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EMPLOYEES vs INDEPENDENT CONTRACTORS INDEPENDENT vs EMPLOYEES Understanding the distinction an into contractor of a and the re-characterisation employees between contractors employee and an alliance of employers’ counsel worldwide employers’ counsel worldwide an alliance of

EMPLOYEES vs INDEPENDENT CONTRACTORS an alliance of employers’ counsel worldwide an alliance of employers’ counsel worldwide L&E GLOBAL Louise 221 Avenue B-1050, Brussels Belgium T +32 2 64 32 633 www.leglobal.org an alliance of employers’ counsel worldwide

EMPLOYEES vs INDEPENDENT CONTRACTORS

Understanding the distncton between contractors and employees and the re-characterisaton of a contractor into an employee INTRODUCTION Since we last touched upon the issue of employees vs independent contractors and the consequences of the re-characterisation of a contractor into an employee back in 2014, there has been a universal effort to eliminate sham contracts, which seek to hide the true nature of the relationship as an employer and employee agreement. Sham contracts are generally utilised so that the employer may avert the costly burdens of guaranteeing employee benefits, such as paid leave (holiday, maternity, paternity, etc.), having to pay the employer’s social security contributions and income taxes on wages, and refraining from hiring unskilled, and at times undocumented migrants, who lack the bargaining power to safeguard their rights as workers.

Despite the risks of re-characterisation, in recent years, the use of independent contractors has increased significantly. So too has the use of fixed-term contracts, temporary commercial agency agreements and labour outsourcing services. This trend is not without its faults. The rise of the on-demand sharing economy (online business transactions) in areas such as carpooling, apartment/home lending, peer-to-peer lending, reselling, co-working and talent- sharing and the enterprises that drive these new workforces, including Uber, Didi, Bpost, Airbnb, Snapgoods and Zaarly, … has led to an increase in litigation, with the qualification of the contracts and work agreements as the central issue.

Surprisingly, there are several similarities between nations with regards to the definition of an “employee” and the classification of an “independent contractor”. Generally, an employment contract is defined as an agreement by which an individual works for another person (natural or legal), under the latter’s subordination, for which s/he receives remuneration. On the other hand, it is likely that an independent contract applies if an individual is responsible for organising his/her own workload and occupational activities, without being subject to the ‘authority’ of another.

Presented with an employee vs independent contractor situation, the most important distinction revolves around the concept of subordination, wherein the relationship is characterised by performance of duties under the authority of an employer who has the power to give orders, monitor execution of assigned duties and punish his subordinate’s breaches of duties. To determine whether subordination exists, it matters less how the parties define their relationship in their agreement, but rather, the most important factor is the reality of the situation, i.e. whether or not subordination actually exists based on the actions of the parties.

Concluding that the circumstances warrant a re-characterisation (to change the status of a contractor into an employee or an employee into an independent contractor), certain legal consequences will apply, both for the self-employed person and the other party, with regards to tax (payments and arrears), social security (payments and arrears), and labour relations (civil or even criminal fines).

So what steps can an employer take to effectively establish an independent contractor relationship?

• a contract for service should be devoid of any kind of control or supervision from the principal employer or employer, as the case may be. Therefore, such employers should avoid involvement in day-to-day management of the work undertaken by the independent contractors and contract labourers. • payment should be based on specified deliverables/results being achieved. • limit the assignment. The agreement should not make inferences to, or guarantee, the length of assignment or future employment. • the contractor should be free to contract with and do work for other companies. • the nature of the services, the apportionment of risk, remedies in the event of breach, and liability for taxes, should be clearly and expressly provided for.

A well-drafted contract will not be sufficient to protect a company from an adverse finding of sham contracting. The substance of the relationship, as evidenced by its day-to-day nature, must also be maintained. The principal should therefore ensure that its managers manage the relationship with the independent contractor in a manner that is consistent with its independent nature, rather than in the same manner and with the same expectations that the Principal may have of its own employees.

Furthermore, it is important to prepare for the possibility that the nature or characterisation of a relationship may be questioned. To that end, it may be useful to keep a record of any information that supports a verbal contract or the interpretation of a written contract, this may include; email communications, notes from meetings, quotes from conversations, diary entries, lists of specifications and any form of reporting or tasks lists.

For employers with operations in multiple jurisdictions, successfully entering into a working relationship, whether with an employee or an independent contractor, is a very real challenge and one that impacts every sector of industry, in every region of the world. To that end, L&E Global is pleased to present our 2017 Global Handbook, which serves as an introduction to the complex issue of employees vs independent contractors, with analyses from 32 key jurisdictions, across 6 continents.

