if they have already started working.
Remember your workplace health and safety obligations
As a business, your startup or SME not only owes health and safety obligations to your employees, but also to any unpaid workers on the premises. Always remember that you have an ongoing duty to ensure their health and safety.
What agreements do we need?
Regardless of which position you are looking to fill on your team, you will need a properly drafted agreement that defines the position, responsibilities, remuneration and any benefits during the engagement. If you’re a startup, you will probably need legal advice on how to include equity (in the form of shares or share options) within the remuneration package for your employees.
Don’t forget to include confidentiality provisions and IP protections in these agreements
Startups more often than not forget to put suitable confidentiality and IP protections in their internship agreements and the confidentiality provisions in their independent contractor agreements are also often useless. It’s best to take a risk management approach to these provisions and tailor them to the specific risks that each business faces. Speak with your lawyer and she will help put what you need in place.
Generally speaking, unless otherwise provided for in your contract, any person that works for your business will own the intellectual property rights for whatever they develop, whether it be software code, graphics, logos, marketing materials, or simply ideas. Accordingly, it is vitally important that as an emerging business, you ensure that employment contracts, internship agreements and certain independent contractor agreements contain assignments of legal and moral (attribution) rights to your business.