In China, it is common for companies to engage independent contractors rather than employees when seeking to limit costs and liability. This approach has become particularly popular in certain service based industries such as hospitality, IT and consumer products sales. Whilst the independent contractor model is generally permitted under PRC law, companies should be aware of the risk that an individual may challenge the basis of their relationship with the company and, even where it was not the parties’ intention to enter into an employment relationship; a de facto employment relationship may in fact exist.
Establishing a de facto employment relationship
Under PRC law and current judicial practice, in determining whether a de facto employment relationship exists, PRC courts will generally assess a variety of factors including whether:
- the company and the contractor satisfy the general requirements for an employer and an employee prescribed by laws and regulations (such as the individual being at least 16 years old and an employer having the appropriate business licence);
- the company is paying a salary and social insurance contributions to the contractor;
- the contractor is subject to the internal rules and regulations of the company;
- the contractor is subject to the control and directions of the company; and
- the services provided by the contractor fall within the company’s core business.
Under relevant labour rules, the following documentation may be used as evidence to prove a de facto employment relationship:
- salary records (such as pay slips) and social insurance contribution records;
- work permits, service permits or other certificates issued by the company to the contractor;
- recruitment registration forms, application forms or other recruitment records of the company which have been completed by the contractor;
- attendance records; and
- evidence from other employees including in relation to the manner in which the contractor performed the work.
PRC labour law and court practice will generally favour employees. On the basis that a contractor can provide preliminary evidence to suggest employment with the company, in the absence of strong evidence from the company that rebuts the existence of an employment relationship (having regard to the above factors), the court will often find in favour of the contractor.
If a contractor is able to prove that a de facto employment relationship exists, then the company will incur liabilities for failing to sign a written employment contract with the contractor.
If the company fails to sign a written employment contract with the contractor for a period of more than one month but less than one year after the commencement of the employee’s work, the company must:
- pay double salary to the employee for such period, and
- sign a written employment contract with the contractor with retrospective effect.
If the company fails to sign a written employment contract with the contractor for more than one year from the commencement of the employee’s work, in addition to the provision of double pay mentioned above, the employer will be deemed as having signed an open-term employment contract with the contractor from the one year anniversary of the commencement of the work. The employer must also sign a written employment contract with the contractor with retrospective effect.
Accordingly, where a company has engaged individuals as contractors and they are found to be employees, there is a high risk that the company will be required to pay additional labour costs and formalise the employment relationship with those individuals.
To mitigate the risks that a company might be deemed as a de facto employer of its contractors, some practical tips to guide companies in administrating their relationships with contractors include:
- Ensuring a written agreement is in place from the commencement of work which records the contractor relationship with the company and makes it clear that the agreement does not intend to create any employment relationship between the contractor and the company.
- Avoiding applying the provisions of its staff handbook or any other internal rules and regulations (such as working time, leave or benefits, disciplinary matters, etc.) to contractors.
- Avoiding paying salary, bonus, statutory social welfare or housing fund contributions to, or on behalf of, the contractors in the same manner as it provides such benefits to employees.
- Avoiding, in its daily business operations, treating the contractors in the same manner as it treats its as employees, for example by providing branded business cards to contractors.
Written by Nanda Lau, Partner, and Alizee Zheng, Associate