How to Convert Contractors to Employees in Taiwan: A Step-by-Step Guide

Introduction

Taiwan’s labor laws can be challenging for businesses looking to convert contractors to employees. This guide covers both the entity and non-entity options for making this transition.

Contractor vs. Employee in Taiwan: Legal Overview

The legal classification of a worker in Taiwan has significant implications for both the worker and the employer. Misclassification of contractors can lead to penalties, backdated taxes, and other legal consequences. To convert contractors to employees effectively, it’s essential to understand the distinctions and legal responsibilities tied to each classification.

Contractor:

• Independence: Contractors in Taiwan generally operate with greater autonomy and are not subject to the day-to-day control of the company. They often work on a project-by-project basis and have the freedom to decide when and how to complete their tasks.
• Tax Obligations: Contractors are responsible for their own taxes, including business income tax, and are not entitled to the same social security benefits as employees.
• Benefits: Contractors in Taiwan do not receive employee benefits such as health insurance, paid leave, or pension contributions, which can lead to a significant disparity in worker entitlements.

Employee:

• Employer Control: Employees are fully integrated into the business, subject to the company’s control and policies regarding working hours, job duties, and performance expectations.
• Taxation: Employers are required to withhold and pay taxes on behalf of employees, including income tax and social insurance contributions.
• Benefits & Rights: Employees are entitled to mandatory benefits in Taiwan, such as health insurance, retirement pension, paid leave, and protections under Taiwan’s Labor Standards Act (LSA), which provides rules on working hours, overtime, and termination rights.

Employers who misclassify employees as contractors risk legal penalties, including fines, back wages, and retroactive employee benefits. Therefore, converting contractors to employees requires a careful evaluation of the working relationship.

Steps for Converting Contractors to Employees in Taiwan

Once you’ve determined that a worker should be reclassified as an employee, it’s time to take action. Here’s a step-by-step guide on how to convert contractors to employees in Taiwan, ensuring compliance with local labor laws.

1. Evaluate the Existing Contract and Define Employment Terms

Start by reviewing the current contract between the business and the contractor. Contractor agreements typically focus on project-based work with limited oversight, but employee contracts should include specific details such as:

• Job title and description
• Regular working hours
• Salary and payment structure
• Benefits such as health insurance, paid time off, and pension contributions
• Termination conditions and notice periods, in line with Taiwan’s LSA

Once these details are defined, draft a new employment contract that accurately reflects the worker’s status as an employee under Taiwanese law.

2. Register the Employee with the Relevant Authorities

After converting a contractor to an employee, the next step is registering the employee with Taiwan’s social insurance systems. Employers in Taiwan must contribute to the following social security programs:

• National Health Insurance (NHI): Both employers and employees contribute to Taiwan’s mandatory health insurance system.
• Labor Insurance: Provides coverage for injury, illness, and maternity benefits. Employers and employees are required to make monthly contributions.
• Labor Pension: Employers must contribute to the labor pension system on behalf of employees. Taiwan’s labor pension scheme ensures that employees have financial security after retirement.

Failure to register an employee or contribute to these systems can lead to penalties and legal complications.

3. Adjust Tax Reporting and Payroll Systems

Employees are subject to a different tax structure than contractors, so it’s important to adjust your payroll system to ensure correct tax withholding and reporting. The employer is responsible for:

• Withholding income tax from the employee’s monthly salary
• Ensuring all social insurance contributions (NHI, labor insurance, pension) are calculated and paid
• Filing the required tax and social insurance reports with Taiwan’s government agencies

4. Provide Mandatory Benefits

Employees in Taiwan are entitled to a range of benefits, many of which are mandated by law. These include:

• Paid Leave: Full-time employees are entitled to annual paid leave, sick leave, and maternity/paternity leave based on their length of service.
• Overtime Pay: Employees who work more than the standard 40 hours per week must receive overtime pay as outlined in the LSA.
• Severance Pay: Employees are entitled to severance pay if their employment is terminated, which must be calculated according to their length of service.

These benefits need to be reflected in the employee’s contract and payroll.

5. Ensure Ongoing Compliance with Labor Laws

Converting a contractor to an employee doesn’t end once the contract is signed. Businesses must continuously ensure that they remain compliant with Taiwan’s labor regulations, which are frequently updated. Key areas to monitor include working hours, overtime pay, and adherence to Taiwan’s health and safety standards.