Differences Between Hiring Employee vs Contractor

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Table of Contents
(Malaysia & The Philippines labor law) A whopping 97% of employees would like to work remotely for at least some time for the rest of their careers, as reported by Buffer's 2022 state of remote work report.   Hence, technological advancement has enabled companies to hire remote employees according to the popular demand and preference of the employees.   However, are companies that hire remote workers from anywhere possess higher risk in disguised employment? Learn more about disguised employment vs disguised unemployment and check your risk whether you are hiring "fake freelancers" as full-time remote employees

Definition of employee

In Malaysia, the Employment Act (EA 1955) is the fundamental employment legislation for the country in terms and conditions of employment. The Employment (Amendment) Act 2022 clearly defines the employees protected by the Act. Under the new section 101c, 44 (1)
  1. The manner of the employee's work is subject to the control or direction of the employer. 
  2. Employee work hours are subject to the employer's control or direction.
  3. The employers will provide all the necessary tools, materials, or equipment to the hired employees for work execution. 
  4. Employee work is integral to the employer's business operations.
  5. The employee's work is performed solely for the benefit of the hiring company.
  6. "Employee monthly salary" is a payment made to the employee in return for the work done at a regular interval. Such payment constitutes the majority of the employee's income.
  7. The employer will need to pay the employees employed on time, regardless of whether the employee has met the work timeline every month. 
Under the Amended EA, the person hired is presumed to be an "employee" with the above criteria stated even when a written contract of service is absent between the employer and employee. 

Definition of independent contractor

On the other hand, what is a contractor, and in what way does the independent contractor work differently from an employed employee?  According to the Department order no. 174 (2) from the department of labour and employment in the Philippines, the term "contractor" refers to any person or entity engaged in a legitimate contracting or subcontracting work arrangement for a specific job.  Such services are undertaken and outlined under a "Service Agreement". Similar to the definition of the employment act in Malaysia, the definition of a contractor in the Philippines is: 
  1. The employees recruited under the contractor will perform activities directly related to the contractor's primary business operation instead of the company (or client) that hires the contractor. 
  2. The contractor does not exercise the right to control the employee's work performance.
  3. The contractor acts as a distinct and independent business and will perform the job according to its method, manner, and responsibilities. 
  4. The contractor has substantial capital to carry out the job by their account, method and manner, including the investment of the tools, equipment, supervision and machinery. 
  5. During the work period, the contractor is free from the control and direction of the principles related to the work performance, apart from the results indicated in the service agreement.  
  6. The service agreement will state the specific description of the work being carried out, including its term or duration.
  7. The service agreement will clearly state the agreed amount of the contracted job and related terms and conditions. 
  8. A standard administrative fee is charged to the hiring company. For instance, it is NOT less than or at least ten (10%) of the total contract cost in the Philippines. 
10-Key -Differences-Between-Employee-And-Contractor-Infographics-AYP-Blog

Employee or Independent contractor? 10 differences you should know.

  1. Contract
  • An employment contract is signed between the employer and the employee.  
  • A service agreement is issued with a mutually agreed timeline or duration. 
  1. Working relationship
  • Employees work solely full-time for the employer and must devote 100% of their work time during their work. 
  • Contractors work on a project basis for the hiring company as their client, and they usually are the business owners who serve multiple clients. 
  1. Payment
  • The employees will receive regular monthly salaries with a fixed payment according to the number of hours worked, including overtime pay benefits. 
  • There is no monthly, daily or hourly rate payment for a contractor. The hiring company will pay the contractors the agreed sum according to the deadline, schedule and goal set in the agreement. 
  1. Resources
  • The company supplies the tools, materials, and equipment. If the employees need to pay to purchase specific tools required, it shall be claimable from the employer. 
  • The contractor should use their resources and are not eligible to claim from the client or the hiring company.

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  1. Expenses
  • All expenses are claimable for an employee of the company, including travelling expenses if the work requires travel.
  • The contractor shall bear all the expenses if they need to visit the client's office unless stated in the service agreement. 
  1. Work autonomy
  • The employees work under the control and direction of the employer. The main objective is to work according to the company's vision, mission and targets. 
  • Contractors work according to their own will and are not controlled and directed by the company's business objectives. 
  1. Business relationship
  • The employer will conduct quarterly, half-yearly, or annual appraisals to evaluate the employee's work performance as it is a long-term working relationship. 
  • The contractor has a short-term relationship with the client and will end the relationship stated according to the service agreement duration. 
  1. Job delegation
  • Employees must work personally for the employer and cannot delegate tasks to other parties.
  • Contractors can delegate tasks freely or collaborate with a subcontractor as long as the project can complete on time. 
  1. Income Tax
  • Using Singapore as an example, employment tax is fully or partially borne by the employer according to the employee's annual salary. 
  • A contractor is considered a self-employed person who works with multiple clients. Therefore, the contractor is responsible for filing its company tax according to the company's annual earnings. 
  1. Employee benefits 
  • Employers are required to pay employees social contributions, annual leaves, medical leaves and paid Public holidays time-off or overtime claims legally. 
  • Under the service agreement, contractors have no right to receive any benefits or workers' compensation the company gives its regular employees. Contractors must also self-register and pay government contributions, such as the social security system. 

Expand confidently and compliantly: Avoid disguised employment.

Avoid-Misclassification-or-Disguised-Employment-AYP-Blog By leveraging AYP's HR knowledge and expertise, your company can achieve corporate compliance without knowing all the laws and regulations. In fact, by trusting AYP's PEO / EOR solutions today, your company can confidently run your business in a new location without much hassle and worry. About AYP:
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