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What is Disguised Employment

February 20, 2021
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Disguised employment, sometimes called hidden employment, refers to a  current problem present in many countries. Nowadays, we are witnessing a growth in the number of freelance workers, which is followed by an exponential interest in self-employment. Not all countries have adequate business registration procedures for freelancers or workers hired by foreign employers, leaving people to find alternatives to run a risk-free business. These two trends are most probably one of the root causes of the disguised employment phenomenon.

What is Disguised Employment?

In the vast majority of legal systems in the world, there is a "binary division" between salaried employment and self-employment, with salaried employment being the benchmark for labor regulation.

More and more companies are hiring for services of self-employed people in a work environment similar, in reality, to salaried employment. Apart from convenience, the main reason for this is the exemption from paying social charges and obligations related to the employment contract, such as minimum wage, holidays, or overtime pay. As you may have understood, the intention behind this is clearly to remove or attenuate the protection afforded to workers under the law.

Disguised employment is often linked to misclassification, resulting in workers being deliberately classified as self-employed, even if a subordination relationship exists.

How to recognize disguised employment?

To understand where or not there is a subordinate relationship between the self-employed and the client, it is necessary to assess the relationship between the two parties involved.

According to courts and case-law, there are several ways that allow saying that the self-employed should instead be considered as an employee. For instance, if:

  • The self-employed is subject to work schedules determined by the employer
  • The self-employed works from 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 are some of the examples showing how the self-employed lose, in reality, the autonomy associated with self-employment status. These elements then make it necessary to consider that a subordination's relationship exists; therefore, this can be regarded as disguised employment.

The counterpart of this subordination for the employee is that they can benefit from protection and rights, which they don't have with the self-employed status.

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 facing this problem.

Disguised employment in The Netherlands

In the Netherlands, for example, 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 possessed a VAR declaration but were actually regular employees. To prevent this from happening, the Dutch government decided to adopt the 2016 Assessment of Employment Relationships (Deregulation) Act (Wet deregulering beoordeling arbeidsrelaties, DBA) with a new system that puts 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 a nutshell, according to French labor law, performance, remuneration, and subordination link 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 differentiation's key 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. The service provider thus acquires employee status. 

Disguised employment in the United Kingdom

In 2019, the United Kingdom carried legislation known as IR35 or off-payroll working. 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. It was supposed to take effect in April 2020 but was postponed to 2021, due to the coronavirus outbreak. To determine if IR35 applies, you can do an online assessment by filling in this survey. To learn more what exactly IR35 means and which companies are affected, take a look at this article we wrote about.

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 are working for one or more clients, especially in Serbia, you and the company are at risk of disguised employment. In late 2019, the Serbian government introduces the Independence test, an assessment that will determine 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 paying for the taxes and social contributions retroactively. 


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How to avoid Disguised Employment?

Each country has its own assessment procedures in cases of potential disguised employment. As mentioned above, the contract's qualification drawn up by the contracting parties doesn't always bind the judge to dismiss the case. However, drawing up an agreement that will define precisely the relationship is vital should you face an audit. In addition, drawing up 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, the customer
  • The nature of the service defined in a clear and exhaustive manner
  • The exact obligations of the parties
  • The remuneration for the work provided
  • The means made available by the parties
  • The duration of the mission or service with clauses on renewal, notice, termination, dispute, etc.
  • 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 you find that your working conditions are starting to look like employment, discuss them with your client to find common ground and mitigate risks.