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Print articleHong Kong: Employee or Independent Contractor?
May, 2007 -
The Court of Final Appeal recently made a ruling in Poon Chau Nam v. Yim Siu Cheung t/a Yat Cheung Air-conditioning & Electric Co. casting light on determining whether a worker should be treated as an employee or an independent contractor under the Employees Compensation Ordinance ("ECO").
This is an appeal case from the District Court and the Court of Appeal. The appellant worker suffered personal injury in a work-related accident at a building. He was welding a part in an air-conditioner when the welding rod suddenly shattered and a fragment struck his left eye. In consequence, he had suffered a 30% loss of vision in that eye and a 45% loss of earning capacity. The issue was whether the appellant worker was an employee of the respondent company at the time of the accident. The District Court and the Court of Appeal both held that there was no employer and employee relationship between the parties.
Considerations of the District Court and the Court of Appeal
The District Court and the Court of Appeal had considered a number of facts and applied the relevant tests in determining whether there was an employment relationship. However, they considered two factors to be crucial, effectively ruling out the existence of any employment contract.
These were:
i. the absence of any mutual obligation to provide and take up work; and
ii. the appellant’s decision to make his own MPF arrangement as a self-employed person (to which the District Court Judge added the fact that the worker had done jobs for different enterprises).
The Court of Final Appeal
Whether an employment relationship exists is a question of fact and therefore it can only be interfered with on appeal if it can be shown that the court below misdirected itself in law or came to a decision which no court, properly directly itself on the relevant facts, could reasonably have reached.
The CFA considered that the courts below misdirected themselves in law by regarding the absence of a mutual obligation to provide and accept work as inconsistent with the existence of a contract of employment.
Provisions under the ECO
It was an undisputed fact that the worker had been engaged "on a casual as required basis". Therefore, the CFA considered necessary to consider the provisions in the ECO dealing with persons casually employed.
Section 2(1) of the ECO defines an "employee" as a person who works under a contract of service. It continues with a proviso which materially states that:
"Provided that the following persons are excepted from the definition of "employee" …(b) any person whose employment is of a casual nature, and who is employed otherwise than for the purposes of the employer's trade or business……"
The effect of the proviso above is to include within the definition of "employee" for ECO purposes, a person working under a contract of service even if his employment is of a casual nature, provided that such casual employment is for the purposes of the employer’s trade or business.
In addition, section 11(2) of the ECO provides a mechanism for calculating compensation where an injury is suffered in the course of casual employment.
Section 11(7) further recognises that a casual employee may find work with more than one employer and addresses the calculation of compensation in such cases.
In view of the above provisions and by considering various cases, the CFA was of the view that there was nothing in the ECO to suggest that a mutual obligation to supply and take up work had to exist before a worker could be qualified as an employee. On the contrary, the CFA considered that the ECO recognised casual work was by its nature irregular, with gaps concurring between stints when there was work, and provided a mechanism for determining compensation based on notional monthly earnings using external evidence of comparable remuneration. It also recognised that such workers might find stints of work with more than one employer.
The CFA considered that the provisions cited above were clearly provisions designed to operate where the parties were not mutually obliged to offer and take up work. They weighed heavily against the suggestion that absence of a mutual obligation to supply and accept work removed the worker from the ECO’s ambit.
Specific engagements / Umbrella contracts
The CFA also considered that the courts below had failed to distinguish between "specific engagements" and "Umbrella contracts" which might arise in the context of casual employment.
As and when a particular casual job is offered and accepted, the parties enter into a contract in relation to that engagement. Plainly, such a contract does not involve any general obligation to provide or accept work. It comes into existence in relation only to the specific engagement and normally terminates by performance when the engagement is completed. Such contract may be an employment contract and it has nothing to do with the mutual obligation.
On the other hand, it is possible for the parties to enter into an overall contract whereby they undertake mutual obligations to provide and accept work. Such a contract is called an "umbrella" or "global" contract. The existence of an umbrella contract does not necessarily mean that there is an employment contract. Similarly, the fact that there is no umbrella contract does not prevent the court from finding that the parties have entered into a contract of employment each time a specific engagement occurs.
The CFA considered that the absence of a mutual obligation to supply and to take up work, while fatal to the existence of an umbrella contract, was irrelevant to the existence of a contract of employment arising out of a specific engagement. The courts below fell into error in holding that the absence of the relevant mutual obligations was inconsistent with an employment relationship without differentiating between these two types of contract.
The appellant worker was injured while contractually engaged by the respondent to work on the air-conditioner in question. The material question was whether the contract was a contract of employment.
A contract of employment?
