Employment has undergone significant change in recent years – being ‘self-employed’ is more common than ever. But what does the term mean? Self-employment is an umbrella term that simply refers to an individual who is not ‘traditionally’ employed or subject to the oversight of an employer. Instead, they work for themselves and are their own bosses. Under the category of ‘self-employed’ include freelancers, independent contractors, and sole proprietors. On the other hand, employees are subject to the control of an employer, meaning that they do not fall into the same category.

Employee

What are employees?

An employee is an individual who is hired by an employer to take up a particular job. Employees perform specific tasks or responsibilities for employers and are awarded compensation in return.

Terms of employment are set out in the employment contract and govern the relationship. Employee manuals/handbooks are also created by the employer and handed to the employee. They outline policies, guidelines, and other important information defining the employee-employer relationship. Check out our customizable template for an employee manual here.

How do employees work?

Since employees are hired by employers, they are subject to oversight by employers and are bound by the terms of employment set out by the employer in their employment contract. Employment contracts are crucial as they govern the employment relationship.

To have employee status, the following factors are typically present:

The employee is obliged to carry out the task personally and cannot simply find or send a substitute.
The employer is obliged to set work for the employee
The employer has a certain level of control over how the employee does the work.

What rights do I have as an employee?

Employment Ordinance (Cap 57 of the laws of Hong Kong) (the “EO”) is the primary legislation governing the employment and labour related matters in Hong Kong. It sets out the rights, duties and benefits of the employees and employers such as the annual level, maternity leave, paternity leave, notice for termination etc. The EO is applicable to all employees, whether full time or part-time. Any term in the employment contract that is less favourable to any statutory right, benefit or protection provided to employees under the EO will be void and unenforceable.

Under the EO, the statutory entitlements differ based on whether the employee is continuously employed or not. However, there are certain basic statutorily rights that all employees enjoy, irrespective of whether they are continuously employed or not, such as protection from discrimination, statutory holidays and payment of wages. Employees’ minimum statutory entitlements are listed below:

Wages – The current statutory minimum wage rate is HK$37.50 per hour as per the Minimum Wage Ordinance. Employer’s right to deduct wages are limited to the circumstances listed in the EO. Also, the employer cannot deduct more than the permissible limit for deduction in a wage period
Annual Payments / Bonus – The EO regulates the end of year payments i.e. any annual payment / bonus of contractual nature. This does not apply to any annual payments that are payable at the discretion of the employer. The EO provides that the end of year payments are due on the last day of the bonus year, unless otherwise specified in the contract of employment; and must be paid within 7 days from the due date. It further sets out the terms of payment in case of termination of employment.
MPF – Employers must enrol their employees in the Mandatory Provident Fund Scheme.
Statutory Holidays – As per the EO, all employees are entitled to 12 statutory holidays. In case of an employee who has been employed under a continuous employment of 3 months before the statutory holiday is entitled to paid statutory holiday. An employer is not permitted to make a payment in lieu of granting a statutory holiday. There are some general holidays which need to be observed only if the establishment is a bank, educational establishment, public office or government department.
Statutory Rest Day – Employees continuously employed for at least 18 hours in each of four consecutive weeks are entitled to at least one rest day per week. This is in addition to the paid statutory holidays that employees are entitled to under the EO
Annual Leave – Employees under a continuous contract are entitled to annual leave depending on the employee’s length of service i.e. it increases from minimum of 7 days to maximum of 14 days depending on the employee’s length of service. To understand more about annual leave, read our article on “What is annual leave? How many days of annual leave in a year should I give my employees?”
Maternity Leave – A female employee under a continuous contract is entitled to 14 weeks of maternity leave after giving the notice of her intention to take the maternity leave. She is also allowed to take leave for a period of not more than four weeks on the grounds of illness or disability due to pregnancy or confinement. Also, if her confinement date occurs later than the expected date of confinement then additional leave is given to the employee The EO also sets out the qualifying requirements to avail the maternity leave.
Paternity Leave – A male employee under a continuous contract immediately before commencement of paternity leave is entitled to five days of paternity leave provided he meets the other requirements set out in the EO.
Sick Leave – Under the EO, an employee under continuous contract can accumulate paid sickness days as follows:

During the first 12 months of employment – 2 paid sickness days for each completed month of employment
After completing the first 12 months of employment – 4 paid sickness days for each completed month of employment.

Severance Pay – If an employee has been made redundant after being employed continuously for a minimum of two years then such employee is entitled to get severance payment.
Long Service Pay – An employee is entitled to long service pay after being employed for minimum period of 5 years, if an employee is dismissed (not summarily dismissed due to his serious misconduct and his dismissal is not by reason of redundancy); fixed term expires without being renewed; employee dies, resigns on ground of ill health or is aged 65 or above and resigns on ground of old age.
Termination by Notice – The EO sets out the minimum period of notice required for termination of employment. However, the employer may pay payment of wages in lieu of notice unless the employee has been summarily dismissed in accordance with Section 9 of the EO.

