Every business owner knows that the cost of doing business in Singapore is expensive. Besides rent for real estate space, the other significant cost area that businesses spend on is labour. As a developed nation with a high cost of living, it should come as no surprise that wages in Singapore are likely to be the biggest cost component for many companies.
When hiring Singaporeans or PRs, companies don’t only need to pay the gross salary for their employee, but also the mandatory employer’s CPF contribution. For workers age 55 and below, this is an additional 17% of wages, capped at the first $6,000 of monthly gross salary. Older workers receive a lower employer’s CPF contribution.
For example, if a company pays a local worker $6,000 a month, the cost to the company is actually $7,020 a month. This is in spite of the worker thinking that his/her salary is only $6,000, of which their take home salary would be only $4,800 after the employee’s CPF contribution.
Think about it. While a worker might only be receiving $4,800 a month (after CPF deduction), the cost to the employer is actually $7,020. This accounts for a difference of $2,220 each month.
Are Freelancers Cheaper (Only) Because There Is No CPF Contribution?
In the work-from-home/work-from-anywhere era, it’s increasingly easier and common for companies to source some work to a freelancer, instead of an employee. Assuming that both the employee and freelancer are working remotely anyway, and are available for meetings whenever it’s needed, one can argue that there is no difference at all from the company’s point of view as long as the work gets done.
However, companies have to pay CPF contributions and other benefits for their employees (whether part-time or full-time) thus increasing their cost of hiring. On the other hand, freelancers typically do not receive any CPF contributions. Yet, the same work ends up being done.
To be clear, there is no law that says freelancers can’t receive CPF contributions. The Employment Act only states that it’s a requirement for CPF contributions to be made by employers to their employees (amongst other requirements). But what then differentiates a full-time/part-time employee, from someone who is a regular freelancer for the company that is being paid on an assignment basis with no CPF contributions?
More importantly, are companies getting away with paying lesser to a freelancer who is willing to do the same work because the freelancer does not need to make any employee’s CPF contribution, thus giving them a higher take home salary?
A Win For Employers. A Win For Freelancers?
In the short-term, many self-employed persons (SEPs) may choose to be freelancers to complete work for their employers clients under a contract for service agreement. A contract for service means that the person isn’t officially an employee, but a freelancer who agrees to complete a project or assignment for a fee.
Since the Employment Act does not protect SEPs, they do not receive statutory benefits such as CPF contributions, annual leaves and medical entitlements, thus making them cheaper to employ work with.
Read Also: Contract of Service VS Contract for Service: What’s The Difference Between These Two “Employment” Relationships?
Employee Vs Freelancer. What Is The Difference?
The Ministry of Manpower (MOM) does provide a set of questions that should be considered when determining if someone is or should be under a Contract of Service or Contract for Service.
For example, if a business is responsible for setting working hours, determining salary and when it is paid, providing workplace and equipment, then it is likely to have an employer-employee relationship with the individual under a Contract of Service.
Think of it this way. If the employment/work arrangement requires a person to report to the office three times a week, 9am to 6pm, then it’s likely that the person is actually an employee, rather than a freelancer. This is because they have little control over their time on those days they are working.
However, this can be a grey area for companies that practise work-from-home/work-from anywhere.
If an employee doesn’t need to report at any particular time as long as they complete their work, how different are they from what a freelancer does? What is to stop companies from simply having a Contract for Service, and to pay them on a freelance basis?
The same logic also applies to workers. If all that matters is that the work gets done and that we get paid according to the work we complete, and can possibly do more elsewhere with another company that engage us on a freelance basis, then could it be reasonable to ask the companies we work with us to have a Contract for Service, and to pay us an amount equivalent to what they would be paying us as an employee, only that its paid fully in cash instead of a part of the money going into CPF contributions?
Should Freelancers (And Their Clients) Start Contributing To CPF
One possible solution is to get freelancers and their clients to contribute to CPF, similar to what would already be done for full-time/part-time employees.
As we wrote in this article, the Contribute As You Earn (CAYE) scheme is one way to ensure some pay parity (if that is what we want) between freelancers and full-time employees. However, it’s still in its infancy stage and only applies to MediSave contributions currently. That isn’t enough.
Today, the line between being a freelancer and a remote worker is becoming increasingly blurred for certain roles. Writers, graphics designers, accountants, digital marketers and sales representatives can all work with a company either as an employee under a Contract of Service, or a freelancer under a Contract for Service with the output received by the company is similar.
Yet, the employment benefits they receive and the cost to the company can be very different.
Besides CPF contributions, we shouldn’t ignore other cost areas that companies do not need to provide freelancers. These would include benefits such as medical claims, hospitalisation leaves, paid annual leaves and maternity/paternity leaves. All of these are cost areas that are covered under the Employment Act for employees but do not need to be paid for freelancers.
The number of self-employed persons (SEPs) is not small either today. In the CPF Annual Report 2021, it’s reported that more than 298,000 SEPs contributed to their MediSave for a total of $589.1 million. In total, however, SEPs contributed only $779.6 million, or just about $190 million outside of Medisave Contributions. This works out to be an average contribution of just $637 per SEP (excluding Medisave contributions).
If these SEPs and/or their companies are expected to contribute to CPF beyond just Medisave, the contribution amount will surely be at least a few billion dollars, and that would increase the cost of business operations for companies that are consistently hiring freelancers.
Read Also: Is It Legal For An Employee To Have Two Jobs (With Two CPF Contributions)?
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