There is no single test that will conclusively point to the distinction between an employee and an independent contractor in all cases. In earlier case law, whether the master controlled the manner of doing the work was regarded as the single test for identifying a master and servant relationship. It became clear later that the control test was too narrow and other indicia had been developed (e.g. master’s power of selection of his servant; payment of wages or other remuneration; ownership of the tools; chance of profit; risk of loss etc). The modern approach is to examine all the features of their relationship against the background of the indicia developed with a view to deciding whether, as a matter of overall impression, the relationship is one of employment.
The CFA found these facts:
i. The air-conditioning business belonged to the respondent company.
ii. The worker’s venture into an air-conditioning business on his own account had failed some years previously.
iii. The company decided which jobs should be assigned to the worker and paid him to do them at the daily rate of HK$550, plus any overtime.
iv. All the profits and losses of the business were for the company’s account.
v. The worker bore no financial risks and reaped no financial rewards beyond his daily-rated remuneration.
vi. The respondent managed the business and hired several other workers, some of whom would sometimes work alongside the worker on a job.
vii. The worker personally did the work assigned to him.
viii. He did not hire anyone to help.
ix. Travel expenses incurred in the course of the work were borne by the company.
x. The relevant equipment was owned by the company.
xi. Whenever items had to be purchased by the worker, he was reimbursed by the company.
xii. The worker was a skilled air-conditioning worker and did not require supervision or control over the manner of carrying out the work.
The CFA considered that the control test was in this case, of little relevance as the appellant was an experienced worker. In addition, the other indicia all pointed clearly to an employer-employee relationship entered into for each specific engagement.
The MPF arrangement
The courts below considered that the worker’s arrangement for an MPF scheme as a self-employed person was a strong indication that there was no employer-employee relationship. In addition, failure to give effect to the parties’ express intention that the worker should be treated as self-employed would unjustly result in the company being saddled with unexpected criminal liability for non-compliance with ECO obligations which are owed to employees but not to self-employed persons.
The CFA was of the view that the aforesaid came close to suggesting that the parties should be accorded freedom to contract out of the ECO, contrary to section 31(a) of the ECO.
Further, CFA considered that where the relationship was highly ambiguous and it was not at all clear that a worker was an employee, the parties’ express agreement as to the status of that person might be important. In the present case, the CFA was of the view that objective facts strongly supported the conclusion that the appellant worker was an employee at the time of the accident and the fact that he labelled himself a self-employed person for MPF purposes would not change the picture concerning the company’s liability under the ECO. Yet, the CFA made clear that its decision in this case was not intended to affect the position of casual employees under the Mandatory Provident Fund Schemes Ordinance which had its own provisions for dealing with such employees and their position did not arise for consideration in the appeal before the CFA.
This is an appeal case from the District Court and the Court of Appeal. The appellant worker suffered personal injury in a work-related accident at a building. He was welding a part in an air-conditioner when the welding rod suddenly shattered and a fragment struck his left eye. In consequence, he had suffered a 30% loss of vision in that eye and a 45% loss of earning capacity. The issue was whether the appellant worker was an employee of the respondent company at the time of the accident. The District Court and the Court of Appeal both held that there was no employer and employee relationship between the parties.
Considerations of the District Court and the Court of Appeal
The District Court and the Court of Appeal had considered a number of facts and applied the relevant tests in determining whether there was an employment relationship. However, they considered two factors to be crucial, effectively ruling out the existence of any employment contract.
These were:
i. the absence of any mutual obligation to provide and take up work; and
ii. the appellant’s decision to make his own MPF arrangement as a self-employed person (to which the District Court Judge added the fact that the worker had done jobs for different enterprises).
The Court of Final Appeal
Whether an employment relationship exists is a question of fact and therefore it can only be interfered with on appeal if it can be shown that the court below misdirected itself in law or came to a decision which no court, properly directly itself on the relevant facts, could reasonably have reached.
The CFA considered that the courts below misdirected themselves in law by regarding the absence of a mutual obligation to provide and accept work as inconsistent with the existence of a contract of employment.
Provisions under the ECO
It was an undisputed fact that the worker had been engaged "on a casual as required basis". Therefore, the CFA considered necessary to consider the provisions in the ECO dealing with persons casually employed.
Section 2(1) of the ECO defines an "employee" as a person who works under a contract of service. It continues with a proviso which materially states that:
"Provided that the following persons are excepted from the definition of "employee" …(b) any person whose employment is of a casual nature, and who is employed otherwise than for the purposes of the employer's trade or business……"
The effect of the proviso above is to include within the definition of "employee" for ECO purposes, a person working under a contract of service even if his employment is of a casual nature, provided that such casual employment is for the purposes of the employer’s trade or business.
In addition, section 11(2) of the ECO provides a mechanism for calculating compensation where an injury is suffered in the course of casual employment.
Section 11(7) further recognises that a casual employee may find work with more than one employer and addresses the calculation of compensation in such cases.