What are the advantages of being an employee?

Steady payment and compensation
Benefits – this includes healthcare, insurance, and tax. Some employers even provide free food or transportation allowance.
Community (eg: other employees) and a collaborative working environment
Professional training and development – as an employee, there is the prospect of being promoted to a more senior role where you receive greater benefits.
Recognition by employer
A set schedule – as an employee, you won’t have the hassle of needing to figure out when to work.
Eligible to avail the statutory benefits applicable for employees

What are the disadvantages of being an employee?

Lack of flexibility
Subject to control and oversight by employer
Often cannot choose exactly what they want to do/the nature of their tasks

Self-employed

What does self-employed mean?

Self-employed simply means that you are employed by yourself. It is an umbrella term that can mean many things. In essence, it refers to titles that involve ‘non-traditional’ employment.

Independent contractors, freelancers, and sole proprietors all fall under the category of self-employed workers. These titles merely constitute different ways of being self-employed. Employees, on the other hand, are not self-employed.

It is important not to mix up self-employment up with other terms. The term self-employed should only be used as a broad, general category. For example, whilst freelancers are always self-employed, not all self-employed people are freelancers.

Am I entitled to any statutory benefits in Hong Kong?

As a ‘self-employed’ you are not entitled to any statutory benefits under the EO (such as paid annual leave, paid statutory holiday, sickness allowance etc.), protection under the Minimum Wages Ordinance (such as minimum wages); protection under the Employees’ Compensation Ordinance (such as compensation arising from work injuries); and protection under the Mandatory Provident Fund Schemes Ordinance.

To understand if you can change your employee’s contractual status from ‘employee’ to ‘self-employed’, read our article “What is the difference between an employee and an independent contractor (or self-employed person)?”

Sole proprietor

What is a sole proprietor?

A sole proprietor refers to an individual who is the sole owner of an unincorporated business. This unincorporated business is also known as a sole proprietorship. Its defining feature is that it only comprises one individual, the owner.

Since sole proprietorships are only run by a single owner, the owner and the company are considered as a single body. There is no concept of separate legal entity. As such, the owner is fully responsible for all liabilities and debts incurred.

Additionally, all profits generated through the sole proprietorship go directly to the owner. This means that the owner must pay personal income tax on all profits earned.

Businesses in the form of sole proprietorship have to be registered with the Inland Revenue Department within a month of commencement of business. To understand the registration process, read our article on How to register a sole proprietorship and partnership in Hong Kong?

How are sole proprietorships different from other business entities?

Sole proprietorships are the simplest possible business form, making them very different from other more complex business structures like corporations, limited liability partnerships (LLP), and limited liability companies (LLC)

Sole proprietorships are different from other business entities as they do not constitute a separate legal entity and essentially just refer to the individual running the business. In this sense, a sole proprietorship is not distinguished from its owner.

What are the advantages of being a sole proprietor?

There are many advantages of being a sole proprietor which make it an enticing choice. These include the following:

Control

As a sole proprietor, you are in full control of the direction of your business, which clients you want to work for, which assets you want to use, etc.

Inexpensive and simple to set up

There are no formalities involved in setting up a sole proprietorship, meaning that the whole process is straightforward. Registration process for sole proprietorship is fairly simple.

Tax advantage

As mentioned earlier, the owner and the business are viewed as one, united body. This makes tax calculations straightforward – any income earned from the business is simply the owner’s income. The profits are taxed at the sole proprietor’s marginal tax rate, which may be lower than the tax rate for a limited company.

What are the disadvantages of a sole proprietor?

Unlimited/full liability

While the freedom you possess as a sole proprietor is beneficial in many aspects, one huge disadvantage is that you are personally responsible for all the debt, liabilities, and losses incurred.

Moreover, the fact that there is no separation between your personal and business assets means that you could potentially suffer quite significantly. Other entities are also entitled to sue you – meaning that they may take your assets if that is what the situation requires.

No continuity

When a sole proprietor dies, the business is dissolved and cannot be continued.

Difficulty in raising capital

It is almost impossible to get investors involved. As mentioned, since the owner and business are considered one body, this means that business and personal assets are mixed. Without independent business assets, investors cannot buy them or invest. This makes it hard for sole proprietors to raise capital for the business.

Are sole proprietors self-employed or employed?

Sole proprietors are sole owners of a business and are therefore self-employed.

A sole proprietorship enables the sole proprietor (owner) to operate and act independently without the oversight or control of an employer. Since they operate independently, sole proprietors do not receive a wage or salary but instead, receive income by providing services/products by dealing with clients on their terms.

Note that since sole proprietors are self-employed, they are also fully responsible for paying taxes and filing with the Inland Revenue Department.

Independent contractor

What is an independent contractor?

