What is better? Official employee or an official contractor? | Company formation in Hong Kong

Main / Blogs / What is better? Official employee or an official contractor?

Estimate time to read: 6 min

Latest Articles

June 06, 2021

What is better? Official employee or an official contractor?

The key contrast between contract personnel and full-time workers centers around discrepancies in the relationship between employer and employee and tax liabilities. A contracted employee usually has greater control over how they finish their job and is liable for their income, whereas a full-time employee operates under the direction and oversight of a boss who reports their taxes. Working with contracted and full-time workers with a small company may provide benefits for both the employer and the employees.

Hong Kong firms hire more contractors

The pattern of creating a more diverse workforce is adopted by businesses in Hong Kong, which would not only help increase competitiveness but also relieve the burden of a declining workforce.

While contracting opportunities are favorable, many Hong Kongers are still reluctant to take contract work. And after they have been offered a temporary position, many job applicants would also choose to wait for a permanent position.

Hong Kongers enjoy the job security a permanent career offers. The Employer Brand Research 2019 showed that for improved job stability, 39 percent of respondents surveyed in Hong Kong would give up 10 percent of their income.

Perhaps you should explore contract work and the gig economy as an alternate career choice with a growing abundance of contracting job openings emerging on the market.

What are the differences between contract employees and full-time workers?

Although there is no clear concept between either contracted or full-time workers, the key distinctions between contract employees and full-time employees are the degree of power of the contractor over their job and the way their taxes are reported.

This is a general summary of how the important disparity between contracting and full-time employees should be understood:

  • An independently contracted worker separately performs its tasks from the organization that contracts them. The contract employee even pays taxes on the amount their customer, the firm, pays them.
  • A full-time employee serves as part of a corporation, reporting their taxes to their boss and providing them with close control over the jobs they do.

While contractor workers also tend to be cheaper for a corporation (since employers do not have to give them fringe benefits such as health care or payroll taxes for them), there have been problems in the past where corporations incorrectly identified full-time employees as contracted employees, resulting in considerable tax penalties and fees.

For a small company looking to increase or develop its jobs, recognizing the discrepancies between contracted and full-time workers is important. To find out more precise criteria shared with these styles of staff.

What are contract workers/freelancers?

Freelancers and independent employees/service providers are people who do not have a working arrangement with a firm and offer freelance or independent services rather than as an employee (e.g. no fixed working hours, no office, no annual leave, etc.).

Depending on where services are rendered by the freelancer or independent worker, there are various monitoring implications:

  1. Payments should be reported in the required defined form from the IRD and subject to individual tax dependent on or rendered services when in Hong Kong.
  2. There are no specific conditions for reporting payments to IRD, dependent on and offered services whilst overseas. However, while evaluating the company’s audited accounts during the tax filing, IRD may request more information

Notice that invoices or service arrangements should be given to an organization for recordkeeping and accounting purposes by individuals hired in this capacity.

What are full-time employees?

It might sound clear, but it is important to find out that an employee who has an employment agreement with a corporation is an employee, i.e. for the sides there is a verbal or written employment arrangement.

Workers with a Hong Kong corporation, whether located locally or overseas, must be registered with the Inland Revenue Department (IRD) and with MPF and compensation insurance (if appropriate, overseas employees are excluded if they are members of an overseas retirement scheme or if they have permission for no longer than 13 months to stay in HK for employment purposes).

In the Employer’s Return (ER) to the IRD, employees must disclose all payments made to an employee, including wage, commission, or other fees. This should also be recorded in the ER whether the employer supports any rent for the individual. The contributions made to an employee are subject to tax on actual income. However, if the worker is based outside Hong Kong and does not visit Hong Kong for more than 60 days of the year of the tax assessment, irrespective of his citizenship, he/she can apply for an individual tax exemption.

Contract employees vs. full-time workers: what are the benefits of each?

There are perks of dealing with both temporary employees and full-time staff with a small company. Here are some variables to remember when considering these two types of employees.

Project Scope

For short-term assignments that need outside expertise, such as technical consultations, seasonal assistance, or administrative services, contract workers could be a safer option. Hiring full-time workers may be the best way to go for ongoing work that needs oversight, includes establishing partnerships, or plays an important role in the organization.

Costs

Contract workers (who also charge higher flat wages or hourly wages than jobs) appear to pay less more for a small company than full-time employees because of disparities in tax liability and compensation obligations. Small business owners, though should ensure that they do not end up misclassifying employees and as a result, they could end up facing tax penalties.

Loyalty

Because of the short-term nature of contract projects, if another organization wants to pay them more a contracted worker can avoid working for a company or be less available if they have several customers. In the long-term, full-time workers will be more likely to stay loyal and dedicated to their work especially if attractive incentives are offered.

Advantages of a Contract job

 

Acquire new skills and build your network

You have the chance to do new work while you work for a new manager, which could require new skills. Projects that need a specific skill set also often include contract work. For example, to accurately compensate sales staff for their contributions from both offline and online channels, an HR professional will need to use data to restructure compensation and company benefit programs. In Hong Kong, some businesses even offer training to help contract workers gain new skills or deepen their capabilities.

Each time you join a company, you will also get to connect and collaborate with new people, which gives you the chance to expand your professional network. Being a contract worker is a quick way to become an expert in your field, simply because several different organizations work on a variety of projects.

Enhanced work protection in challenges

Contract professionals may, contrary to popular beliefs, actually enjoy better job security than permanent staff these days. It is not uncommon for employers to reduce or change the job scope of a permanent employee when a company goes through business restructuring, instead of a contractor who is due to leave in a few months.

Contractors normally sign contracts of employment lasting six months or two years, which assures them a position over that time. Many contract employees also obtain job opportunities thanks to their large career network and can secure their next gig before the end of their current job.

Advantages of a Full-time worker

Easy-to-follow career path

A permanent employee should be transferred to the same organization. There is a development track for every position, and permanent workers have clarity on targets and KPIs to achieve to progress to the next level. With a deep understanding of the nature of the company and business practices, tenured professionals are seen to have greater prospects for advancement and are more likely to be groomed for leadership and managerial roles.

On the other hand, contractors can bargain for a higher title and wage only when they switch employers.

Access to more incentives for employees

Permanent employees possess employee perks to which contract jobs are often not treated. Usually, permanent hires receive more perks and they are expected to progress into more senior roles in the same company. Therefore, their incentives will include insurance packages to guarantee that if they continue to stay and work with the business, they remain safe and competent.

A permanent employee will have the right to provide pensions, retirement options, annual leave, and educational opportunities, and other job benefits.

Conclusion

Ultimately, both contract workers and full-time workers will serve as good options to meet a small business’s numerous projects and needs. If you are looking for a new opportunity in your career and a contract deal with a highly desirable employer that suits your work expectations comes along, we’d say go for it. Who knows, you might even get transferred to a permanent employee or other more enticing career prospects if you succeed above projections in the role.

 

Office in Hong Kong

Address: Office room 77, 7/F, Woon Lee Commercial Building, 7-9 Austin Ave, Tsim Sha Tsui, Kowloon, Hong Kong

Contact 

Email: legal@vitaliberta.com
Office Tel: +85268416177
Skype: ygrtima

Subscribe Now