In view of the above provisions and by considering various cases, the CFA was of the view that there was nothing in the ECO to suggest that a mutual obligation to supply and take up work had to exist before a worker could be qualified as an employee. On the contrary, the CFA considered that the ECO recognised casual work was by its nature irregular, with gaps concurring between stints when there was work, and provided a mechanism for determining compensation based on notional monthly earnings using external evidence of comparable remuneration. It also recognised that such workers might find stints of work with more than one employer.
The CFA considered that the provisions cited above were clearly provisions designed to operate where the parties were not mutually obliged to offer and take up work. They weighed heavily against the suggestion that absence of a mutual obligation to supply and accept work removed the worker from the ECO’s ambit.
Specific engagements / Umbrella contracts
The CFA also considered that the courts below had failed to distinguish between "specific engagements" and "Umbrella contracts" which might arise in the context of casual employment.
As and when a particular casual job is offered and accepted, the parties enter into a contract in relation to that engagement. Plainly, such a contract does not involve any general obligation to provide or accept work. It comes into existence in relation only to the specific engagement and normally terminates by performance when the engagement is completed. Such contract may be an employment contract and it has nothing to do with the mutual obligation.
On the other hand, it is possible for the parties to enter into an overall contract whereby they undertake mutual obligations to provide and accept work. Such a contract is called an "umbrella" or "global" contract. The existence of an umbrella contract does not necessarily mean that there is an employment contract. Similarly, the fact that there is no umbrella contract does not prevent the court from finding that the parties have entered into a contract of employment each time a specific engagement occurs.
The CFA considered that the absence of a mutual obligation to supply and to take up work, while fatal to the existence of an umbrella contract, was irrelevant to the existence of a contract of employment arising out of a specific engagement. The courts below fell into error in holding that the absence of the relevant mutual obligations was inconsistent with an employment relationship without differentiating between these two types of contract.
The appellant worker was injured while contractually engaged by the respondent to work on the air-conditioner in question. The material question was whether the contract was a contract of employment.
A contract of employment?
There is no single test that will conclusively point to the distinction between an employee and an independent contractor in all cases. In earlier case law, whether the master controlled the manner of doing the work was regarded as the single test for identifying a master and servant relationship. It became clear later that the control test was too narrow and other indicia had been developed (e.g. master’s power of selection of his servant; payment of wages or other remuneration; ownership of the tools; chance of profit; risk of loss etc). The modern approach is to examine all the features of their relationship against the background of the indicia developed with a view to deciding whether, as a matter of overall impression, the relationship is one of employment.
The CFA found these facts:
i. The air-conditioning business belonged to the respondent company.
ii. The worker’s venture into an air-conditioning business on his own account had failed some years previously.
iii. The company decided which jobs should be assigned to the worker and paid him to do them at the daily rate of HK$550, plus any overtime.
iv. All the profits and losses of the business were for the company’s account.
v. The worker bore no financial risks and reaped no financial rewards beyond his daily-rated remuneration.
vi. The respondent managed the business and hired several other workers, some of whom would sometimes work alongside the worker on a job.
vii. The worker personally did the work assigned to him.
viii. He did not hire anyone to help.
ix. Travel expenses incurred in the course of the work were borne by the company.
x. The relevant equipment was owned by the company.
xi. Whenever items had to be purchased by the worker, he was reimbursed by the company.
xii. The worker was a skilled air-conditioning worker and did not require supervision or control over the manner of carrying out the work.
The CFA considered that the control test was in this case, of little relevance as the appellant was an experienced worker. In addition, the other indicia all pointed clearly to an employer-employee relationship entered into for each specific engagement.
The MPF arrangement
The courts below considered that the worker’s arrangement for an MPF scheme as a self-employed person was a strong indication that there was no employer-employee relationship. In addition, failure to give effect to the parties’ express intention that the worker should be treated as self-employed would unjustly result in the company being saddled with unexpected criminal liability for non-compliance with ECO obligations which are owed to employees but not to self-employed persons.
The CFA was of the view that the aforesaid came close to suggesting that the parties should be accorded freedom to contract out of the ECO, contrary to section 31(a) of the ECO.
Further, CFA considered that where the relationship was highly ambiguous and it was not at all clear that a worker was an employee, the parties’ express agreement as to the status of that person might be important. In the present case, the CFA was of the view that objective facts strongly supported the conclusion that the appellant worker was an employee at the time of the accident and the fact that he labelled himself a self-employed person for MPF purposes would not change the picture concerning the company’s liability under the ECO. Yet, the CFA made clear that its decision in this case was not intended to affect the position of casual employees under the Mandatory Provident Fund Schemes Ordinance which had its own provisions for dealing with such employees and their position did not arise for consideration in the appeal before the CFA.