DENMARK

I. Overview 161 II. Legal Framework Differentiating Employees From Independent Contractors 161 III. Re-Characterisation of Independent Contractors as Employees 164 IV. How to structure an Independent Contractor Relationship 166

V. Trends and Specific Cases 167 VI. Conclusion 168 Employees vs Independent Contractors - denmark

I. Overview a. Introducton Denmark has never adopted a general employment “consttuton” so, unfortunately, there is no general rule, which can be applied to determine whether a person is an employee or an independent contractor. Instead, the Danish courts have handed down judgements giving specifc rules on, for example, holiday enttlement, the issuing of employment certfcates, withholding tax and other mandatory rules. In essence, there are a number of factors, which determine whether a person is an employee or an independent contractor, but certain factors are more signifcant than others.

II. Legal Framework Differentiating Employees from Independent Contractors a. Factors that Determine Who is an Employee and Who is an Independent Contractor A worker who has an employment contract is considered as an employee. There are three essental elements creatng an employment contract: Personal work, remuneraton and "relatonship of authority". The third element is the most signifcant. An independent contractor is a person (or a company) performing professional actvites in respect of which he/she is not bound by an employment contract; this means that he/she does not work under the authority of an employer. Consequently, it is the lack of subordinaton, which distnguishes an independent contractor from an employee so that if one of these partes exercises an employer’s authority over the other, the relatonship will be considered an employment contract. If a Danish court is required to decide whether a person is an employee or an independent contractor, the court will consider: • if the person carrying out work is in a subordinate positon and takes instructons and works under supervision/control from a manager; • which party is responsible for the result of the work performed; • if the person carries out work for only one contractor or if he/she has other customers; • does the person fulfll his/her work obligatons regularly and using the same methods of work as ordinary employees employed by the contractor, including if the person has fxed working hours, makes use of working tools owned or facilitated by the contractor, makes use of the contractor’s canteen facilites, partcipates in social actvites available to the contractor’s employees, etc.?; • if the person must personally perform the work or if he/she can designate the work to another person; • if the person runs a personal fnancial risk when carrying out work for the contractor; • if the person has established his/her own independent business registered with the Danish Business Authority. b. General Diferences in Tax Treatment

Income tax For an employer doing business with an independent contractor, payment of the agreed fees will be made directly to the independent contractor without deductng any tax and with the additon of VAT (25 %) on the contractor's fees. Thus, the independent contractor is personally responsible for the payment of taxes and VAT to the Danish Government. Within the framework of an employment contract, the employer is obliged

