Where is the line drawn between freelancer and employee?

9 May 2024 4 min read

By Xu Zhou

At a glance

  • Gig economy growth has led to new employment forms, potentially creating de facto employment relationships.
  • Courts use ‘triple characteristics’ (subordination, economic dependence, organisational integration) to determine de facto employment.
  • If deemed a de facto employment relationship, companies may face liabilities, including double salaries and employee benefits.
  • Case studies show varying rulings on de facto employment for delivery drivers, live streamers, and ride-hailing drivers, based on the ‘triple characteristics’.
  • Companies can mitigate risk by not subjecting individuals to company rules, not paying directly, and not assigning tasks directly.

With the phenomenal growth of the gig economy, new forms of flexible employment have emerged such as ride-hailing drivers, delivery drivers and live streamers. These types of employment can sometimes constitute a de facto employment relationship.

The courts have published various cases illustrating criteria to determine the establishment of de facto employment relationship between the companies and the individuals. The relationship may also be potentially established as de facto employment relationship where there are shared employees working for affiliated companies, and where a company engages individuals through an outsourcer.

If the relationship between the individuals and the companies are deemed a de facto employment relationship, the companies may have to pay double salaries for not signing written employment contracts and other benefits the individuals should be entitled to as an employee of the company.

Companies have to be cautious in managing their workforce to avoid bearing employer liability resulting from de facto employment.

Related model cases

Delivery drivers 

In China, millions of delivery drivers work for online platforms to deliver takeout food, groceries, medicines and other goods.

Anhui High People’s Court ruled that an employment relationship was established between the driver and the platform even without a formal employment contract. This was because delivery drivers were bound by the platform’s rules and policies. They followed the platform’s instruction to provide service to the platform regularly. They had no discretion on the tasks they performed. And they received a fixed commission from the platform every month, which demonstrates the ‘triple characteristics’ of the traditional employment relationship.

The triple characteristics are:

  • subordination (ie the employee adheres to the company’s administration and the company’s policies and rules); 
  • economic dependence (ie the employee is paid by the company); and
  • organisational integration (ie the product produced by the employee forms an integral part of the main business of the company). 

But a case in Fujian Quanzhou showed that if the platform only had the authority to distribute orders among different delivery drivers, while the drivers are managed and paid by a human resources company, there was no employment relationship between the online platform company and the delivery driver because the triple characteristics do not exist.

Live streamers

Live streamers have been able to make significant sales volumes in recent years, because of the rapid development of live streaming or broadcasting services and its commercialisation in China.

In one case in Suzhou City, the live streamers had full control over their live streaming accounts, including when and where to go live, so they had more autonomy and independence in their live streaming services. The live streamers’ main income came from the audience rather than the media company. So, the court ruled that there was no employment relationship between the live streamers and the media company.

Meanwhile, a media company in Rizhao City conducted daily management and arrangements for the live streamer’s live broadcast tasks by managing the live stream account, determining the time and place to go live, and distributing tasks to the live streamer. The company also paid the live streamers commissions based on their sales volume and fixed allowance for the day of attendance. The court ruled that the relationship between the live streamer and the media company was an employment relationship, as it indicates the triple characteristics of the traditional employment relationship.

Ride-hailing drivers

In the first case of the third batch of 2023 employment-related typical cases published by the Ministry of Human Resources and Social Security and the Supreme People’s Court, the de facto employment was ruled to be established considering the triple characteristics of the traditional employment relationship. This was because a van driver working for an online platform company had to register their attendance every day on the online platform, pick up orders distributed by the online platform, provide services for over eight hours a day, and abide by the online platform’s policies.

To sum up, establishing an employment relationship between a company and an individual is not simply determined by concluding an employment contract or the form of the work.

The courts will make a comprehensive judgment to determine whether de facto employment is established based on the individuals’ actual performance, considering whether the characteristics of the traditional employment relationship exist, ie the triple characteristics.

To mitigate the risk of establishing a de facto employment relationship, companies should try to cut off connections with the individuals providing services by not subjecting the individuals to the company’s internal rules and polices, not paying remuneration directly, and not designating tasks to the individuals directly.

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