Employees vs Consultants

10 mins • 22 Dec 21

Personnel is crucial to the smooth operation of a business. When engaging personnel, it is worth considering if they are employees or independent contractors. This distinction is crucial as employees tend to have more rights than contractors, whose rights are generally entirely defined by a services agreement.

For example, an employer may under law be required to pay pension contributions to its employees, but not to independent contractors.

Obligations To Employees

◼️Pay pensions

◼️Provide annual leave and medical leave

◼️Provide parental leave benefits

Business owners who fail to consider this issue may find themselves facing unexpected employment-related claims, which could place a strain on the Startup’s financial and manpower resources.

Key Differences Between Employees And Contractors

Consultants are often treated as employees, but there are some major differences to the nature of their work as well as the terms and conditions of their engagement with the company. If in doubt as to whether your personnel are considered employees or independent contractors, it may be worth consulting an employment lawyer. Let’s go through the key differences between a consultant and employee.

Location

◼️A contractor can work either at home, their own office or at the company's office. An employee generally works from the company’s office. Note, with COVID - many employees have found themselves working from home. Whether this trend continues remains to be seen.

Responsibilities

◼️Where a consultant is paid to share their area of expertise and knowledge with the company, an employee is hired to fill their workforce.

Benefits

◼️Contractors do not receive any benefits from the company. Employees may receive employee benefits such as medical aid, overtime and pension fund contributions.

Tax

◼️Employees of a company will receive their net salary, as the company will withhold income tax. A contractor is given their full amount and is held responsible for their own income tax.

Work hours

◼️A contractor can have either fixed or flexi time options, whereas an employee generally gas a set fixed amount of hours per day.

Purpose

◼️Typically, a contractor is hired for a fixed term project, whereas employees are hired to work regardless of what projects are currently underway.

Independent Contractor” Or “Employee” Relationship

Under general common law, the question of whether an “independent contractor” or “employee” relationship exists is a fact-sensitive enquiry. Factors that may be relevant include:

◼️The degree of control exercised by the company over the individual.

◼️Whether the work of an individual is done as an integral part of the business of the alleged employer.

◼️Whether there is any representation of the individual as part of the company’s business (e.g. name cards, uniforms, etc.).

Under general common law, the question of whether an “independent contractor” or “employee” relationship exists requires a fact-sensitive determination. Defining the various roles and responsibilities of workers in your organisation is imperative to know exactly what added responsibilities you have as an employer. Different contracts are required for full-time employees vs that of a contractor.

What's Next?

When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.

We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion. 

Observations and Tips

Understand the Legal Difference Clearly: Employees work under the company’s control and receive statutory protections, while consultants operate independently under contractual terms.
Assess Control & Supervision Carefully: The degree of control over work hours, methods, and reporting often determines classification.
Use Proper Written Agreements: Employment contracts and consultancy agreements should clearly define the nature of the relationship.
Address Intellectual Property Ownership: Both employee and consultant agreements should ensure IP created during engagement belongs to the company.
Understand Tax & Compliance Obligations: Employees may trigger payroll, tax withholding, benefits, and labour law obligations that consultants typically do not.
Clarify Confidentiality Obligations: Confidential information and trade secrets should remain protected regardless of engagement type.
Review Benefits & Entitlements Carefully: Employees may be entitled to leave, insurance, provident fund, and other statutory protections.
Avoid Misclassification Risks: Incorrectly treating employees as consultants can lead to penalties, tax exposure, and labour disputes.
Define Scope of Work & Deliverables Clearly: Consultancy agreements should specify independent deliverables, timelines, and payment structures.
Align Hiring Structure With Business Needs: Businesses should assess flexibility, long-term operational requirements, and cost implications before choosing engagement models.
Maintain Proper Records & Documentation: Clear onboarding, invoicing, payment, and compliance records help manage legal risk effectively.
Prevent Informal Hiring Arrangements: Undefined working relationships often create disputes regarding ownership, liability, and employment rights.