Empresas a control remoto: estrategias y tendencias de expansión 2021

Disguised employment is a growing challenge due to the expansion in international hiring. Inadequate legal setups can pose a risk to both companies and workers.

Anja Simic
Written by Anja Simic
August 19, 2021

An exponentially-growing interest in self-employment is leading to a growth in freelance workers. This is leading to a new phenomenon called “disguised employment”, especially in countries that lack adequate business registration or worker protection regulations.

How to recognize disguised employment?

Disguised employment is recognized by reviewing the working relation between the employer and the worker. Working duties, conditions and expectations vary from employer to employer, so this review is usually on a case-by-case basis. A main goal of the review is to see if there is subordination to the employer—does the employer control the working relationship?

According to courts and case-law, there are several factors where a self-employed contractor may need to be considered as an employee. Some factors include:

  • The worker is subject to work schedules determined by the employer
  • The worker must be in an office determined by the employer and use the company's equipment
  • Instructions and deadlines have been imposed by the client
  • Leaves or vacation are directed by the client

Those examples show how the worker has lost the autonomy that is expected to be available to a contractor. These elements then make it necessary to consider if there is an employer-employee relationship and thus whether this can be regarded as disguised employment.

The risks connected to disguised employment

The risks and penalties for disguised employment may vary from country to country. Every legal system legislates its own rules. Let's see how some European countries are tackling this problem.

Disguised employment in the Netherlands

In the Netherlands, before 2016, the existing legal system could easily be abused. At the time, freelancers or self-employed professionals could apply for a Declaration of Independent Contractor Status (Verklaring Arbeidsrelatie, VAR), which allowed the freelancer's clients to ensure they were dealing with independent contractors. The problem was that independent contractors could possess a VAR declaration even though they were actually regular employees. To prevent this from happening, the Dutch government adopted the 2016 Assessment of Employment Relationships (Deregulation) Act (Wet deregulering beoordeling arbeidsrelaties, DBA) with a new system that put an end to the disguised employment issue.

Disguised employment in France

In France, an employment contract is signed as soon as a person (employee) works in exchange for remuneration under another person (employer). The employment contract must generally be written and specify the compensation, qualifications, working hours, and, more generally, the employee's duties. It also entails several obligations for both the employee and the employer. In summary, French labor law says that performance, remuneration, and subordination links between the employee and the employer are required for the employment contract. The employment contract is different from the service contract. In service contracts, there is no mention of the subordination, but only performance and remuneration. The differentiating factor is therefore the subordinate link. The Court of Cassation's case-law (25 June 2013) specifies that the subordination link corresponds to "the execution of work under the authority of an employer who has the power to give orders and directives, to control their execution and to sanction the shortcomings of his subordinate".

In May 2015, the Court of Cassation added another element: "the existence of the employment contract does not depend on the will of the parties, nor on the qualification given to the service provided (salaries, fees, indemnities...), but on the de facto conditions in which the worker's activity is carried out".

Therefore, if the contract is not suitably classified, and it is discovered that it actually disguises full-time employment, there are several consequences that are triggered by it, the main being the necessity of re-qualification. The court can re-qualify the assignment contract as a permanent employment contract, providing the contractor with employee status.

Disguised employment in the UK

In 2019, the United Kingdom passed legislation known as IR35, which applies new regulations to working "off-payroll". IR35 is the abbreviation for the 'intermediaries legislation', a set of tax rules that apply to you if you work for a client through an intermediary. IR35 treats contractors as "deemed employees" if they would be considered an employee had they not been contracted through an intermediary. Deemed employees would be expected to pay income tax and National Insurance Contributions. IR35 rules took effect in April 2021. To determine if IR35 applies, you can do an online assessment by completing an online assessment tool. To learn more about what IR35 means and which companies are affected, refer to this article.

Disguised employment in Serbia

Serbia is one of the countries that doesn't have a designated business structure for freelancers or people working for foreign clients. That leaves people with the option to register as entrepreneurs and operate that way, invoicing (foreign) clients for their services. At times, when you work for one or more clients, especially in Serbia, you and the company are at risk of disguised employment. In late 2019, the Serbian government introduced the Independence test, an assessment that determines whether you are truly independent or not. If the case proves you are not an independent, you need to reclassify. The company that hired you can be at risk of paying fines and retroactive taxes and social contributions. 

Disguised employment in Germany

Germany does not have clear statutory regulations defining contractor status. The German Federal Labor Court (Bundesarbeitsgericht) assesses the legal status of a contractor on a case-by-case basis, usually relying on the scope of instructions that was agreed on. Overall, the more an employer can determine the contractor’s performance, the more likely the contractor would be classified as an employee.

How to avoid disguised employment?

Each country has its own assessment procedures in cases of potential disguised employment. As mentioned above, having a contract that explicitly defines the relationship as a contractor is not enough to guarantee that a ruling judge would agree with the classification. However, drawing up an agreement that can precisely outline the relationship is vital in case of an audit. In addition, a proper contract that is legally binding and localized for both countries involved will protect you from the risk of re-qualification in case of a dispute.

Here are some of the elements that constitute a good contract:

  • The identification of the parties (the service provider and the client)
  • The nature of the service to be provided, defined in a clear and exhaustive manner
  • The exact obligations of the parties
  • The compensation for the work provided
  • The means made available by the parties
  • The duration of the mission or service with clauses on renewal, notice, termination, and dispute
  • The date and signatures of the parties

Drafting an iron-clad contract may seem like a complex task, but it is crucial to invest time and effort into making one. Define your conditions by mutual agreement before performing the assignment. If as a contractor, you find that your working conditions are starting to look like employment, discuss with your client to find common ground and mitigate risks.

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