Bosses and workers need to mind the gaps in the gig economy

THE human capital landscape has evolved much from what it was a decade ago. With digital technology redefining the nature, form and structure of work and employment, we are seeing the rise of the gig economy across markets, including Singapore.

In a gig economy, individuals who function as freelancers or independent contractors are hired for specific skills as and when required. Such an arrangement allows companies to reduce the costs associated with the traditional employee set-up, and empowers individuals to manage their time and income opportunities.

As with any new trends, there often arises risks that need to be addressed.

TAX UNCERTAINTIES

As the gig economy grows, governments may see potential tax leakages due to misunderstanding of the statutory reporting process. Under the law, companies are required to report an employee's employment-related income and benefits to the tax authorities.

Where an individual is in a contracting arrangement, the obligation to report the earned income then falls on the individual. Individuals acting as independent contractors should therefore be aware of their obligations and ensure that they declare their income by the filing deadlines.

There is a possibility that independent contractors may pay substantially less tax overall, compared to being fully employed. For example, for individuals working from home, they are able to claim business expenses, such as the cost of rent, utilities, tools and marketing, all of which are deemed necessary so as to perform the services rendered. Independent contractors should therefore keep a detailed log of the projects that they undertake and the business expenses incurred, along with supporting documentation in order to avoid misreporting and penalties.

Similarly, individuals who corporatise themselves and draw a partial salary from their company revenue must ensure that the business income is reported for corporate tax correctly, and that their salary drawn is in line with the market rate. In this instance, the revenue earned by the company is reported for corporate tax, less any relevant deductions available, and the drawn salary of the individual is then reported for personal income tax.

This arrangement can be controversial given the difference in tax rates for corporations and individuals, as well as the various exemption schemes and rebates available. A corporation that is earning the same income as an independent contractor may well pay considerably less tax.

The Income Revenue Authority of Singapore (IRAS) has in recent years subjected this arrangement to further scrutiny to ensure that it is not a form of tax avoidance. That said, the US recently introduced legislation to allow sole proprietors to deduct 20 per cent of their revenue from their taxable income; this has been seen as an incentive for workers to undertake gig roles rather than traditional employment.

This flat deduction could be seen as a recognition of the additional burden on individuals operating outside the usual employment arrangement, offering better cash flow to compensate them for uncertain income streams and perhaps also to reinvest in their own private pension and healthcare plans.

Yet, this new US legislation has been criticised for paving a way for companies to entice individuals to transit from being an employee to an independent contractor for the tax benefits, while not considering the greater loss of a regular wage packet, employee benefits, minimum wage and overtime laws.

To ensure that there is clear guidance for individuals and to reduce any tax leakage that may occur due to uncertainty or misunderstanding, it is worthwhile to introduce or relook at legislations specific to workers in the gig economy, while ensuring worker rights are protected.

LEGAL COMPLEXITIES

Whilst employers may be attracted to employing freelancers, given lower costs since traditional employee benefits and employer Central Provident Fund (CPF) contributions are not required, there are lessons to be learnt from overseas cases regarding misclassifying individuals as independent contractors.

In a recent ruling by the New York state labour department, which involved a ride-hailing company and three of its former drivers, the court observed that the company "exercised sufficient supervision, direction and control over key aspects of the services rendered by claimants such that an employer-employee relationship was created". This ruling then entitles the former drivers to unemployment benefits and a guaranteed minimum wage during their employment.

In contrast to this, a food-delivery company in the UK, which was under scrutiny for the treatment of its riders, had the courts ruling that its riders were considered self-employed under the law, primarily due to a clause in the contract that allowed the rider to substitute himself with an individual of his choice.

As governments seek to protect workers' rights in this relatively new sphere, companies must ensure they keep abreast of potential changes to legislation to remain compliant and mitigate the legal risks.

REDUCED PERSONAL SAFETY NETS

Typically, employers are required either by law or by market practice to provide certain benefits such as mandatory social security contributions, private pension plans, insurance and healthcare. However, this is generally not required for independent contractors.

In Singapore, an independent contractor does not only miss out on a 20 per cent contribution to three CPF accounts mandated under the law for employees, but also a 17 per cent employer contribution. Being unsure of where the next assignment will come from or how much income it may bring may lead independent contractors to focus more on maximising cash flow in the short term, and compromise longer-term savings.

It is therefore timely to consider whether adjustments can be made to ensure that independent contractors are not disadvantaged in the future. For example, can the mandatory contributions in excess of just the Medisave be introduced? Can the cap of S$5,000 on the tax relief for life insurance premiums be removed and extended to retirement plans? These are possible ways to encourage independent contractors to plan for their healthcare and retirement savings in the long run.

Clearly, as the gig economy gains momentum, employment regulations and education of both employer and employee on tax compliance requirements, worker's rights and personal finance planning must move in tandem.

To that end, companies and governments must work hand in hand to ensure that legislations are current, practicable and reflective of the new world order.

This was first published in The Business Times on 15 February 2018.  This article is co-written by Kerrie Chang and Panneer Selvam, who are People Advisory Services Partners at Ernst & Young Solutions LLP.