Compliantly Engage Contractors in Hong Kong

Any business hiring in Hong Kong should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses that are hiring contractors under the guise of employment, which can lead to criminal charges and reputational damage.

Understanding the distinctions between employees and independent contractors is therefore critical to compliantly engaging workers in Hong Kong. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies independent contractors for you and lets you know when freelance talent must be engaged as an independent contractor or employed directly.

Hong Kongese law does not differentiate independent contractors from employees. Moreover, there can be multiple factors that the Court can use to determine whether someone is effectively working in an employment relationship and should be classified as such, even if the individual themself and/or the hiring company consider them to be an independent contractor. If a potential misclassification is brought before the Court, the burden of proof will sit with the individual to demonstrate that they are in fact working as an employee. 

Depending on the individual’s classification, this can have significant implications for companies looking to hire independent contractors in Hong Kong. For the hiring company, engaging with independent contractors may be legally and financially risky, especially given the possibility of an independent contractor becoming re-classified as an employee. 

As in many countries, if the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in Hong Kong to ensure that independent contractors fall under the correct working relationship with your business.

Who is an Independent Contractor?

Like in many countries, there is no strict definition of who is an independent contractor in Hong Kongese law. Moreover, there is no single predominant factor that the Courts would focus on when making the determination. Instead, an “overall impression” approach is taken, meaning that individuals are more likely to be considered independent contractors if they:

• Are described as an independent contractor in their contract
• Are not under direct control or supervision by the hiring company
• Can choose whether to accept or decline a job
• Can choose their own place to work from (unless the work is site-specific)
• Provide their own equipment to carry out assigned tasks 
• Are paid based on time spent on work, not for deliverables
• Are not subject to disciplinary procedures
• Are liable for any damages relating to work performed
• Do not benefit from social security contributions by the hiring company

There are two main categories of independent contractors in Hong Kong:

Sole Proprietor: This refers to individuals who work as independent contractors but have not formed their own company. These individuals do not benefit from personal asset protection and are fully liable for all commercial, financial, and legal risks. Sole proprietors must register with the Inland Revenue Department’s (IRD) Business Registration Office. As unincorporated businesses, sole proprietorships are taxed at a flat rate of 15% on profits.

Company (Incorporated): Independent contractors can also set up a separate legal entity by incorporating it as a company. The most common business structure is the Limited Liability Company (LLC) (including Public Limited Companies (PLC) and Private Limited Companies (Ltd)), which provides protection of assets against various business risks. Other options include a Limited Liability Partnership (LLP), which involves at least two individuals and also provides limited liability protections.

There are two main types of contracting models for working with independent contractors in Hong Kong.

A. Direct engagement of the contractor as a self-employed sole proprietor or via their own company. Under this model, the hiring company engages directly with the independent contractor – either as an individual sole trader, or as a legally incorporated company (see above) – and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, in accordance with the terms of the contract.

B. Third party. These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Temp Agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement.
• Umbrella Company: Some independent contractors may work under an umbrella company. In this case, the contractor is responsible for finding and fulfilling their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the independent contractor’s earnings. Umbrella companies provide independent contractors with the added benefit of being able to work on multiple contracts under a single work permit.
• Hiring Partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up employment contracts or business-to-business contracts, onboard and manage contractors, and make payments to them.

Companies hiring independent contractors in Hong Kong should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying independent contractors in Hong Kong. The contract should stipulate the preferred payment method agreed upon by both parties.

The tax year runs from 1 April to 31 March. Hong Kong has a progressive personal income tax rate from 2% (for personal incomes up to HKD 50,000) to 17% (for personal incomes over HKD 200,000) and all taxpayers must file tax returns with the Inland Revenue Department (IRD). Individuals are not subjected to a single tax, but pay different taxes for incomes from business profits (“profits tax”), employment/pension (“salaries tax”), and rental income (“property tax”). Taxes can be paid online at the ‘Pay e-Cheque’ portal. 

Unlike in many countries, employers are not required to withhold any tax deductions from employees’ salaries. However, employers also submit a tax return for each employee (in addition to the employee submitting their own), which is used to reconcile the employee’s final tax liability. 

Independent contractors must file their own income taxes with the Inland Revenue Department (IRD). Taxes are paid on an annual basis, and must be paid within four months of the end of the preceding tax year. must pay within four months of the end of the preceding tax year. Contractors can also pay their taxes at the ‘Pay e-Cheque’ portal. Contractors pay their own contributions to the Mandatory Provident Fund (MPF), with a minimum contribution of 5% of their monthly income. 

The social security system in Hong Kong is limited to a pension fund. Employers must usually register every employee aged 18-65 in the national Mandatory Provident Fund (MPF). Employers deduct 5% of the employee’s salary at source as contributions to the MPF, while also matching this through the employer’s own contribution. Hiring companies do not make any tax or social security deductions from independent contractors’ payments.