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to withhold tax at source. neither can trade unions or governmental bodies. However, certain procedures may be provided for according to collectve agreements. If a dismissal is not made on fair Furthermore, the independent contractor must fle an annual tax account (turnover grounds, the employee may be enttled to compensaton for unfair dismissal. deducted with all business related costs, declaring appreciatons on business assets and interest paid) to the Danish tax authorites, while the employee will only fle a summary A number of employees enjoy special protecton against dismissal (e.g. pregnancy, tax return form as the employer will report almost all important informaton related to paternity or parental leave, positon as shop steward or safety steward, complaints the remuneraton earned by the employee to the Danish tax authorites. against unequal treatment, etc.). The rules providing this special protecton are derived from legislaton or collectve agreements. Depending on the specifc case, the protecton The level of income tax for independent contractors and employees is similar. The income requires certain procedures to be followed prior to the issuing of the notce of dismissal. tax level is progressive – the higher the income, the higher the tax level, ending in a maximum tax level of approximately 60% per cent, but the independent contractor may e. Local Limitatons on Use of Independent Contractors beneft from certain tax advantages, such as the ability to deduct business related costs. There are no limitatons on the use of independent contractors, but they must register Pension and Supplementary Pension Contributons as "business owners" with the Danish Business Authority and with the tax authorites. Under Danish law, it is not mandatory for employers to give employees access to a pension scheme. However, quite a number of individual employment agreements and, in f. Other Ramifcatons of Classifcaton general, all collectve bargaining agreements will involve the payment of supplementary pension contributons, both by the employer and by the individual employee to a pension Where an employer's business is closed down, employees can beneft from the labour market pension scheme. The level of labour market pension contributon is solely interventon of the “Employees’ Guarantee Fund” (Lønmodtagernes Garantfund, ”LG”). a contractual mater and not set by legislaton. Apart from pension schemes involving The LG is mainly fnanced by the Danish Government, by employers’ contributons and civil servants, a Danish labour market pension scheme will be a “defned-contributon” reimbursements by receivers and liquidators of the amounts that were paid in advance pension scheme. The employer of an independent contractor is obliged to, and cannot to the employees. In practce, the LG pays the amounts payable to the employees and make pension contributons to the independent contractor’s privately established recovers them aferwards from the receivers and liquidators. The LG supports employees pension scheme. in case of bankruptcy, insolvent liquidaton and business closure. An employer is responsible for the declaraton and payment of both the employee’s and Following certain legal criteria, the LG makes diferent kinds of payments to the the employer’s supplementary pension contributons in accordance with the Danish employees: Closing-down indemnites, contractual indemnites, pension contributons, Act on Labour Market Supplementary Pension (Act no. 1110 of 10 October 2014), bonuses, holiday allowance, and severance payments based on legislaton and on certain which provides that employers and employees must contribute to a Governmental collectve agreements. supplementary pension scheme, for employees who are employed in Denmark. The employer’s contributon is a fxed monthly payment of approximately EUR 40 covering g. Leased or Seconded Employees a fulltme employee and the employee’s contributon approximately EUR 20. The supplementary pension is paid out in additon to the Governmental old-age pension A “lease” of employees can only be arranged through temporary work agencies, namely scheme. The employer of the independent contractor is not bound to make contributons an agency for the purpose of hiring out their employees to other companies in need of to the Labour Market Supplementary Pension on behalf of the independent contractor. extra workers. However, these companies will not become employers to such temporarily employed employees, but will instruct them in their day-to-day work during the ‘lease’ c. Diferences in Beneft Enttlement period. Independent contractors are not enttled to specifc benefts; they only receive the fees “Leased employees” are protected by the Danish Act on Temporary Work (Act no. 595 of agreed between the partes with the additon of VAT (25%). 12 June 2013), which provides that the hired employees are enttled to the same level of salary, benefts and working conditons as if they were employed directly by the company Apart from the agreed salary and benefts, employees are enttled by law to the payment hiring them. of either holiday pay (12.5% of the salary and all taxable benefts) or salary during fve weeks' holiday per holiday year, and salary or state sickness benefts during periods of A secondment of employees will typically only take place through an agreement entered sickness. between the seconded employee, the employer and the company to which the employee will be seconded, typically for a limited period of tme. d. Diferences in Protecton from Terminaton h. Regulatons of the Diferent Categories of Contracts The way in which contractual relatonships are terminated is the same for contracts covering the relatonship between contractors as it is for terminaton of other forms of In Denmark, employment relatonships are regulated through legislaton, collectve independent contracts, which means the partes are free to agree whatever terms they bargaining agreements or individual agreements. However, all employment relatonships wish. (provided they exceed one month’s duraton and the employee works on average more than eight hours per week) must adhere to the mandatory Danish Act on Employment For employees, there are a set of rules restrictng the terminaton of the employment of Contracts (Act no. 240 of 17 March 2010). This Act regulates terms and conditons of employees and such rules are based on either mandatory legislaton or on individual or employment and sets out what clauses must be included in an employment contract, collectve agreements. As a general rule, an employee cannot object to being dismissed, such as salary and benefts, holiday enttlement, notce period, place of work, whether

