One of the conversations we have increasingly often at Ryoss starts with a business telling us, “We were advised we could just engage them as contractors.”
Sometimes that arrangement is perfectly legitimate. Sometimes it is not.
The problem is that putting the words Independent Contractor Agreement at the top of a document does not necessarily determine the legal relationship underneath it.
Across Southeast Asia, governments, courts and employment authorities can look at how the relationship actually operates. Singapore’s Ministry of Manpower, for example, expressly states that employment status depends on the actual relationship and considers factors including control, who provides equipment and whether the individual is genuinely operating a business on their own account.
In the Philippines, courts apply tests including who engages and pays the worker, who has the power to dismiss them and, importantly, who controls how the work is performed. Vietnam’s Labour Code similarly recognises employment based on the substance of an arrangement, including whether the person is paid, managed and supervised by the employer. Malaysia’s Employment Act also contains presumptions of employment in certain circumstances involving control over work or hours, provision of equipment, integration into the business and regular payment.
The legislation differs from country to country, but the message for businesses is simple.
The substance of the relationship can matter considerably more than the title of the contract.
Here are five areas we believe businesses should properly investigate before engaging someone as an independent contractor.
1. Understand How the Country Defines an Employee
The first question should not be whether your recruiter, accountant or contractor platform says the arrangement is acceptable.
It should be:
How does the law in the country where the person actually works distinguish an employee from an independent contractor?
A genuine contractor is generally operating independently. They may determine how work is performed, provide their own equipment, work with multiple clients, accept commercial risk and be engaged to deliver an outcome rather than simply occupy an ongoing position inside another business.
By contrast, warning signs can arise where someone works full time for one company, follows company hours, reports to a manager, performs an integral role within the organisation and has little genuine commercial independence.
No single factor necessarily decides the issue, and the tests vary between jurisdictions.
That is exactly why local advice matters.
2. Look at What Happens in Practice, Not Just What the Contract Says
This is where we see businesses get into trouble.
The contract says “independent contractor”, but operationally the person looks exactly like an employee.
They work Monday to Friday, use the company’s laptop, have a company email address, appear on the organisation chart, report to the same manager every day, need approval for time away and have been doing substantially the same role for several years.
That does not automatically mean they are legally an employee, but it should certainly cause the business to examine the arrangement carefully.
Singapore’s Ministry of Manpower has made the point particularly clearly, even stating that the wording of the contract itself is not determinative when assessing whether somebody is genuinely independent. Businesses therefore need to audit both the agreement and the working reality behind it.
3. Understand the Consequences if the Person Is Later Deemed an Employee
Misclassification is not simply an administrative issue.
Depending on the jurisdiction and circumstances, a finding that someone should have been treated as an employee can potentially create exposure relating to unpaid statutory benefits, social security contributions, leave, employment taxes, termination rights, overtime, penalties, interest and other employment entitlements.
There can also be a much wider commercial problem.
Imagine a business has 25 people in one country all engaged under substantially the same contractor model.
If one person successfully challenges their status, management immediately has to ask whether the same issue potentially exists across the other 24 engagements. That can turn one employment dispute into a broader workforce compliance problem.
It can also affect the workers themselves. Contractors may discover that their tax, social security or employment position was different from what they understood when accepting the role.
This is why both sides should understand the arrangement from the beginning.
4. Do Not Confuse Recruitment Advice With Employment Law Advice
There is considerable misinformation in this area. We regularly speak with businesses that were told an arrangement was “standard”, “everyone does it” or “completely compliant”, only to later discover that nobody had actually obtained employment law advice in the country concerned.
Recruiters and contractor platforms can play a valuable role in helping businesses access talent, but their commercial objective is usually to facilitate an engagement.
That is not the same as providing independent legal advice. Businesses should therefore be cautious when a proposed workforce model is being legally justified primarily by the organisation selling the recruitment or contractor solution.
Ask simple questions.
Who has legally reviewed this model?
Which country’s laws were considered?
What happens if the contractor claims employee status?
Who carries that risk?
What statutory obligations might arise?
If the answer is unclear, obtain advice from qualified local employment counsel before proceeding.
The cost of a legal review at the beginning can be insignificant compared with unwinding dozens of incorrectly structured engagements later.
5. Consider Whether a Contractor Is Actually the Right Structure
Sometimes the conclusion from proper due diligence is that an independent contractor arrangement is appropriate.
Other times, the business is clearly trying to build a long term team.
In that situation, there may be better options.
An Employer of Record, or EOR, can allow a business to employ people compliantly through a local employer while it does not yet have its own entity. In Singapore, for example, the Ministry of Manpower confirms that a worker employed by an EOR under a contract of service remains an employee with the associated statutory protections.
For businesses expecting to build larger or permanent teams, establishing their own local company may ultimately provide greater control over employment, culture, benefits, payroll, intellectual property and workforce strategy.
Increasingly, we see businesses use EOR as an interim solution and then transition employees into their own entity once the operation reaches sufficient scale.
Our View
Independent contracting is not inherently non compliant.
Used correctly, it can be an effective way to engage genuine consultants, specialists, project resources and independent businesses.
The problem arises when a business uses contractor documentation to describe what is, in substance, an employment relationship.
At Ryoss, many of the businesses that come to us for help are not deliberately trying to avoid employment obligations. They were simply given incomplete advice, relied on what appeared to be a straightforward solution, or did not appreciate that the rules in the worker’s country could be very different from those at home.
Our advice is simple.
Before engaging contractors in Southeast Asia, understand the local law, examine how the relationship will operate in reality, quantify the potential risk and have the structure reviewed by qualified local counsel.
Then decide whether contracting, EOR or establishing your own entity is genuinely the right model.
It is far easier to structure the workforce correctly at the beginning than to explain several years later why thirty “contractors” were operating exactly like employees.
Important note: This article is provided for general information only and does not constitute legal, employment, tax or accounting advice. Employment status and contractor rules vary materially between jurisdictions and individual circumstances. Businesses should obtain advice from appropriately qualified legal and tax professionals in the country where the individual will perform their work before implementing any contractor arrangement.