COVID-19 Turning Full-Time Staff Into Contractors – Pros & Cons From A Legal Point Of View
Digital technology and internet easily connect people from different locations, which has been applied in the ordinary course of various industries for communication and work delivery. Nowadays, there are multiple robust mobile applications to choose from and hi-speed internet is available across the regions, backing online connections. The benefits are cost reduction and time efficiency without the need of large office space rentals, reduction of traveling, and of course, environmental benefits. More recently, due to COVID-19 outbreak, where physical proximity has to be avoided, many firms have realized that working from remote locations is doable across many departments.
Working-From-Home (‘WFH’), to be precise, working from anywhere, is typically implemented by working against applicable performance review, even though, being at the workplace is occasionally still of the essence. Once the immediate COVID-19 pandemic measures will be gradually removed, a semi-lockdown and social distancing is likely to continue for an unknown period of time to ensure the end of spillover cases. It may also take some time for an economic upturn to materialize. Many of the affected firms may be unable to bear high fixed cost and accrued liability any longer, one of those being the hiring of full-time staff under unaffordable conditions. In order to survive this crisis, turning full time staff into contractors (rather than layoffs), seems to be a workable solution for both sides. The company will be able to keep the business running on a smaller budget whereas the employees will not lose their jobs. The transition requires deliberate consideration for a mutual agreement onwards.
Full-time Staff vs. Contractor
Under Thai labour law, the borderline between employees and contractors is the exercise of command by the employer. The full-time staff or employee is bound by directive order and work regulations imposed by the employer insofar as they are justifiable through the hire of service. On the other hand, the employer is obliged to comply with the labour protection statues, such as social security contribution, severance pay upon employment termination, work safety and welfare, etc., subject to the employee protective jurisdiction of labour inspector and labour court.
The responsibility and liability between the employer and contractor apply differently with regards to the hire of work. The employer factually becomes a client or customer, in the same manner as an ordinary contractor would be hired. The employer would no longer be required to fund the compulsory welfare, overtime pay, and additional benefits on top of a regular salary. Severance provision writ-offs in many cases could turn to a profit on the books, in addition to the reduced cost of office rent and facility expenses. In this regard, the employer gives away the command and all directive orders under the law, giving the contractor more freedom to manage work-life balance outside of office restrictions.
As long as the statutory severance pay upon employment termination is concerned, the COVID-19 pandemic is not a justifiable cause to refrain from payment of severance, even though, this force majeure could result in a lawful employment termination. In other words, the employer is still obliged to pay severance under the law to terminated employees. By default, the transition will be a full-time employment termination against the rehiring under a new contractor agreement, subject to the employer making severance payment. However, that may be unaffordable for many companies given the financial situation in an economic downturn. As such, the employees’ understanding of the situation and willful consent must be sought. To be successful, precise communication and transparency will be needed for the employees to sympathize with this solution and for the team spirit to prevail.
As a legal mechanism, a mutual agreement on the transition should be reached. This could be as simple as the employee voluntarily resigning from a full-time staff position and entering into a new contractor agreement. A resigning employee is not entitled to receive severance payment under the law. However, the employee still has the option to receive statutory payments, including severance, if he or she does not wish to be rehired. Any failure by the employer to rehire the employee as agreed and/or withhold statutory payment on purpose, would subject the employer to criminal and civil liabilities.
An employment agreement and a contractor agreement are very similar at first glance, as both the employee and the contractor are paid for the performance of work. The critical difference between the two is the objective or purpose of the agreement. The employment agreement is meant to constitute a command by the employer over the employee to continuously perform the work according to the job descriptions, whereby the successful and complete delivery in exchange of wage payment is immaterial. On the other hand, the contractor agreement aims to a successful and complete assignment under the agreed scope of work, whereby the employer does not have any command over the contractor. Simply speaking, the employee is always subjected to the employer’s justifiable order in the course of work and paid regularly regardless of the work completion. The contractor has more freedom, but will be paid only against the work’s completion by project.
The contexts must clearly draw along this borderline to distinguish each type of agreement. Any grey area in the agreement could be interpreted as constituting the employment under the regime of labour law and court of competent jurisdiction. This means to revert the rights and obligations between the full-time staff and employer, including severance pay.
Here are some of the consequences which are commonly misunderstood:
Consideration & Taxes
The aforementioned legal implications result in different payment terms and conditions. If it is apparent that, despite rehiring, the parties keep in practice the same working conditions (work environments), an employment relation can be otherwise indicated by factual circumstances. This means that it could be assumed that an employment relationship would continue. Typical indications are e.g. regular (salary) payment irrespective of work completion, daily clock in/out office hours, command chain and reports, etc.
More important, the withholding tax applicable to salaries is based on progressive personal income tax rates, as opposed to a withholding tax fixed rate for hire of work or service fees received by a contractor. Upon the transition, the contractor may keep his/her social security status active by voluntary submissions. Provident fund and retirement mutual fund are convertible, subject to the particular conditions as imposed by the fund manager.
The default or late payment by the employer under the employment agreement is subject to a default interest at a rate of 15% per annum plus 15% weekly surcharge of the overdue salary, should it be withheld without reasonable cause. The default interest under the contractor agreement is limited to 7.5% per annum. Any liquidated damages, although specified in writing, will be considered as fluctuate penalty against provable damages and subject to the court’s sole discretion.
Expiry & Renewal Option
In general, an employment agreement does not have an expiry term. The agreement will continue to be valid and end upon the termination by either party or mutual termination by both parties. A termination of employment requires a minimum notice, the latest upon the upcoming payday to be effective at the end of the following payday, unless the employee is compensated in lieu of notice. An expiry term and renewal option make the contractor agreement different from the employment agreement. In the contractor agreement, the expiry term must be stated clearly, e.g. with a renewal option, should the employer be satisfied with the past performance and the employee be available. A termination notice is optional and can be otherwise agreed by the parties. An automatic renewal clause in a contractor agreement may expose the parties to an employment relationship under the labour law.
Work Products Copyright Ownership
Although, a written contract is not required for validity and enforceability, the employment agreement and the contractor agreement have different implications. One particular issue is work related products copyright ownership. Unless otherwise agreed, the copyright created in the course of work belongs to the employee under an employment agreement, as opposed to the employer under a contractor agreement.
A non-compete clause is acceptable in both employment agreements and contractor agreements, although pre-agreed liquidated damages are subject to the court’s sole discretion on the provable actual damages only. As the contractor is, by default, free to engage with any principal, an exclusivity clause for the performance of work solely to a specific employer is a factual circumstance which may constitute an employment relationship.
This transition model works regularly in any circumstance to reduce costs and maintain jobs. However, a productive implementation requires appropriate communication skills and management, including tidy documentation and agreements in order to avoid that this sensitive matter backfires.
We hope that the information provided was helpful to you. If you have any further questions, please do not hesitate to contact us. We will make sure that your question will be brought to the right person’s attention and we will deliver a prompt response.
The above information is intended to highlight an overview of key issues for ease of understanding and cannot substitute a personal consultation with a qualified lawyer. We highly advise you to read this article in conjunction with appropriate advice from your legal counsel to determine the legal implications this article might have on your business and how to mitigate exposures as much as possible.
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