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the employment is covered by a collectve bargaining agreement, etc. b. The Legal Consequences of a Re-Characterisaton Finally specifc rules apply to partcular groups of employees, such as the Danish Act on In the event of re-characterizaton, there are several legal consequences regarding Seamen (Act no. 73 of 17 January 2014), the Danish Act on Civil Servants’ Rights (Act no. employment, tax and social security relatons, which will afect both the independent 488 of 6 May 2010) and the Danish Act on Farming and Household Assistants (Act no. contractor and the other party to the contract. 712 of 20 August 2002). Employment law In comparison, agreements entered into with independent contractors are not regulated If a relatonship is re-characterised as an employer-employee relatonship, the and there are no Acts which regulate the engagement of independent contractors. independent contractor will be deemed to be an employee and will be enttled to claim Instead, the general civil, commercial and corporate laws will apply to an independent a number of benefts, such as the right to be dismissed with notce (either through contractor agreement. legislaton, a collectve bargaining agreement or a customary notce), dismissal with salary, pension contributons and other benefts under the relevant collectve bargaining agreement, the payment of holiday pay, etc. The employee could also claim a legal III. Re-Characterisation of Independent Contractors as Employees severance payment in the case of unfair dismissal. a. Laws and Guiding Principles Non-compliance with the Danish Holiday Act will result in both the obligaton to pay for holiday periods, which should have been supported by the employer and an obligaton to A re-characterizaton of an independent contractor may occur if the person performing pay salary or holiday allowances for future holiday periods. Furthermore, the employer the work is deemed to be an employee, for example in terms of the Act on Employment will be liable for interest on holiday pay not paid to an employee and is likely to be fned Contracts, the Holiday Act or the Salaried Employees Act. A re-characterizaton of for non-compliance. an independent contractor as an employee may also take place if the tax authorites conclude that the payment for services under the contract with an independent Furthermore, if an employment relatonship was subject to a collectve bargaining contractor in reality, is payment for work performed under an employment relatonship. agreement, but the agreement was disregarded by an employer, this will be considered a breach of the collectve bargaining agreement, and will lead to a fne being imposed in For example the Danish Holiday Act Secton 1.2 (Act no. 1177 of 9 October 2015) defnes accordance with Labour Court practce. an employee as follows: Tax law ”For the purpose of this Act an employee shall be taken to mean a person receiving The employer could be held liable for having withheld personal income tax, especially if remuneraton for personal work in an employment relatonship.” the independent contractor cannot pay the income tax. Tax fnes are likely to be imposed. However, the employer will not be solely liable for the taxes, because if the authorites As the wording of the above defniton may be considered “circular” and no general request payment of the taxes from the employer, the later will have recourse against the rule exists in Danish legislaton to assist with defning an employee or an employment employee for the amounts paid. Furthermore, both the employer and the employee will relatonship, a re-characterizaton can only be made by the Danish courts afer an in- be fned for tax evasion. depth analysis of how the partes interacted with one another. The courts will consider a number of factors, but the most important guiding principles to determine if work was Supplementary Pension Scheme carried out by an employee or an independent contractor will be the following criteria: In the event of a re-characterisaton, the supplementary pension scheme will become applicable. In terms of this scheme, the employer is responsible for the declaraton • if the person carrying out work is subordinate, takes instructons and works under and payment of both the employee’s and the employer’s supplementary pension the supervision/control of a manager; contributons in accordance with the Danish Act on Labour Market Supplementary • if the person regularly or perhaps even on a daily basis carries out work for the same Pension. The employer’s contributon is a fxed monthly payment of approximately EUR employer and typically works for only one employer; 40 covering a fulltme employee; the employee's contributon is approximately EUR 20. • if the person carries out work for only one employer or if he/she has other Danish authorites may, in principle, impose a fne as a penalty for non-compliance with customers; the scheme. • if the person fulflls his/her work using the same working methods as ordinary employees employed by the employer, including if the person has a fxed number of c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status working hours, makes use of tools owned or provided by the employer, makes use of the contractor’s canteen facilites, partcipates in social actvites available to A person seeking employee status may atempt to negotate with his/her employer, but the employer's employees, etc. would normally have to fle a lawsuit with the ordinary courts. If a trade union fnds that • if the person is required to perform the work personally and is not allowed to an employer is in breach of a collectve bargaining agreement, the Danish Labour Court delegate the work to another person; will be asked to rule on this queston. • if the person is responsible for the outcome of the work; • if the person runs a personal, economic risk when carrying out work for the Typically, it is only when the independent contractor relatonship comes to an end and employer; and the individual concerned initates legal proceedings, that the court will examine the • if the person has established his/her own independent business, registered with the employment status, as well as the contractual terms. When there are a sufcient number Danish Business Authority and the tax authorites. of elements, which are not compatble with the chosen form of employment status, it will be re-characterized as an employment contract and the individual concerned will,

