Independant Contractor Payment in Singapore attracts CPF?

[vijsrinp]

Dear Expert,

We plan to engage an independant contractor for telecom domain consulting work on a monthly basis for five (5) months and make one-time final payment at the end after all deliverables have been completed to the independant contractors personal bank account. He does not have a business entity.

This will be a one-time engagement.

Thereafter if we find the services satisfactory we plan to hire the independant contractor into regular employment of the company.

Does the one-time payment for five (5) months paid to independant contractor attract CPF contribution since an employer-employee relationship does not exist?

Thanks in advance...
vijsrinp

[sundaymorningstaple]

There is a fine line between the legality of a Contract for Service and a disguised Contract of Service in order to avoid payment of CPF. The following quotation is taken from the MOM site. If the contract is actually a Contract for Service (independent contractor) then the main contractor ("employer") does not have to deduct or pay CPF for the independent contractor. However, the independent contractor will be liable for Medisave Contributions.

Difference between a Contract of Service and a Contract for Service

A contract for service differs from a contract of service.

A contract of service is an agreement whereby one person agrees to employ another as an employee and the other agrees to serve his employer as an employee. Under a contract of service, the employer must contribute CPF, and provide relevant statutory benefits such as annual leave, sick leave etc. for its employees engaged.

A contract for services, however, is an agreement whereby a person is engaged as an independent contractor, such as a self-employed person or vendor engaged for a fee to carry out an assignment or a project for the company. Under such a work arrangement, there is no employer-employee relationship, and the employee is not covered by the Employment Act.

There is no single conclusive test to distinguish a contract of employment from a contract for services. Some of the factors to be considered in identifying a contract of employment include:

1. Control
Who decides on the recruitment and dismissal of employees?
Who pays for the employees' wages and in what ways?
Who determines the production process, timing and method of production?
Who is responsible for the provision of work?
2. Ownership of factors of production
Who provides the tools and equipment?
Who provides the working place and materials?
3. Economic considerations
Does he carry on business on his own account or carry on the business for the employer?
Does he involve in any prospect of profit or is he liable to any risk of loss?
How are his earnings calculated and profits derived?

The red highlighted text is the one to be extremely careful of. If the CPF board determines to the contrary, you can find yourself with a fine in addition to paying the full CPF amount (both his and the employers) plus interest and penalties. Also, the inconvenience of being audited every quarter for the next couple of years (I know - my company had a problem before I joined them 7 years ago and I was stuck with the bloody audits every quarter for 3 of our companies for around 3 years - and that was only for non-payment of SDF levies!)

My personal opinion? You run the risk if you are thinking of hiring him if he's any good. It will be like waving a red flag in front of the bull called the CPF Board.

[Strong Eagle]

From my practical experience. If the contractor:

a) Works a substantial amount of time at her/his home or office
b) Supplies her/his own computer equipment
c) Has had prior clients and customers
d) Has an invoicing system and has properly reported earned income in the past

Then you could probably prove up a contractor relationship. But, for your scheme, I don't think so.

a) You don't intend to pay the person for five months. This in itself is a big red flag because no self respecting contractor works completely for free while the client has no skin in the game. It makes me think that your 'contractor' is willing to work for free for five months in order to get the job... because...

b) You intend to hire the person at the end of the five months if it all works out... so what you really have here is a probationary period of five months... and with no pay!

Any self respecting contractor would have contractual provisions for converting to full time employment. Contractors should earn more than an employee because they cover their own full cost of holidays, sick time, training, etc.

If you are supplying your 'contractor' additional perks like paid time off for holidays, and you are not paying more than you intend to pay as a full time employee, then if I were on the CPF board, I'd say this stinks like a three day old fish.