An independent contractor is a self-employed individual who is contracted to perform tasks/a certain job for another entity. They are not employees, meaning that they are not eligible for employee benefits.

Examples of independent contractors include dentists, doctors, construction workers, etc.

But what is the difference between an employee and an independent contractor?

While employees and independent contractors may very well be doing work of a similar nature and can be compensated the same sum, it is important to remember that their classification/title will affect the rights and benefits of your worker.

For instance only employees are entitled to the rights and benefits under the Employment Ordinance, Minimum Wage Ordinance, Mandatory Provident Fund Schemes Ordinance and the Employee Compensation Ordinance

Although there is no ‘set’ test to determine whether someone is an employee or an independent contractor, here are some factors that can be particularly important.

Control: This refers to the payer’s control over the daily activities of the worker. Generally, independent contractors are subject to less control and oversight. More importantly, however, is that payers cannot determine how an independent contractor fulfils the job, whereas employers can do so for their employees.
Ownership of tools/equipment: Who invested in the tools? If the worker has, he is likely to be an independent contractor. Independent contractors are also more likely to have invested in their workspace.
Payment: Independent contractors often hand in an invoice for their work rather than working for a salary.
Working hours: Employees work for a certain, specified time that is set out in the terms of employment. Independent contractors, on the other hand, are their business entity, meaning that as long as they complete the work set for them, they are free to choose their hours/schedule.
The permanency of the relationship: The general trend is that the more permanent the role, the more likely it is to be traditional employment rather than self-employment.

Employment Benefits: Is the worker receiving any employment benefits? Only employees are entitled to benefits provided under the Employment Ordinance, Minimum Wage Ordinance etc. This is an important criteria to distinguish between employees and independent contractors.

Do independent contractors have to enter contracts?

Yes – while they are not subject to the traditional employee-employer relationship, they nevertheless work under a contract and must complete whatever is stated in the contract. The payer will usually specify the work they need to be completed by the independent contractor.

Regardless, contracts are crucial for avoiding disputes and making sure that all parties fully agree on the work to be completed, as well as the nature of the commercial relationship between them.

A sample of an independent contractor contract can be found here.

Freelancer

What are freelancers?

A freelancer is an individual who is self-employed and not committed to one employer. Since they work for themselves, unlike employees, they often work for several clients and are committed under several shorter-term contracts.

An example of a freelancer would be a professional video editor, journalist, or developer. Their title tends to not matter so much because freelancers often work on projects that are different in nature.

As a freelancer, you need to register your unincorporated business with the Hong Kong Inland Revenue Department within 1 month from its date of commencement of business.

What do freelancers do?

Although freelancers are not employees of the firm, they may still be contracted to complete work that an employee would do.

The difference is that typically, freelancers work on a short time basis and earn wages per job/assignment. This stands in contrast to employees who earn a salary and work for long-term periods as set out in their employment contracts.

Are freelancers self-employed?

Yes – freelancers are self-employed. Since they work for themselves, they can work for more than one client, on a variety of projects.

But how are Freelancers and Independent Contractors different? Aren’t they both self-employed?

Yes, they are both self-employed. From a legal perspective (in terms of tax/employment), the two terms mean the same thing. They just constitute different terminology/labels. From a practical perspective, however, some subtle differences can help to distinguish the two:

1. Clients

It is more common for a freelancer to be working on different projects for several clients all at once. On the contrary, independent contractors are more likely to work for one client for a specified period, albeit still on a relatively short-term basis (eg: a few months).

2. Location of work

Independent contractors are more likely to work from the client’s office, compared to freelancers who work often do not have proper working space and tend to work remotely.

3. Nature or scope of work

Since freelancers tend to work for multiple clients at a given time, they tend to take on smaller/ad-hoc projects, compared to independent contractors.

Freelancer v Independent Contractor: Which one should I hire for my company?

Neither is ‘better or ‘worse’ – it simply depends on your needs.

A freelancer may be the better choice if you:

Need ad-hoc help
Need help on a particular niche project or area
Have work that can be done remotely
Are not certain how long you’ll need help and do not want to enter a long-term contract
Want to pay on an hourly basis

An independent contractor may be the better choice if you:

Want a project/task to be carried out on a more consistent basis
Want someone who can work from the office
Want to pay someone a specified price for a particular piece of work
Requires the work to be done by someone who will not work for competitor companies

Either way, if you want to hire a freelancer or an independent contractor, you will need to draft a contract that is clear and concise. We created a customizable freelancer/independent contract you can use here.

Summary

It is important to be clear about the various terms which fall under the category of ‘self-employment’, and how self-employment differs from traditional employment. While being a freelancer or independent contractor is similar in terms of how much tax you need to pay, the roles often involve slightly different benefits. Companies should also consider a variety of factors before determining which type of worker they want to hire for a certain project or role.

Please note that this is a general summary of the position under the Laws of Hong Kong SAR and does not constitute legal advice.