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based on their claim, be awarded several amounts depending on the executon and b. Day-to-Day Management of the Relatonship terminaton of their employment contract. In their day-to-day dealings with one another, the partes must ensure that the An alternatve is to request the holiday authorites to assess whether the person is independent contractor is not a subordinate to the employer and that the management enttled to holiday pay or salary during holiday periods, which is an equivalent to seeking of their relatonship is consistent with the contract. Accordingly, exercising close control employee status through the courts. If the employer rejects the ruling from the holiday over the work performed and giving detailed daily instructons must be avoided. Only authorites, the employee will need to fle a lawsuit against the employer. general directves should be transmited from the principal to the individual. The principal should give the independent contractor as much independence as possible. d. Legal or Administratve Penaltes or Damages for the Employers in the Event of Re- Characterisaton V. Trends and Specific Cases If the individual is considered an employee, he/she is likely to be enttled to compensaton for any economic loss sufered, including for example salary and benefts during a notce a. New or Expected Developments period, severance pay and holiday pay accrued. From a European perspectve, the Danish labour market is considered atractve due If the re-characterizaton is initated by the tax authorites based on taxaton issues, to both a strong Danish economy and the specialised Danish labour market model, both the employer and the employee may expect to be liable for the payment of tax at which benefts both employers and employees through fexible working conditons, source for the period of tme when the independent contractor actually held the status employment terms and conditons based on individual or collectve agreements and a of employee. Furthermore, the employee can expect an investgaton into and a re- high level of social security. In recent years, a number of independent contractors and examinaton of his/her tax accounts for a number of previous years and tax-deductons businesses have been established in Denmark as a result; in partcular specialists can made will be investgated in order to determine if they were made wrongfully. beneft from establishing themselves as independent contractors, instead of working as employees. In recent years, a signifcant number of graduates from universites Non-compliance with the Danish Holiday Act and with tax legislaton is likely to lead and business schools have shifed their career focus from being employed by well- to the impositon of fnes and payments for interest related to mandatory payment of known Danish and internatonal businesses, to instead becoming owners of their own holiday pay and tax at source. Extensive tax evasion may qualify as a criminal ofence and businesses, typically based in a start-up environment. a breach of the Danish Criminal Code. Another development is the appearance of so-called “atypical employees”, a group of highly specialised individuals, e.g. journalists or IT specialists, who cater to a number of IV. How to Structure an Independent Contractor Relationship diferent employers or contractors as independent contractors, freelancers, consultants and employees depending on the work to be carried out or the character of the a. How to Properly Document the Relatonship cooperaton. Accordingly, an “atypical employee” might be both an employee and an independent contractor depending on how the specifc relatonship is structured. An A proper record of the relatonship between an independent contractor and contractor “atypical employee” will beneft from a very fexible working method combined with the will involve the drafing of a writen agreement which refects the nature of the high level of social security mentoned earlier. relatonship. This clearly worded agreement should refect the general criteria provided by case law described above, including: In recent years, unskilled work has moved away from Denmark to other countries due to the higher salary levels. In order to stay compettve, including avoiding high salary levels • representatons by the contractng partes, including a representaton by the especially supported by collectve bargaining agreements, certain employers involved independent contractor as a business partner with a specifc VAT-number and as in manufacture or who are dependent on an unskilled work-force (e.g. transportaton being responsible for the payment of taxes and VAT originatng from the agreed by lorries and trucks), have redefned their employees as ‘independent contractors’ work; with the efect that the unskilled workers will not be protected by collectve bargaining • a detailed descripton of the work and the result to be delivered, typically focusing agreements, will not receive any pay during periods of sickness, will not receive holiday on the result and not on the day-to-day work to be carried out by the independent pay or be able to join a labour market pension scheme and will receive low rates of pay contractor; which are not in line with the labour market. Such bogus-employees have been brought • estmated tme of delivery and legal consequences if the agreed deadline is not met; to the atenton of both Danish trade unions and the tax authorites. • when the payment of the purchase price becomes due; the purchase price should not become due untl the work has been delivered, as a regular and contnued b. Recent Amendments to the Law payment or payment based on hours spent could potentally result in an interpretaton that the work was in fact carried out by an In September 2014, the Danish High Court (High Court Western Division, 17 September employee; 2014) ruled in a case regarding the employment of a Lebanese freelance interpreter, who • the contractor’s responsibility to provide the working tools. assisted refugees with social work and interpretatonal work. The freelance interpreter was engaged by a company for a total of 24 months to perform interpretatonal work on In other words, it should be structured in such a way as to include as many independent a freelance basis. The interpreter carried out work on a regular basis; an employment factors as possible, and avoid elements specifc to a subordinate relatonship. The writen contract was not entered into and the interpreter received his remuneraton both as agreement is important in establishing the nature of the relatonship. “salary” and as payments based on invoices issued by the interpreter to the company. As the interpreter was not guaranteed a specifc number of hours of work, he was

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preferred and as he had never challenged the fact that the company did not pay him holiday pay, the High Court ruled that the interpreter, despite the fact that he had on a

This ruling demonstrates that all aspects of the engagement must be considered carefully

VI. Conclusion

The use of independent contractors in Denmark is increasing, and the primary reason for this development is because of how the Danish labour market is structured, where it as possible.

employed.

Labora Legal Denmark

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LABORA LEGAL Anne Kathrine Schøn, Partner [email protected] T: 45 22 12 24 48 www.laboralegal.com