The Dangers of Employee Misclassification
Many of Singapore’s Small & Medium Enterprises have, as a cost-cutting measure, turned to the services of freelance contractors to meet their workforce needs instead of hiring employees.
While the use of freelance contractors does provide cost savings, business owners must have a clear understanding of who qualifies as freelance contractors.
In recent years, the Singapore Courts have come down hard on companies who hire “temps” or freelance contractors to avoid paying for employee benefits.
The Courts may disagree that your hired hand is not an “employee” but a “freelance contractor” based on your declaration.
Why Does the Difference Matter?
- When you misclassify workers as “freelance contractors” who are your employees, you expose your business to several significant legal liabilities.
- These can include fines and penalties for violating labour laws, such as the Workmen’s Compensation Act, the Employment Act, and the Central Provident Fund Act.
- In addition, not complying with your statutory obligations to your employees can cause significant damage to your business.
Factors In Determining Employer-Employee Relationship
- The Court looks at various factors to determine if an employer-employee relationship exists.
- These include the actual mechanices of the relationship, as well as economic considerations.
- For example, the Court will look at how the workers are paid, whether they provide benefits, and how much control the employer has over their work.
- Additionally, the Court will examine the parties’ intent and the work’s nature.
- Ultimately, the Court will consider all the facts and circumstances to decide.
Degree of Control
- One important consideration is the degree of control over the worker’s activities.
- In a classic employer-employee relationship, the employee is generally obligated to follow the employer’s instructions in all tasks that lead up to the final work output.
- Whereas in the case of a freelance contractor, the hirer’s control is often limited to the scope of the project and its deliverables while having little say over how the worker should perform each of the tasks that make up the project.
- The freelance contractor’s obligations to the hirer are to complete the project/task.
- In contrast, the execution of tasks involved in the deliverables is left to the freelance contractor.
- The higher the control over the worker’s activities, the more likely the “employer-employee” relationship exists. This is because the employer is in a better position to dictate the terms and conditions of the work, and the worker is in a less advantageous position to negotiate. As a result, the worker is more likely to be considered an employee, and the employer is more likely to be considered the employer.
Factors of Production
- Another critical consideration in determining whether an employer-employee relationship exists is the ownership of factors of production.
- For example, who provides the tools and equipment necessary for the job, as well as the place of work?
- If the hirer provides these, it is more likely that an employer-employee relationship exists. Again, this is because the hirer has more control over the worker (“employee”) in this situation.
Financial Control
- The third important consideration when determining the nature of the working relationship is the degree of financial control for services rendered.
- For example, is the payment for services made upon completion of the project/task or on a regular periodic basis?
- Suppose payment is made upon completion of the project/task. In that case, it is more likely to be viewed as a freelance contractor relationship.
- On the other hand, if payment is made regularly, it is more likely to be considered an employer-employee relationship.
Other Factors
- The Courts have considered several other factors when determining whether or not an employer-employee relationship exists.
- For example, the Courts will look at the terms of the agreement between the parties, such as how long the agreement is for, the nature of the job or services to be performed, etc.
What Can I Do To Minimise My Liability?
- While some business owners have avoided legal liability through mis-characterisation, others have paid a high price for disgusing their employees as freelance contractors.
- The rule of thumb is “If you treat the worker as an employee, so will the authorities.”
Is your temp a freelance contractor or an employee? We offer video consultation via Lawyer Anywhere so that you can get the help you need. Contact us today to get started!
Important Disclaimer
The information contained here only provides general information on the subject covered. Nothing in this publication should be regarded as constituting legal advice concerning any particular business, operational or other situations you might face. Further, the law may have changed since the first publication, and the reader is cautioned accordingly. Please seek professional advice before taking any action.